Securities disclosure is under fire, with professors and politicians launching two basic criticisms against it. The first is that it causes “information overload:” Investors cannot process all the disclosure that securities rules require. The idea can be traced back to a 2003 paper by then-professor, and now former SEC commissioner, Troy Paredes, and it is built on research in behavioral economics. Information overload has recently caught fire, being cited by former Securities and Exchange Commission Chair Mary Jo White, two other SEC Commissioners, SEC staff, and members of Congress as a rationale for the SEC’s Disclosure … Read more
New York’s Department of Financial Services (DFS or the Department) has responded to a large volume of comments about its proposed, sweeping cybersecurity regulation for banks, insurers and other financial service providers by softening a number of provisions that many in the industry had criticized as onerous and overly prescriptive. On December 28, 2016, the Department published a revised regulation (the Revised Draft Regulation) that altered its original, “first-in-the-nation” proposal issued on September 13, 2016 (the Original Draft Regulation).
Many had argued that the Original Draft Regulation should be more risk-based, along the lines of the NIST Cybersecurity Framework … Read more
The pendulum swung sharply back last year from 2015’s record volume of corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”), but the overall yield remained generally consistent with the prosecutions we have seen since the 2008–2009 economic recession. As we begin 2017 and await the changes that the incoming administration will inevitably bring, it is difficult to determine what the future holds for NPAs and DPAs; however, there are several reasons to believe that they will continue to play a prominent role in criminal and civil enforcement, as explored in the sections that follow.
This client alert, our … Read more
International trade figures prominently among the top priorities of the incoming Administration. Candidate Trump railed against U.S. trade policy during the campaign, promising to withdraw the United States from the recently concluded (but not yet entered into force) Trans-Pacific Partnership agreement, renegotiate the North American Free Trade Agreement (NAFTA) and ramp up enforcement of trade rules in various unspecified ways.
The incoming President appears to have big plans for revamping U.S. trade policy as signaled by early decisions like his creation of a White House-based National Trade Council to coordinate the trade-related actions of various Executive Branch agencies. But in … Read more
“Reputation matters” is by now almost a mantra. Scholars of commercial law increasingly refer to reputational concerns as important forces that shape our behavior – a “system of control” of sorts. The idea – backed by mounting empirical evidence – is that news about corporate misbehavior should bring with it declines in stock prices, in consumers’ willingness to pay, and in employee motivation. Companies and business people anticipate the risk of diminished future business opportunities, and it encourages them to avoid misbehaving, the argument goes. Yet so far the literature has stayed remarkably silent on how exactly reputation matters, or … Read more
The observed prices of financial assets are a function of the information available to investors regarding the assets. The revelation of new information regarding the future prospects of a firm affects the price of the firm’s financial securities. The news of a corporate merger, the announcement of a CEO resignation, or the announcement of the development of a new product all provide investors with new information regarding the economic prospects of the firm, and thus affect the valuation of outstanding financial claims on the firm’s assets. In our study, we examine one such source of new information. Specifically, we examine … Read more
On December 27, the United States Court of Appeals for the Tenth Circuit in Bandimere v. S.E.C. found that the Securities and Exchange Commission’s (“SEC”) use of administrative law judges (“ALJs”) violated the U.S. Constitution. While the court’s opinion relies on a somewhat arcane question of administrative law—whether the hiring of SEC ALJs must comply with the Appointments Clause of the Constitution—its decision to set aside an SEC order imposing sanctions for securities laws violations raises significant questions about future SEC claims brought before ALJs rather than in federal courts, as well as prior adjudications. With the D.C. Circuit … Read more
The tax affairs of large corporations have recently come under intense scrutiny. One symptom of this scrutiny has been increasing disclosure requirements, both to the public and to taxing authorities. One form of increased disclosure includes putting more information about the firm’s tax affairs in the hands of the public. For instance, public release of tax data in the form of public country-by-country reporting is a possibility in the U.S. and all European Union member states by 2018. In 2013, the Australian legislature began debating making public certain tax-return data that were previously available only to the taxing authority. Amid … Read more
On December 19, the Federal Reserve published a final rule[i] implementing public disclosure requirements for bank holding companies subject to the liquidity coverage ratio (the “LCR”)[ii] that will require them to publicly disclose quantitative and qualitative information regarding their respective LCR calculations on a quarterly basis. The final rule adopts the quantitative components of the LCR disclosure as proposed,[iii] but includes certain changes from and clarifications to the proposed rule with respect to the required qualitative disclosures that were suggested by industry commenters,[iv] including:
- clarifying that a covered company may, in determining which items
Over the last 30 years, institutional investors have dramatically increased their stakes in U.S. companies. In the 1980s, they held approximately 20 percent to 30 percent of the average firm in the U.S. By 2010, they held over 65 percent. This increase in institutional holdings coincides with the growing complexity of markets and importance of corporate governance. Prior research has focused on the different effects on firms of the informed “smart money” of the institutional investor in contrast to the less sophisticated individual “retail” investor. Yet, as SEC Commissioner Luis Aguilar said in a recent speech, “Institutional investors are not … Read more
How will derivatives regulation change in the Trump Administration? During the campaign and since the election, President-elect Trump and his advisors, as well as key Congressional Republicans and other market participants, have suggested that aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), should be rolled back, or even repealed outright. Derivatives regulation, however, has not been the focus of much of the discussion around financial regulation more generally, and some market participants have suggested that it would not necessarily be feasible or desirable to roll back the Dodd-Frank reforms completely. It will likely be some time … Read more
In a December 22, 2016, decision in the long-running Argentine debt litigation, the United States District Court for the Southern District of New York spelled out significant limitations on prior rulings it had issued that were based on the pari passu clause in Argentina’s defaulted bonds. In those earlier rulings, the court had imposed injunctions barring Argentina from performing on new debt unless it likewise paid the defaulted debt. Those injunctions were lifted earlier last year in a settlement with most of the holdout creditors. In the new decision, the court held that Argentina’s payments to creditors who participated in … Read more
Company insiders trade for a variety of reasons. While there has been empirical evidence suggesting that insiders buy their firm’s shares ahead of good news, in the case of insider sales, the evidence has been mixed. In particular, the academic literature has largely failed to distinguish genuine liquidity-motivated sales from information-based trades, thwarting efforts to uncover whether the average sale contains any information relevant to the value of the stock. In a new paper, I and my co-authors, Jonathan Faasse and Juliane Lotz, offer new evidence of what information insider sales convey, using voluntary disclosures in the footnotes of insider … Read more
In our new article, available here, we examine what we term “regulatory entrepreneurship”: companies pursuing a line of business in which changing the law is a significant part of the business plan. Regulatory entrepreneurship is not a new phenomenon, but it has become increasingly salient in recent years, as a host of high-profile companies – from startups such as Airbnb, DraftKings, and Uber to public companies such as Tesla and Alphabet (formerly Google) – have adopted this strategy. These companies, and other regulatory entrepreneurs, have spent enormous amounts of resources pursuing lines of business that reside in legal gray … Read more
The regulation of bank capital and liquidity has been in sharp focus ever since the financial crisis of 2008-09. The Basel Committee on Banking Supervision (“BCBS”) has led the work internationally to develop a revised set of capital and liquidity standards to update the then existing Basel II accord. These standards, dubbed Basel III, have to a large extent been adopted and enacted in the world’s major jurisdictions, including the United States and the European Union.
The development of Basel III did not complete the mandate given to the BCBS by the G20 to overhaul bank capital and liquidity. As … Read more
In crafting the Defend Trade Secrets Act of 2016 (DTSA), Congress went beyond the federalization of state trade secret protection to tackle a broader social justice problem: the misuse of nondisclosure agreements (NDAs) to discourage reporting of illegal activity in a variety of areas. The past few decades have witnessed devastating government contracting abuses, regulatory violations, and deceptive financial schemes that have hurt the public and cost taxpayers and investors billions of dollars. Congress recognized that immunizing whistleblowers from the cost and risk of trade secret liability for providing information to the Government could spur law enforcement. But could this … Read more
While it remains too early to predict with any certainty, both allies and adversaries alike are anxiously scanning statements from the campaign and Trump’s past for any clues as to the policy directions his administration is likely to take. In this update, we offer our initial expectations regarding the impact a Trump Presidency will have on economic sanctions and export controls.
During the presidential campaign, Trump extensively criticized President Obama’s policies with respect to Iran, Russia, and Cuba – all policies in which the imposition or the easing of sanctions have played a key part. Though it is … Read more
The Blue Sky Blog will be quiet for the next week, but we will be back, better than ever, for the New Year. Happy Holidays.… Read more
On November 15, 2016, the Securities and Exchange Commission (SEC) approved a plan to establish a Consolidated Audit Trail (CAT), which will contain a complete record of all equities and options traded in the U.S. The plan will require national securities exchanges and FINRA (self-regulatory organizations or SROs), alternative trading systems (ATSs), and broker-dealers (collectively, CAT reporters) to submit information on trade events, including customers and prices, to the CAT on a daily basis. The approval of the plan is an important milestone towards full operation of the CAT, which is projected by the end of 2019 … Read more
It is too early to predict with confidence the direction that antitrust policy will take in the Trump Administration, because the President-elect has not yet announced who will lead the Antitrust Division of the Department of Justice (“DOJ”) or the Federal Trade Commission (“FTC”). But President-elect Trump’s selection of Senator Jeff Sessions for Attorney General and an antitrust transition team consisting of former Antitrust Division Deputy Assistant Attorney General David Higbee, former FTC Commissioner Joshua Wright, and Alex Pollock of the R Street Institute suggest that some changes to the level and types of federal antitrust enforcement are likely to … Read more
Many expect Donald Trump’s inauguration as U.S. president and Republican majorities in both houses of the U.S. Congress will result in a revised financial regulatory framework. Preliminary indications from the Trump transition team have signaled substantial changes may be in the offing, although the exact contours of these changes remain unclear. In this Client Update, we review the potential financial regulatory changes that may take place in the legislative, regulatory and international areas. We focus on issues relevant for the banking industry, capital markets and Securities and Exchange Commission (“SEC”) enforcement.
We will continue to monitor developments in these areas … Read more
On December 2, 2016, President Obama issued an executive order (the “Order”) blocking the proposed acquisition of German semiconductor manufacturer Aixtron SE’s (“Aixtron”) U.S. business (“Aixtron U.S.”) by a group of Chinese investors led by Fujian Grand Chip Investment Fund LP (the “Buyers”). This marks only the second time that a president has blocked a transaction since 2007, when CFIUS’s authority was codified by the Foreign Investment and National Security Act of 2007 (“FINSA”).
In pertinent part, the Order declares that “credible evidence exists” that control of Aixtron U.S. by the Buyers would threaten to impair U.S. … Read more
Much of the debate in bankruptcy scholarship today centers on the extent to which the law protects stakeholder options. In a new paper, “Beyond Options,” we argue that this focus is misplaced. Protecting options is neither necessary nor sufficient for advancing the goal of a well-functioning bankruptcy system. What is needed is a regime that cashes out the rights of junior stakeholders with minimal judicial involvement.
Modern bankruptcy scholarship adopts an options-based perspective, seeing options embedded in every layer of the firm’s capital structure and examining ways that current law redistributes value across stakeholders by modifying, creating, or destroying options. … Read more
The National Security Division (NSD) of the U.S. Department of Justice (DOJ) recently issued “Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations” (the Guidance). The Guidance articulates NSD’s policy for granting credit to companies that voluntarily self-disclose and/or cooperate with respect to potential criminal conduct under U.S, sanctions or export control laws. The Guidance defines the key factors that NSD considers when assessing whether and to what extent a company should receive cooperation and mitigation credit. These circumstances include: (1) voluntary self-disclosure, (2) full cooperation, (3) timely and appropriate remediation and (4) … Read more
There is a general perception that statutory appraisal challenges have been on the rise over the past several years. The Delaware Court of Chancery has issued a number of opinions during that time that use the merger price minus synergies as the best evidence of fair value. However, several notable opinions in 2016 have departed from this trend, relying instead on a discounted cash flow valuation derived from management projections and finding that the fair value for appraisal was significantly above the price paid by the acquirer in the transaction.
Statutory appraisal under Section 262 of the Delaware General … Read more
After the spike in activity due to megadeals in October, M&A activity returned in November to more normalized levels both in deal volume and number of deals. Total deal volume in the U.S. and globally declined in November 2016, by 56.1% to $154.31 billion and by 37.5% to $352.27 billion, respectively. The number of deals recovered somewhat from near record-low territory in October, with U.S. deals increasing by 9.5% to 774 and global deals by 10.7% to 3,095. These trends were primarily driven by a return to the norm in the level of strategic megadeal activity (as compared to October). … Read more
Corporate governance has become even more important since the collapse of major firms in the 1990s and the global financial crisis of 2007-2008, and the relationship between financial reporting and the capital markets is a big reason why. The debate has continued over the unreliability of reported earnings as the magnitude and frequency of non-GAAP earnings, earnings restatements, earnings management, and fraud have grown. Additionally, major market players disagree about the value of corporate governance codes to U.S. firms.
In my recent article, “Corporate Governance and U.S. Firms over the Last Three Decades,” published in the Journal of Accounting, Ethics … Read more
In December 2015, Ukraine defaulted on a $3 billion loan made two years previously by the Russian government. Governments lend to one another all the time, but this loan was extraordinary, and so were the events that followed in its wake.
Like most government-to-government loans, this one had political motivations. For Russia, these included the desire to reward President Victor Yanukovych for backing out of an Association Agreement that would have deepened Ukraine’s ties to the European Union. The structure, however, was unusual for a government-to-government loan. Whereas governments typically lend funds directly, the Russian loan took the form of … Read more
Shareholder activism remains a major force in corporate decision-making in 2016 but is increasingly operating in an environment of robust, multi-faceted shareholder engagement, particularly at large companies. The time and effort that companies and institutional investors have spent developing a mutual understanding of eachother’s concerns have narrowed the opportunities for activists at high-profile companies, and the returns of activist funds overall are down in 2016. The total number of activist campaigns has nevertheless remained high, due in large part to newer and often smaller activists targeting small and mid-size companies.
Large institutional investors have long been an important constituency in … Read more
The dominant narrative about Salman v. United States, the first insider trading case decided by the U.S. Supreme Court in almost 20 years, is that it was a big win for federal prosecutors. That is only part of the story.
There is certainly good news in the Salman decision for prosecutors. It reaffirms the prohibition against trading based on material nonpublic information provided to a friend or family member as a gift. Moreover, the opinion explicitly rejects the suggestion in United States v. Newman, a 2014 federal appeals court decision, that a tip made to a friend or family … Read more
Why do some firms generate great wealth for investors and offer innovative solutions to problems, while seemingly similar firms are much less successful? Why do employees at some firms repeatedly act unethically, shocking their leaders with scandals, while seemingly similar employees at other firms are quick to blow the whistle on unethical actions? One answer might be corporate culture. While policymakers, executives, and the press often credit corporate culture with some of the greatest business successes and failures, there is limited large-scale evidence to support such arguments. In our recent article, “Corporate Culture: Evidence from the Field,” available here, … Read more
In In re Chelsea Therapeutics International LTD Stockholders Litigation, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed claims that Chelsea Therapeutics International Ltd.’s (Chelsea) board of directors acted in bad faith by selling Chelsea to Lundbeck A/S (Lundbeck) at an amount substantially below its standalone value. Specifically at issue were the board’s instructions to its financial advisor to ignore one set of financial projections in opining on the fairness of the sale, as well as the board’s choice to disregard a second set of projections before recommending the transaction to Chelsea’s stockholders. The plaintiffs did … Read more
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) represents a singular development in U.S. resolution law. It provides a new regime, the so-called Orderly Liquidation Authority, for use in the event that a systemically important U.S. financial company encounters severe financial distress. Like other provisions in the Dodd‑Frank Act, Title II was designed as a response to perceived inadequacies in U.S. legal and regulatory regimes during the financial crisis. Title II is intended to be available as an alternative to and substitute for a bankruptcy process, because a bankruptcy process was seen … Read more
The syndicated loan market is one of the largest sources of financing for U.S. firms. This market has experienced tremendous growth over the past 20 years. In fact, some recent estimates suggest that U.S. firms obtain over $1 trillion in new syndicated loans each year and that this represents more than 50 percent of total equity and debt issuances.,
The primary players in the syndicated loan market are large banks that have developed strong reputations over time, likely due to their performance in issuing high quality loans. These banks employ loan officers and corporate bankers who screen … Read more
The election of Donald J. Trump as president and continued Republican control of both the US Senate and House of Representatives may provide the new president the opportunity to immediately remake the Consumer Financial Protection Bureau (CFPB) after he takes office in January 2017.
When a panel of the US Court of Appeals for the District of Columbia Circuit held in October that the structure of the CFPB is unconstitutional, we wrote that the flaw was cured by converting the CFPB’s director from a position that may only be terminated “for cause” to one where the director, as with other … Read more
The Silicon Valley ecosystem has changed profoundly since the dizzying heights of the dot-com era. Consider two of that era’s iconic companies: Yahoo! and eBay. At the time of their IPOs, both of these companies were mere infants by today’s standards. Yahoo reported having 49 employees, net revenue of only $1.3 million, and a total market capitalization of about $400 million. eBay reported having 76 employees, annual net revenue of less than $20 million, and a market capitalization of approximately $700 million.
Google and Facebook ushered in a new era of mature startup. At the time of its 2004 IPO, … Read more
On December 2, 2016, Comptroller of the Currency Thomas J. Curry announced formally that the Office of the Comptroller of the Currency (OCC) will move forward with chartering financial technology (FinTech) companies that offer bank products and services as special purpose national banks. The announcement was accompanied by the OCC’s release of a guidance paper (Paper) entitled “Exploring Special Purpose National Bank Charters for Fintech Companies” that provided both initial guidance on the special purpose chartering process and posed a set of thirteen questions for public comment. The OCC will accept comments on its Paper until January 15, 2017. … Read more
In September 2009, Bank of America CEO Ken Lewis suddenly announced his intention to retire by the end of the year. The company’s board was taken by surprise as it scrambled to find a successor and was further embarrassed as multiple candidates rebuffed the company’s approach. Several delays of self-imposed deadlines and rampant speculation that the company would be forced to choose a stopgap CEO followed. It was only days before Lewis’ departure that the board named Brian Moynihan as the new CEO. This incident highlights that most companies have long been complacent about succession planning. More than half of … Read more
Going back as far as the Securities Act of 1933, the Securities and Exchange Commission has taken action to improve the readability and understandability of financial data. In 1969, a report commissioned by the SEC, the Wheat Report, indicated that the length and complexity of prospectuses made it difficult for the average investor to understand them. The Wheat Report recommended the avoidance of long, complex, or verbose writing. In 1997, while chairman of the SEC, Arthur Levitt revisited the issue of writing complexity in financial reports during a speech to the Securities Regulation Institute, suggesting that “[i]n many cases, the … Read more
The Delaware Supreme Court’s landmark decision in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) articulated a new defendant-friendly rule for post-closing damages actions for breaches of fiduciary duties. The Delaware Supreme Court held that where a transaction “not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders,” the deferential business judgment standard of review will apply, leaving only a claim for waste. The Corwin decision was followed shortly by an order in Singh v. Attenborough, 137 A.3d 151 (Del. 2016) (ORDER), in which … Read more
There are two established explanations for bank runs: coordination problems among depositors and information asymmetries between bank managers and depositors. In a new paper, “Information Gaps and Shadow Banking,” forthcoming in the Virginia Law Review and available here, I offer a novel, complementary explanation for why short-term creditors run: information nobody possesses.
Both the banking and shadow banking systems use short-term debt to fund longer-term, less liquid assets. That short-term debt is designed to pose sufficiently minimal credit, liquidity, and duration risk that holders can treat the claims as close substitutes for money. This reduces funding costs and has … Read more
The two most influential proxy advisory firms–Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis)–recently released their updated proxy voting guidelines for 2017. The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments. The 2017 ISS policy updates are available here. The 2017 Glass Lewis Guidelines are available here.
ISS 2017 Proxy Voting Policy Updates
On November 21, 2016, ISS released updated proxy voting policies for shareholder meetings held on … Read more
With Congress and the Presidency soon in Republican control, look for the Financial CHOICE Act (or perhaps an enhanced version) to be re-introduced in the next Congress. The bill, sponsored by Jeb Hensarling, Chair of the House Financial Services Committee, was framed as a Republican proposal to reform the financial regulatory system necessary to undo the burdens of Dodd-Frank, which were characterized as distractions from the SEC’s basic statutory responsibilities. In addition to taking aim at much of Dodd-Frank, among other things, the bill places a heavier burden on proxy advisory firms, regulators and regulations generally and eases some other … Read more
It’s great to be here today [November 30] with so many people involved in the fight against international corruption. The diversity of this crowd – which includes folks from the public and private sector, from the United States and abroad, and from many different industries – demonstrates both the wide scope and the deep impact of our anti-corruption effort.
I’ve spent much of my professional career at the Department of Justice. During my time as an Assistant U.S. Attorney and U.S. Attorney in Atlanta, I had the opportunity to prosecute and supervise a wide variety of cases, from drug trafficking … Read more
The growth in cybersecurity threats combined with the increasing demands placed on outside directors create challenges that often go beyond the risks that public companies face from employee and client communications. If public companies cannot communicate quickly with directors or directors cannot easily share information and discuss options, corporate governance will suffer. On the other hand, outside directors often have professional responsibilities to multiple organizations and, accordingly, are more likely to rely on electronic communications that are outside of any particular company’s technology resources.
Recent hacking incidents highlight the need for public companies to review their director communication practices to … Read more
In common law countries such as the U.S., corporate governance aims primarily to protect shareholders from managers’ self-dealing. Post-Enron reforms such as the Sarbanes-Oxley Act of 2002 and various Securities and Exchange Commission rules are examples of this shareholder-oriented approach. However, to the extent that the interests of shareholders and debtholders are not entirely aligned, governance reforms that beneﬁt shareholders may harm debtholders. Similarly, some public polices such as state anti-takeover laws (ATLs) may entrench management and harm shareholders but benefit debtholders by reducing both the variance of cash flow from operations and the firm’s risk of default.
In our … Read more