Does the Dodd-Frank Act lower the earnings of the private fund industry? For much of its history, the private fund industry has viewed private fund adviser registration and the disclosure of proprietary information as a threat to its profitability. Title IV of the Dodd-Frank Act introduced the most significant regulatory change in the history of the private fund industry in the United States – requiring mandatory registration for private fund managers with over $150 million in assets under management and increasing the disclosure requirements pertaining to confidential and proprietary information. Implemented under Title IV, the controversial disclosure obligations in Form … Read more
In recent years, taking advantage of expanded jurisdictional provisions in Dodd-Frank, the U.S. Securities and Exchange Commission (SEC) has brought an increasing number of enforcement actions, including complex matters with difficult factual and legal issues, through administrative proceedings, rather than in federal court as has traditionally been the case. As the Wall Street Journal observed in June and August of 2015, this practice has been widely criticized, but the SEC has insisted that it maintains legal authority to choose the forum in which to bring its cases and has published non-binding criteria to guide its decisions in this regard. On … Read more
State-sponsored cyber hostilities on corporations are not a new occurrence. Recent examples include the August 2014 suspected Russian hack of JP Morgan Chase and the continuous cyber activities against corporate targets conducted by Unit 61398 of the Chinese People’s Liberation Army. However, North Korea’s actions against Sony are considered by many a “game changer” and a significant escalation of the cyber hostilities targeting corporations. Rather than hacking Sony to steal corporate secrets or disrupt their business activity, the North Koreans attempted to devastate the company and chill its activities for a perceived nationalist slight. This targeting … Read more
On July 1, 2015, the Securities and Exchange Commission issued a concept release seeking public comment on possible revisions to audit committee disclosure requirements, focused primarily on audit committee oversight of independent auditors. The concept release is available here. Comments are due no later than September 8, 2015.
At the July 1 open meeting, SEC Chair Mary Jo White noted that “effective audit committee oversight is essential to investor protection and the functioning of our capital markets.” The concept release follows this statement and requests public comment on four primary topics: (i) audit committee oversight of independent auditors, (ii) … Read more
Crises can generate pressure for change – and there are crises aplenty in contemporary governance and corporate accountability. After decades of neoliberal orthodoxy, the US sub-prime crisis, the European banking crises and corporate malfeasance have shaken the ideologies of shareholder value and efficient self-regulating markets and increased support for the re-regulation of markets. Markets require information to discipline firms, and the lack of information on companies’ social and environmental impacts has prevented market mechanisms from pushing against the externalization of costs after impacts created by the externalization became a concern to society.
In response, the EU has passed … Read more
On August 5, 2015, the US Securities and Exchange Commission (“SEC”) took several incremental steps toward completing its regulatory framework for security‑based swap dealers and majority security‑based swap participants (“SBS Entities”). The SEC unanimously adopted final rules (the “Final Rules”) providing the registration process for SBS Entities, including the detailed forms that registrants will be required to file. The SEC also voted 3‑2 to propose rules to establish a process for an SBS Entity to apply for permission to continue to have associated persons for security‑based swap activity that are subject to statutory disqualification (the “Disqualification Waiver Process”).
When Will … Read more
An estimate by John B. Henry in the Metropolitan Corporate Counsel (February 2008, p. 28) suggests that the annual direct litigation cost of Fortune 500 companies was a whopping $210 billion in 2006, i.e., about one-third of their after-tax profits that year. Apart from direct litigation cost, lawsuits also hurt firms’ reputations. Not surprisingly, companies lose significant market values upon the filing of lawsuits against them. Given the substantial impact of litigation, it is surprising that little research has been done to identify the determinants of various types of lawsuits against firms. Our paper aims to fill this gap by … Read more
On July 10, 2015, the United States Court of Appeals for the District of Columbia Circuit held that the 180-day requirement set forth in Section 4E of the Securities Exchange Act of 1934 for the Securities and Exchange Commission (“SEC” or the “Commission”) to file an enforcement action after the issuance of a Wells notification is not jurisdictional.
1. Factual and Procedural Background
In 2003, Ernest V. Montford, Sr., founder of institutional investment advisor, Montford and Company, Inc. (“Montford Associates” and collectively, “Petitioners”), began recommending that his clients invest with investment manager Stanley Kowalewski. When Kowalewski started his own investment … Read more
The Literature on agency theory is largely focused on relationships in which one party (the principal) engages another party (the agent) to perform some service on the principal’s behalf, the performance of which involves delegating some decision making authority to the agent. This literature explains that when the principal and the agent do not share the same interests, a conflict may arise; an “agency problem.” Generally speaking, two main governance devices have been suggested to help align the interests of principals and agents in order to eliminate conflicts of interest and thereby enhance the welfare of principals. The first … Read more
Are securities law and their enforcement effective at mitigating market manipulation activities, especially insider trading activities? The study ‘Exchange Trading Rules, Surveillance and Suspected Insider Trading’, forthcoming in the Journal of Corporate Finance, tries to answer this question with unique international data and a natural experiment. For the first time, we examine the exchange trading rules that govern market conduct and relate these rules to insider trading. We use exchange trading rule changes in Europe as a natural experiment to ascertain the impact of trading rules on suspected insider trading. Further, we make use of unique surveillance data in … Read more
The release last week of public summaries of the resolution plans submitted by the 12 largest financial institutions operating in the US reveal more insight into the institutions’ resolution strategies than ever before, including the strategy for each of their most important subsidiaries (“material entities”).
The considerable additional detail of the 2015 releases displays the structural differences between these institutions – especially between the eight domestic banks and the four foreign banking organizations (“FBOs”). In particular, there is a notable shift toward a Title I single point of entry (“SPOE”) strategy among domestic institutions:1
- Six of the eight domestic
Federal retirement policy has long been premised on the view that many of us, if left to our own devices, will save too little for retirement. A growing literature in behavioral economics has shown that seemingly small nudges in employer retirement plan design, like automatically enrolling workers into contributing to the plan, can have large effects on behavior. Many have seized on these findings to advocate that employers design the “choice architecture” of their 401(k) plans in order to improve their workers’ choices.
Indeed, this approach is widely heralded as the most successful application of behavioral economics to public policy … Read more
On June 23, 2015, the District Court (the “Court”) for the Southern District of New York (the “SDNY”) held that an out-of-court restructuring that involved the elimination of a parent guarantee and a significant asset transfer was impermissible under Section 316(b) of the Trust Indenture Act of 1939, as amended (“TIA”). The Court held that the elimination of the guarantee and asset transfer impaired the nonconsenting noteholders’ right to receive payment, which was protected by the TIA. This decision, Marblegate Asset Management et al. v. Education Management Corp. et al., No. 14 Civ. … Read more
The “car-sharing” services Uber and Lyft continue to generate no end of controversy. A recent strike by French taxi drivers protesting Uber turned violent at times, and French authorities subsequently arrested two of Uber’s local executives for continuing to operate its low-cost UberPop service despite a national ban. Uber and Lyft have for the most part been able to strike deals with regulators to continue operating in the U.S., but both companies now face potential jury trials over whether their drivers are employees or independent contractors under California law, and the California Labor Commissioner has held that at least … Read more
In recent years, the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have zealously pursued potential insider trading. After a long string of high-profile successes, the government faces significant roadblocks created last year by the Second Circuit in its momentous U.S. v. Newman decision. On July 30, 2015, the Solicitor General petitioned the U.S. Supreme Court to overturn Newman. If the Supreme Court grants cert., the resulting decision likely will mark a critical development in insider trading law. These evolutions affect entities, which must craft and implement insider trading policies, and individual market participants alike.
Insider … Read more
The Federal Open Market Committee, which controls the supply of money in the United States, may be the country’s most important agency. The chair of the committee is often dubbed the second most powerful person in Washington, only deferring to the President himself. Financial scholars and analysts obsess over the institution, leading to a rich tradition of FOMC Kremlinology, veneration, and second-guessing in business schools and economics departments.
But legal scholars have been less entranced by the committee, put off, perhaps, by the fact that the institution has never been checked by the courts or the Administrative Procedure Act. As … Read more
More than ten years after the Global Research Settlement and the adoption of NASD Rule 2711, the Securities and Exchange Commission (SEC or Commission) has approved new FINRA rules addressing conflicts of interest for both equity and debt research analysts and research reports. The new rules, FINRA Rules 2241 and 2242 (collectively, the Research Rules or Rules), will require FINRA member firms to establish certain policies and procedures related to equity (Rule 2241) and debt (Rule 2242) research reports and research analysts. The Research Rules are the product of a lengthy and dynamic rulemaking process, which began in … Read more
A few months ago, the European Commission (the ‘Commission’) officially launched a major new EU policy initiative. It proposed to establish an EU-wide Capital Markets Union (CMU). The CMU is a flagship initiative of the Commission. It has ambitious objectives. The project is about completing a single EU capital market, but it is also about reducing Europe’s reliance on bank finance. The project aims to help the real economy – especially SMEs – to gain access to capital and help investors to gain access to a wider range of investment opportunities. These objectives reflect the Commission’s attempt to foster jobs, … Read more
The term “corporate governance”, while now ubiquitous, was largely unknown in the U.S. until the 1970s and the rest of world until the 1990s. There has been little research done on why corporate governance rose to prominence when it did. Conceivably the lack of analysis could be because nothing more was going on than the adoption of a handy catch phrase encompassing already familiar topics and themes. In fact, the new terminology was accompanied by a reconfiguration of governance arrangements in U.S. public companies. These important changes coincided with and were related to the demise of a “managerial capitalism” … Read more
On August 4, 2015 the Securities and Exchange Commission issued interpretive guidance elaborating its view that the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply equally to tipsters who claim retaliation after reporting internally, as well as those who are retaliated against after reporting information to the SEC. The guidance reflects that there is a split among federal courts over whether Dodd-Frank’s whistleblower retaliation provisions apply to internal as well as external reporting, and recognizes that the only circuit court to decide the issue to date, the Fifth Circuit, has taken a contrary position to … Read more
For more than a decade, the Justice Department morphed its approach to corporate crime, eschewing criminal prosecutions in favor of deferred prosecution and non-prosecution agreements that allowed large corporations to avoid the ignominy of criminal convictions. The trend began during the Bush administration and became so dominant during the Obama administration that the Criminal Division of the Justice Department entered deferred prosecution and non-prosecution agreements in more than two-thirds of the corporate cases it resolved.
There seemingly were no crimes that did not qualify for corporate absolution. The Justice Department entered a non-prosecution agreement in the Upper Big Branch mine … Read more
Be Careful to Adhere to Best Practices When Approving Advisory Agreements
The Securities and Exchange Commission instituted and settled an administrative proceeding against an investment adviser, its principal, and three independent directors of a registered investment company for process failures in connection with the directors’ evaluation of fund advisory contracts. Release No. IC-31678 (June 17, 2015). The proceeding was brought under Section 15(c) of the Investment Company Act of 1940, which requires fund advisory contracts to be approved by the independent directors.
Key Takeaway. The enforcement action signals that the SEC will take it seriously when fund advisers and … Read more
On August 5, 2015, the SEC voted, 3-2, to adopt final rules to implement the pay ratio disclosure provision of Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Consistent with their positions on the proposed rules, SEC Chair Mary Jo White and Commissioners Luis Aguilar and Kara Stein voted to adopt the rules and Commissioners Daniel Gallagher and Michael Piwowar dissented, making this Commissioner Gallagher’s 16th dissent (which Gallagher indicated is a Commission record).
With over 4000 citations in the Westlaw JLR database (most referencing his antitrust scholarship), Hovenkamp is one of the most cited legal scholars. His citations reflect an enormous body of work including the 21-volume Antitrust Law: An Analysis of Antitrust Principles and Their Application (“Treatise”) upon which we primarily focus. Hovenkamp’s scholarship has shaped both academic and judicial discourse. Justice Breyer once remarked that litigants “would prefer to have two paragraphs of [the Areeda–Hovenkamp] treatise on their side than three Courts of Appeals or four Supreme Court Justices.”
During the 1970s, antitrust began its revolution to a more … Read more
FinTech businesses focused on payments systems and foreign exchange have witnessed an explosion of demand in recent years. As these payment systems services continue to gain mainstream acceptance, financial regulators in the US are increasingly interested in monitoring and, as appropriate, prescribing policies or regulations concerning them, slowly casting a prudential regulatory framework over the FinTech payments systems industry. The policy and regulatory landscape in this area is undergoing fundamental change.
Regulation of the US payment system is highly fragmented and often ad hoc. In the foreign exchange sector, for instance, the appropriate regulator and the nature of the … Read more
Multiforum shareholder litigation has increased sharply in recent years. In our working paper, The Private Ordering Solution to Multiforum Shareholder Litigation, we empirically analyze what has quickly proven to be the most popular and robust response to this trend: exclusive forum provisions in corporate charters and bylaws. These provisions require that corporate law-related suits be filed in a single forum, usually a court in the corporation’s statutory domicile. We identify 746 U.S. public corporations that have adopted the provision (as of August 2014); the bulk of these (93 percent) are incorporated in Delaware. Using hand-collected data on these firms, … Read more
On June 30, the Federal Trade Commission (FTC) issued its first guidance document as part of its Start with Security initiative. The initiative, announced by FTC Consumer Protection Director Jessica Rich in March, will initially focus on encouraging small and medium-sized businesses to embrace security-by-design principles. The initiative will include a series of FTC-hosted meetings across the country as part of the FTC’s education and outreach program. The first seminar, which will discuss guidelines for data security, will be held on September 9, 2015 at the University of California Hastings College of Law in San Francisco.
In the new … Read more
At its core, the Volcker Rule is designed to prevent excessive risk-taking by banks, which was seen by the U.S. Congress and financial regulators as a contributor to the 2008 financial crisis. With its focus on the stability of the U.S. financial system, the Volcker Rule is meant to have only a limited reach to activities of foreign banks outside the United States. Although the scope of banks and bank affiliates subject to the Volcker Rule is very broad, the statutory language of the Volcker Rule exempts from the proprietary trading prohibition foreign bank trading activity that occurs solely outside … Read more
In a recent paper, I compare the legal treatment of outsider trading under US and EU law. Outsider trading can be defined as the sale or purchase of listed securities on the basis of material nonpublic information by individuals who do not qualify as insiders. There is substantial (and so far largely unnoticed) divergence between EU and the US in this area of securities regulation.
In both systems outsider trading, like more ordinary insider trading, is subject to severe restrictions. In the US, however, the trading prohibition has a limited scope. It applies selectively, only if certain conditions are … Read more
Despite the July 31, 2015 compliance date, the SEC will not enforce the third-party solicitation ban until corresponding FINRA/MSRB Rules take effect.
On June 25, 2015, the Securities and Exchange Commission (SEC) announced a compliance date of July 31, 2015 for the provision of its Pay-to-Play Rule under the Investment Advisers Act of 1940 that requires third-party solicitors be subject to a similar pay-to-play regime.1 Some had thought that the SEC would require compliance with the third-party solicitation ban2 as early as April 1, 2015.3 While the SEC has now established the compliance date at the end … Read more
Critics lament that with Burwell v. Hobby Lobby Stores, Inc., the Supreme Court further expanded corporate personhood powers. My forthcoming article offers an alternative reading. It suggests that Hobby Lobby might actually provide a tool for limiting previously recognized corporate constitutional rights. To those who oppose the decision, this assertion might seem unduly optimistic. After all, the Court did determine that three family-owned business corporations were “persons” with sincere religious beliefs entitled to use the Religious Freedom Restoration Act (“RFRA”) to deprive employees of federally mandated healthcare insurance coverage. Given that the Court determined that certain “closely held” business corporations … Read more
On July 17, the Board of Governors of the Federal Reserve System (the “FRB”) released a notice of proposed rulemaking (the “NPR” and the rules set forth therein, the “Proposed Rule”) that would modify certain aspects of the FRB’s capital plan rule (the “Capital Plan Rule”) and Dodd-Frank Act stress test rules (the “DFAST Stress Test Rules”) applicable to large bank holding companies (“BHCs”) and certain banking organizations with total consolidated assets of more than $10 billion. The NPR would also affect elements of the … Read more
The Dodd-Frank Act charged the Consumer Financial Protection Bureau with ensuring that consumers “understand the costs, benefits, and risks” associated with financial products and services. Despite this ambitious mandate, and despite the Bureau’s self-branding as a “21st century agency,” the Bureau’s pursuit of consumer comprehension has thus far focused on 20th century tools that have proven ineffective at regulating financial transactions: disclosure requirements and deception prohibitions. No matter how well the Bureau’s “Know Before You Owe” disclosures perform in the lab, or even in field trials, firms will run circles around disclosures when the experiments end, confusing consumers and defying … Read more
As part of the effort to make capital more accessible for small businesses, the JOBS Act authorized the SEC to exempt annually up to $50 million of a company’s securities issuances from the registration requirements of the Securities Act of 1933. In response, the SEC has amended Regulation A under the Securities Act to provide a two-tier exemption scheme for offerings that are “qualified” as opposed to being registered. This new scheme expands the pool of investors who can purchase securities. The amendments also allow issuers to “test the waters” before undertaking a qualified Regulation A offering.
New Regulation A+… Read more
What role does public disclosure by a defendant firm play in the outcome of securities fraud class actions? In a recent article we study this question and find when a defendant firm discloses more via press releases and conference calls, it is more likely to experience an adverse outcome in litigation. While the possibility of private legal liability likely improves the quality and integrity of disclosure, it may also make firms reluctant to release information to financial markets. These compelling findings should be of interest to companies and legal practitioners as they evaluate corporate disclosure decisions and policies, as well … Read more
Under the long-awaited proposed rules adopted by the Securities and Exchange Commission on July 1, 2015, generally, all US publicly listed companies would be required to adopt broad clawback policies and make new clawback-related disclosures. Although these requirements likely will not take effect prior to the 2016 proxy season, all companies should start planning for these changes now.
Background: History of Clawback Regulations
Since 2002, the Securities and Exchange Commission (the SEC) has had the authority under Section 304 of the Sarbanes-Oxley Act (SOX) to recover (or “clawback”) certain compensation from chief executive officers and chief financial officers of public … Read more
The business judgment rule may be the most enigmatic doctrine in corporate law, but it has always performed a relatively straightforward task in the corporate governance system of the United States, namely, protecting corporate directors from liability for honest mistakes. The words that courts use to convey that simple idea have varied greatly, but perhaps none are more confusing than the words most often employed in the Delaware courts: “The business judgment rule … is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest … Read more
On May 13, 2015, the Equity Market Structure Advisory Committee (the “EMSAC” or “Committee”) held its inaugural meeting (the “Inaugural Meeting”) at the Securities and Exchange Commission (the “Commission” or “SEC”) in Washington, D.C. Discussions during the Inaugural Meeting made clear that the primary purpose of the EMSAC is to assess the current complexity of the equity markets. Based on this review, the Committee is to determine whether there are regulatory or industry initiatives that will help ensure that the level of complexity does not exceed that which is necessary to optimally meet the needs of investors and issuers.… Read more
The Securities and Exchange Commission recently published a request for comment on topics relating to its oversight of exchange-traded products under the Securities Exchange Act of 1934, and particularly the listing and trading of exchange-traded products on national securities exchanges and the sales of such products by broker-dealers.
In the request for comment, the SEC states that it is soliciting public comment to help inform its review of the listing and trading of new, novel or complex exchange-traded products, including requests for exemptive and no-action relief under the Exchange Act and filings by exchanges to adopt listing standards applicable to … Read more
To the friends of the CLS Blue Sky Blog: The ABA journal is conducting a poll to identify the top 100 legal blogs. We would be honored by your nomination. In addition to reprinting commentary from practitioners and regulators on legal developments in corporate law, securities and other financial regulation, antitrust, restructuring and kindred topics, we feature explanations of recent scholarship in these fields and debates on policy issues. We select our content to provide readers with a rich and broad view, and do not shy away from technical topics. I believe there are few if any other forums serving … Read more
Compliance is a growth field in both legal education and practice. Overall, whether compliance teaching is geared towards students or individuals within a company, greater care and nuance must be taken in undertaking compliance teaching and training to reflect the inter-disciplinary and proactive elements of the creation of robust and effective compliance programs. Increasingly, this means that lawyers and law professors need to incorporate insights from other disciplines in their teaching to use more case studies.
Compliance is a growing field of practice across multiple areas of law. Increasingly companies put compliance risk among the most important corporate governance issues … Read more
Six things every investor, start-up, financial institution and payment processor should know about the future regulation of Bitcoin and other cryptocurrency derivatives.
With the quickly developing market for cryptocurrency derivatives and seemingly inexhaustive possibilities of applications on the blockchain protocol, the U.S. Commodity Futures Trading Commission (CFTC) is keeping a watchful eye, though has not formally announced any policy or regulatory regime for cryptocurrency derivatives. This article considers the current U.S. derivatives regulatory regime of the CFTC and its applicability to Bitcoin, other cryptocurrencies, and the blockchain protocol. We also discuss practical considerations for those entering the market and what … Read more
Delaware dominates the incorporation market, with approximately 60% of publicly traded companies in the United States incorporated there, including 63% of the Fortune 500 companies. Over 90% of companies that incorporate outside of their principal state of operations make Delaware their state of incorporation. The unresolved question is why corporate lawyers and their clients are drawn to Delaware when most companies have little more than a P.O. Box based in the state.
In The Delaware Delusion, we set out to empirically assess whether there is an economic basis for Delaware’s appeal in the market for company incorporations. We set out … Read more
The Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), enacted in 2005, has been the subject of extensive commentary over the effects that the Act might have on the chapter 11 landscape and the debtor’s reorganization chances.
In my article, “Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era,” I use multivariate regression models to examine empirically and quantify, for the first time, BAPCPA’s effect on three distinct aspects of the chapter 11 process: (a) the duration of traditional chapter 11 cases; (b) the use of preplanned bankruptcies, that is, prepackaged … Read more