Whistleblowers play a significant role in detecting corporate fraud. For example, recent high-profile financial frauds such as the Enron scandal and Bernard Madoff’s Ponzi scheme were brought to light by whistleblowers. To encourage more whistleblowers to come forward, the Securities and Exchange Commission (SEC) implemented in 2011 the Dodd-Frank whistleblower program, which provides enhanced protection and financial rewards to whistleblowers. According to the program’s 2016 annual report, the SEC received over 4,200 tips for the fiscal year 2016 and has awarded more than $111 million to 34 whistleblowers since the inception of this program. In a recent paper, I … Read more
The Uniform Law Commission (“ULC”) is an organization focused on developing and preparing “non-partisan, well-conceived, and well-drafted” state legislation in areas of state law where there is a perceived need for uniformity. In practice, once the ULC releases proposed state legislation in any particular area (such as abandoned property or arbitration), it is not unusual for multiple states to adopt the ULC legislation. That is why we must pay attention when the ULC releases a proposed law regulating virtual, digital, or crypto currencies.
On October 9, 2017, the ULC released the final version of its Uniform Regulation of Virtual-Currency … Read more
An October 2017 Treasury Department report on the asset management and insurance industries includes an important—and fundamentally flawed—recommendation that could change the way U.S. regulators monitor risk in the financial system. The Treasury report recommends that regulators focus on identifying and overseeing potentially risky financial activities rather than systemic firms like AIG, Lehman Brothers, and Bear Stearns.
This proposal, long favored by the insurance sector, would represent a sharp departure from U.S. and global regulators’ approach to systemic risk since the financial crisis. When Congress created the Financial Stability Oversight Council as part of the Dodd-Frank Act, it gave the … Read more
As the season changes to fall, and baseball playoffs and football dominate sports headlines, the home field advantage has proven important once again. But in the regulatory litigation game, it appears that even a home field advantage cannot help the Securities and Exchange Commission consistently win its enforcement trials in administrative proceedings. The SEC clearly expected to do better when it announced it would be bringing more cases in its administrative forum as opposed to district court. But in the last 25 months, the SEC has lost a number of high-profile administrative cases, notwithstanding the fact that the SEC has … Read more
Despite the extensive scholarship on insider trading, relatively little attention has been directed to a basic but fundamental question: Does insider trading law actually affect the amount of insider trading? In a new article, available here, I seek to empirically evaluate that question by leveraging a change in insider trading law that occurred in 2014 when the Second Circuit issued its seminal decision in United States v. Newman, which substantially limited the scope of tippee liability. The article provides strong empirical evidence that changes in insider trading law do affect the amount of insider trading, sometimes dramatically.
The … Read more
“Deal Activism,” in which activists invest to oppose announced deals, has become an increasingly frequent component of the activist playbook. While efforts by the target company’s shareholders to oppose a deal to secure a higher bid have received the most media attention, activists have also run campaigns against acquirors to block transactions outright, to extract concessions or to generate pressure against a board. This occurs most frequently in strategic, stock-for-stock transactions where votes are needed on both sides.
The recent proxy contest over EQT Corporation’s strategic merger with Rice Energy demonstrates that these fights can be fought and won. EQT … Read more
It is well known that banks play an important role in monitoring borrowing firms (e.g., Diamond, 1984). Yet, how banks choose among alternative mechanisms that reduce agency costs with borrowers is not completely understood. In our paper, “Bank Relations and Borrower Corporate Governance and Incentive Structures,” we document that, as banks and borrowers develop closer relationships, borrowing firms adopt corporate governance and incentive structures that help to reduce the banks’ risk of expropriation by the managers and shareholders.
While some bank monitoring can constrain managerial opportunism and thereby benefit debtholders and shareholders, banks also protect themselves against actions that benefit … Read more
House Republicans unveiled a sweeping tax reform bill on Thursday, November 2 that proposed to lower the corporate tax rate and allow companies to immediately deduct the full cost of business assets in the year companies build or acquire them.
The bill also takes aim at some of the key tax subsidies that the wind industry uses. In particular, the bill proposes to cut about a third of the value of the production tax credits for wind projects that begin construction after the bill is enacted. The bill could also potentially overturn some important aspects of current Internal Revenue Service … Read more
Law and economics scholars have long argued that efficiency is best served when a firm’s capital structure is arranged as a single, hierarchical value waterfall. In such a regime, claimants with seniority are made whole before the next-junior stakeholders receive anything. To implement this single waterfall approach, those scholars envision a property-based mechanism: a blanket lien on all of a firm’s assets, and therefore all of its value (including as a going-concern). This view informs current proposals for contractual bankruptcy and relative priority. Coincident with this scholarship, lawyers, scholars, and judges have largely accepted at face value the proposition that … Read more
On October 1, 2017, new international investment arbitration trial rules (Chinese version) (the “Rules”) issued by the China International Economic and Trade Arbitration Commission (“CIETAC”) became effective. The Rules mark China’s first attempt to establish a domestic arbitral institution for international investment disputes. The Rules come at the same time as China’s “Belt and Road” initiative, focusing on improving trade infrastructure on land from China to other countries in Asia, securing efficient sea trade routes and establishing a network of free trade zones and cultural exchanges. CIETAC may become the forum of choice for Chinese investors in future arbitrations with … Read more
The separation of corporate ownership from control leads to an agency problem caused by the divergent interests of shareholders (the principals) and management (the agent). One area of contention is the level of risk-taking by the firm. Managers’ investment in human capital makes them more risk-averse than shareholders are, and this difference creates losses that account in part for the agency cost of equity. To mitigate this cost, prior research suggests that managers be paid in stock and stock options, in addition to cash compensation, so that their interests are aligned with those of shareholders.
Unfortunately, the convergence of managers’ … Read more
Takeover transactions are often the most significant activity affecting corporations and their shareholders. Accordingly, there are intense debates about the value and impact of takeovers and the extent to which law should regulate such transactions. One area of focus for takeover regulation has been the potential impact of takeovers on minority shareholders. The focus on minority shareholders is not surprising as research suggests that laws which protect minority shareholders are associated with stronger financial markets.
In a recent book chapter, I focus on how deal structures affect the protection of minority shareholders in two common law jurisdictions, the U.S. and … Read more
Thank you, Keith [Higgins], for that gracious introduction. Let me return the sentiment. Keith – you are a member of an esteemed group of Division Directors, some of whom are here today, who have served the Commission and, most importantly, investors very well. The PLI 49th Annual Institute on Securities Regulation demonstrates the efforts by many to ensure that there is continuous education about the securities laws, as well as ongoing, candid dialogue about the state of our securities markets. I am honored to be here.
My remarks will focus on governance and transparency. These issues are, of
… Read more
In a new study, we examine restricted-stock vesting events, through which directors and high-level executives (“insiders”) receive stock but face fewer reporting requirements and selling restrictions than if the stock had been purchased on the open market. Using a detailed dataset that tracks restricted stock vesting schedules from Equilar, we find that insiders realize gains by retaining vested stock. A trading strategy that mimics insiders’ trading patterns by buying on the vesting date and selling on the subsequent open-market sales date yields positive abnormal returns.
The vast majority of previous insider-trading literature focuses on open-market transactions, but insiders acquire significantly … Read more
Earlier this year, the Securities and Exchange Commission (SEC) issued guidance regarding “robo-advisers,” automated investment advice tools accessed via web-based or mobile platforms with minimal human interaction.1 The guidance is an important reminder to the industry that robo-advisers are subject to the same regulatory framework as traditional advisers and highlights several unique regulatory considerations stemming from their distinct business model. The SEC also, for the first time, included these considerations as a part of this year’s examination priorities.
The SEC’s sharpened focus on robo-advisers is a response to their dramatic increase in use over the past several years, largely … Read more
Whether and when targets of civil enforcement admit wrongdoing has been in and out of the public spotlight since the 2007-2008 financial crisis, when the issue seemed tied up in frustrations that suspected wrongdoers—especially banks and corporations—were getting off too lightly. And the Securities and Exchange Commission has been at the heart of the debate. Its policy of allowing targets to settle without admitting they did anything wrong prompted judicial rebukes, a public debate, and ultimately an announced policy change in 2013. Admissions would be required when they furthered “public accountability” and “acceptance of responsibility.” The decision to ask for … Read more
The recently proposed Tax Cuts and Jobs Act (the “Act”) includes executive compensation tax reforms that, if enacted, would have significant implications for the way in which companies structure their compensation programs.
The Act was introduced in the U.S. House of Representatives on November 2, 2017, and may undergo significant revisions as part of the legislative process in the House, and the U.S. Senate is expected to propose tax reform legislation shortly that may not be identical to the House’s bill, even though an identical bill could facilitate enactment without the need for a joint committee to reconcile differences.
At … Read more
Scholars are attempting to fully understand all the causes of the 2007-09 U.S. financial crisis, hoping their efforts will ensure that something like this will not happen again. Nonetheless, in this research, weaknesses in mortgage servicing regulation have been largely ignored. Servicers collect payments from homeowners, keep records of mortgage balances, pool the payments and remit them to investors, and manage escrow accounts. In a world where mortgage assets are securitized, mortgage servicing is essential to the functioning of the financial system. Investors in mortgage-backed securities routinely expect that the servicer of the underlying loans will keep accurate records, and … Read more
The SEC Division of Corporate Finance recently provided useful guidance on excluding certain Rule 14a-8 shareholder proposals (Staff Legal Bulletin No. 14I). While helpful, we hope the SEC will undertake a much-needed comprehensive review of Rule 14a-8, including its outdated eligibility requirements.
“Ordinary Business” and “Economic Relevance” Exclusions. A shareholder proposal relating to a company’s ordinary business operations may generally be excluded from the company’s proxy statement unless significant policy issues transcending ordinary business are involved (Rule 14a-8(i)(7)). Noting that this exclusion often involves difficult judgment calls (and without addressing the distinction between the SEC’s interpretive approach … Read more
In recent years, executive compensation in the U.S. has become a hotly debated issue. A central point of contention is peer benchmarking, an integral part of the pay-setting process in which firms compare their executives’ compensation with that of rivals in the labor market. Proponents of this practice claim that compensation benchmarking is an efficient mechanism used to gauge market wages within a competitive labor market, while detractors allege that it inflates pay because firms may arbitrarily select peers with generously remunerated executives.
In a recent paper, I study the dynamics of compensation benchmarking using a comprehensive, hand-collected dataset of … Read more
In 2015 the U.S. Securities and Exchange Commission adopted amendments that significantly expanded Regulation A, a previously little used provision that allows companies to conduct small public securities offerings without having to comply with all the requirements applicable to traditional registered public offerings (referred to as “Regulation A public offerings” below). The amendments implemented JOBS Act Title IV and included raising the annual offering limit from $5 million to $50 million as well as other changes. This regulatory shock had the potential to expand the financing options available to small growth companies. Previously, the main alternatives to a securities offering … Read more
Hedge fund activism has transformed the corporate governance landscape – possibly for better, possibly for worse. But as activist funds emerge as the newest and most potent players in corporate governance, there is one certainty: New agency costs also arise. The activist firm has the de facto ability today to buy a significant block of stock in a target firm (typically 5 percent to 8 percent), announce a new business strategy for the target (often involving increased leverage and asset sales), and then demand board representation (generally two directors, sometimes more) to implement its strategy. Increasingly, the activist gets what … Read more
During the 2008 financial crisis, the U.S. government viewed the survival of large consolidated banks as inextricably linked to the welfare of the overall economy, prompting such institutions to be labeled too-big-to-fail (TBTF) and granted government assistance. The primary and preferred means of bank resolution by federal regulators was, however, mergers and acquisitions (M&A). The basic idea was that through a merger a healthy bank would acquire a failing bank, saving the economy from the full cost of the distressed bank’s collapse. This private-sector solution was preferred because the government did not have to use public funds to bail out … Read more
Item 402(u) of Regulation S-K was adopted in 2015 to implement the pay ratio disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and will require pay ratio disclosure with respect to the first fiscal year beginning on or after January 1, 2017 (i.e., such disclosure will be required during the 2018 proxy season). The required disclosures consist of the total compensation of the registrant’s principal executive officer, the median total compensation of the registrant’s employees other than its principal executive officer, and the ratio of the first of these amounts to the second.
One … Read more
In the last few years, a source of financing for start-ups, known as crowdfunding, has become widely available. It involves raising capital from a large number of individuals, each of whom typically contributes a small sum. The internet has lowered the costs of crowdfunding by facilitating the dissemination of information about small projects, and its use has grown exponentially, with some $34 billion being raised worldwide through crowdfunding in 2015 alone.
While the availability of crowdfunding is clearly good news for entrepreneurs, its merits for those providing the funding are less certain. Because funders typically put only small sums into … Read more
These days you rarely hear the name Financial Industry Regulatory Authority (“FINRA”) in this town [Washington, D.C.]  without some mention of “FINRA 360,” the comprehensive self-evaluation initiated by FINRA President and CEO Robert Cook. From what I have seen and heard thus far, FINRA 360 is more than just a genius marketing strategy developed to kick off Robert’s tenure. Over the past several weeks, I have heard from a number of people that this review is generating constructive feedback and engagement from the industry in ways that will help FINRA chart a new path forward.
… Read more
Investor relations (IR) connects the preparers of financial information with its users, aiming to facilitate efficient and effective interaction between the firm and the investment community. Historically, the IR function has been viewed as a communications role, and the investor relations officer (IRO) has had a background or training in communications and public relations. Recently, however, more companies turn to Wall Street to fill IR positions. For example, in a recent step toward a much-anticipated IPO, Spotify hired a former Wall Street veteran who had run the internet and media research groups at Barclays as head of IR. A … Read more
In 2013, the Securities and Exchange Commission announced a new policy of sometimes requiring admissions when settling enforcement actions. The policy was a radical departure from the agency’s more than four decades-old practice of allowing companies and individuals to settle cases without admitting or denying the allegations against them. The change came in the wake of the financial crisis of 2008 and in response to widespread criticism that the agency was being too soft on wrongdoers, allowing them to resolve matters without taking responsibility for their actions. Since the new policy went into effect, the SEC has repeatedly trumpeted its … Read more
With institutional shareholders playing a growing role in corporate governance, dialogue between boards and shareholders is increasingly common in the U.S. and Europe. Talking with boards is essential to institutional investors’ stewardship functions, and engaging with institutional investors has become a focus of listed companies’ communication strategies. Empirical analysis shows that private discussions with directors have become institutional investors’ preferred method of engagement, and they resort to shareholder proposals, public criticism, and similar practices only if private conversations fail.
Nevertheless, meetings between directors and institutional investors raise legal concerns in the U.S. and the EU, because they may lead to … Read more
Continuing a relatively flat year so far, M&A activity showed mixed results in September 2017, with the global market switching positions with the U.S. from last month and generally faring better. In the U.S., total deal volume, as measured by dollar value, decreased by 31.2% to $90.51 billion, while the number of deals increased by 7.8% to 927. Globally, deal volume increased by 1.5% to $289.22 billion, and the number of deals increased by 6.7% to 3,456.
Strategic vs. Sponsor Activity
In the U.S., strategic deal volume increased by 4.9% to $81.04 billion, and the number of deals increased by … Read more
Research has begun to analyze the tone and narrative structure of earnings announcements after decades of focusing on market reactions to the earnings news itself. One conclusion from this literature is that language matters – the tone (i.e., the excess of optimistic over pessimistic language) and opacity of the earnings announcement text is associated with future firm performance and with the market reaction to the earnings press release. In other words, managers’ language choices convey information beyond that captured by earnings, and investors respond accordingly.
In a recent paper, we study another aspect of managers’ disclosure choice: the decision to … Read more
On October 11, 2017, the SEC proposed a collection of amendments to its rules and forms intended to modernize and simplify some of the disclosure requirements applicable to U.S. public companies. The proposals would implement a statutory directive under the 2015 FAST Act. They span a number of topics, including MD&A, property, risk factors, confidential treatment requests and exhibits, and are generally modest changes, although some may prove quite helpful for companies in practice.
We discuss the more significant of the proposed amendments below and summarize many of the proposal’s other, more ministerial amendments in a list at the … Read more
Excessive risk-taking by corporate executives is often blamed for triggering the financial crisis of 2008. Therefore, it is crucial to understand the nature of corporate risk-taking so as to prevent, or reduce the likelihood of, a future crisis. In theory, managers, who represent shareholders, are expected to act in the best interest of the shareholders and only take risks that maximize shareholder wealth. In reality, managers may take either too little risk or too much.
First, managers may adopt corporate policies and strategies that are too conservative, because their human capital is invested in the company. A high degree of … Read more
In two recent decisions, the Eighth Circuit addressed the hotly-litigated issue of when consumer plaintiffs have standing to pursue claims arising out of a data breach. The decisions stake out the Eighth Circuit’s positions on a current circuit split and also address the viability of certain types of injuries often alleged in data breach class actions. Notably, the Eighth Circuit revealed its skepticism that an increased risk of future injury alone can support Article III standing in a data breach class action.
In Kuhns v. Scottrade, Inc., the Eighth Circuit expressed approval of a fairly recent and unique … Read more
On Friday, October 6, the Treasury Department issued a report to the President on streamlining and reforming U.S. capital market regulation. The report covers recommendations on nine topics across the U.S. financial regulatory system. One of the topics – Access to Capital – includes many recommendations of interest to participants in public and private company capital markets. Without dwelling on why Treasury would issue such a report on the Friday before a holiday weekend, let’s dive into the substance of this section of the report.
The report starts with frequently cited statistics chronicling the decline in the number of listed … Read more
When a corporation engages in misconduct, courts, regulators, or prosecutors often arrange for the appointment of a monitor—an independent, private outsider—to oversee remediation efforts at the firm. As I’ve described previously, the expansive use of monitors has become common, with some private companies even appointing them voluntarily. Monitors oversee an array of remediation efforts, from ending collusive activity, to compensating foreclosure victims, to ensuring that healthcare providers adhere to legal and regulatory mandates.
The variety of situations involving monitors has made regulating them a challenge. Creating a single regulatory or statutory scheme would be difficult, given that so many … Read more
Corporate short-termism has been much discussed over the past few decades, but has recently become a growing concern for the U.S. economy. Executives and politicians warn of increased market pressure on corporations to meet short-term performance metrics at the expense of long-term value creation and sustainable growth. Sheila C. Bair, former chair of the FDIC, lamented in an op-ed piece that efforts to prevent the financial crisis “were impeded by the culture of short-termism” in both the financial and political arena.
Some empirical evidence is consistent with these concerns; surveys of executives, analyses of firm investments, and various anecdotes point … Read more
On September 27, President Trump, the House Committee on Ways and Means and the Senate Committee on Finance released their framework for tax reform (the “framework”), which represents the most detailed proposal for changes to the tax code issued during the Trump administration. The framework’s key elements include:
- a reduction in corporate tax rates to 20% and partial limitation on the deductibility of interest for corporate taxpayers;
- a shift to a modified “territorial” regime of corporate taxation that eliminates tax on dividends from foreign subsidiaries but subjects all foreign earnings to current taxation at a minimum rate to be determined;
… Read more
There is an emerging consensus that antitrust law promotes innovation. According to this theory, a monopolist has little reason to create superior goods and methods unless those efforts would increase the monopolist’s market power. In fact, a monopolist can preserve or increase her market power by obstructing competitors from innovating rival products. Since monopoly power may restrain both competition and innovation, the case for making innovation a goal of antitrust law is that enforcement fosters competition, which forces firms to innovate to survive the competition.
The value of promoting innovation through antitrust law can hardly be overstated. In addition to … Read more
Directors of regulated financial institutions have exceedingly difficult jobs with many demands. The aftermath of the financial crisis led to countless new regulatory requirements and expectations, many of these unwritten and evolving based on political currents or varying views at different levels of the regulatory hierarchy. Governance processes and actions are examined and second-guessed like never before. For many companies, new and shifting compliance burdens tend to crowd out other business on board agendas.
At the same time, these boards have faced prolonged operating and economic challenges. Initially, defaults and delinquencies in loan portfolios and low interest rates choked financial … Read more
An important feature of U.S. corporate law is regulatory competition among various states. Unlike firms in other industrialized countries, American corporations can choose to incorporate in any state, even if they do not do business there. A large body of academic literature has studied the merits and weaknesses of this approach to regulating corporations, focusing primarily on the value of state corporate laws. This debate has focused on two competing hypotheses. In the first, interstate competition in corporate laws promotes a “race to the top” by motivating states to enact laws that are optimal for shareholders and that minimize managerial … Read more
As cryptocurrencies such as Bitcoin and Ethereum become more prevalent in investment circles
and acceptable for commercial transactions, the United States Internal Revenue Service (“IRS”)
has said little other than to label “virtual currencies” as property and state that transactions
involving virtual currencies may be subject to taxation under generally applicable law. 1
However, on September 7, the United States Congressional Blockchain Caucus 2 (the “Caucus”)
introduced the Cryptocurrency Tax Fairness Act (the “Act”), which would exempt certain
cryptocurrency transactions and create a cryptocurrency-specific information reporting
The Cryptocurrency Tax Fairness Act
Under the Act, gross income would not include … Read more
Every securities lawyer knows that offers and sales of securities must either be registered under the Securities Act of 1933 (Securities Act) or made pursuant to an applicable exemption. This rule is so fundamental that we often neglect to think about its purpose: investor protection. We spend countless hours analyzing whether some instrument or another is a security and, if it is, whether an offer or sale is taking place. These are often difficult questions, to be sure, but I often wonder whether we approach them more as intellectual explorations into the metaphysics of the Securities Act than as important … Read more
Corporate planners and practitioners know well that it takes quite a long time to close a long-form merger, with the shareholder approval requirement accounting for the bulk of the delay in almost half of such mergers. But we have not yet identified mechanisms for shortening the delay, in part because we assume that shareholder approval and related procedures are necessary. In a forthcoming article, I question this assumption and find that shareholder approval in the context of long-form mergers is in fact not nearly as valuable as we might expect.
Contrary to conventional wisdom, merger votes are rarely close. … Read more
In the last two decades, anti-corruption has become a global norm, as the OECD and the United Nations have made clear in adopting anti-corruption conventions. As a result, combatting corruption in international business has joined upholding human and labor rights and protecting the environment as major aims of corporate social responsibility. Currently, however, anti-corruption responsibilities only require corporations to think about avoiding direct involvement in a corrupt transaction. In an article forthcoming in the Wisconsin Law Review, I argue that corporations’ responsibility to combat corruption extends beyond a duty to avoid paying bribes and requires corporations to fight corruption … Read more
The Office of the Comptroller of the Currency (OCC) recently took an enforcement action in the form of a consent order against a bank director that serves as a cautionary tale for the banking industry. The consent order, agreed to by and between the OCC and a director and former senior vice president of a small national bank in Wisconsin, reminds bank boards of directors of their fiduciary duties with respect to executive compensation and the consequences of breaching those duties. In particular, this action puts board compensation committee members on notice that they may be found liable for unsafe … Read more