The financial regulatory structure in the U.S. is complex, consisting of multiple agencies with overlapping responsibilities. Regulators have raised concerns that regulatory fragmentation may undermine the stability and efficiency of the U.S. financial system (GAO 2016). In this paper, we suggest that fragmented securities regulation increases information asymmetries and the costs of searching filed documents and thus negatively affects capital markets. Specifically, we examine the consequences of separate disclosure systems due to regulatory fragmentation on stock price efficiency.
Publicly traded banks without a bank holding company (hereinafter stand-alone banks) in the U.S. are exempt from Securities and Exchange Commission (SEC) … Read more
At the general meeting of Tesla Inc. on June 11, 2019, two management proposals seeking to introduce shareholder-friendly changes to the company’s governance structure failed to pass, despite both items receiving support by more than 99.5 percent of votes cast at the meeting. To get official shareholder approval, the proposals needed support by at least two-thirds of the company’s outstanding shares. However, only 52 percent of the company’s share capital was represented at the general meeting; based on turnout alone, there was no possible way for the proposal to pass.
As strange as the voting outcome at Tesla may seem, … Read more
U.S. Insider trading law is strange. Because Congress has never adopted a comprehensive statute on the subject, insider trading law is largely a species of federal common law. That’s not to say that the Supreme Court has nothing to go on — since 1980, it has developed its insider trading jurisprudence around Section 10(b) of the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5. But in some ways, this fact makes things even stranger because Rule 10b-5 simply creates liability for securities fraud. And yet, what does insider trading have to do with fraud?
A lot, or so … Read more
Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant
LIBOR is an indicative measure of the average interest rate at which major global banks could borrow from one another. LIBOR is quoted in multiple currencies and multiple time frames using data reported by private-sector banks. LIBOR is used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other
… Read more
The Securities and Exchange Commission has proposed changes to its rules requiring companies to obtain attestation on their internal controls from an independent public accountant. The proposal rests on the idea that attestation’s costs often exceed its benefits. The SEC’s principal empirical support for that idea is a Journal of Finance article using data from 2004. Since markets have changed since then, over 40 law and accounting professors have petitioned the SEC to replicate the Journal of Finance study using recent data before proceeding with the proposed changes.
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The attestation requirement, known as Section 404(b), is … Read more
On July 9, 2019, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC” and collectively, the “Agencies”) released final rules adopting their previously proposed amendments to the regulations implementing Section 13 of the Bank Holding Company Act of 1956 (the “BHC Act”), known as the “Volcker Rule.”
The amendments modify the implementing regulations in a manner consistent with Sections 203 and 204 of the … Read more
The media, investors, and regulators often consider trading by corporate insiders to be a signal of firm value, given that insiders know their business better than do others. Although trading on material, non-public information can be illegal in the U.S., insiders may still attempt to profit from their informational advantage, as evidenced by dozens of insider trading enforcement actions each year.
Research also suggests that politically connected firms may avoid investigations by, or receive lower penalties from, regulatory agencies. And since insiders are the ones who decide to build political connections for the firms, they may do so to seek … Read more
The announcement on June 18 by Facebook of what it calls “a simple global currency and financial infrastructure that empowers billions of people” was sure to receive immediate attention. Facebook founder and CEO Mark Zuckerberg is now on a global “mission.” However, the Libra White Paper is long on Libra’s technology and short on the regulatory challenges it faces around the world.
The need for Libra is based on a diagnostic: People lack access to a global, open, instant, and low-cost way to move money. The project focuses on international payments.
Why is cross-border payment expensive? First, … Read more
On July 4, 2019 the UK Serious Fraud Office (“SFO”) secured approval for its fifth Deferred Prosecution Agreement (“DPA”) before the Crown Court sitting at Southwark. The DPA is with Serco Geografix Limited (“SGL”), a security company that contracts with the UK Ministry of Justice (“MOJ”) to electronically monitor suspects and offenders. The DPA relates to three charges of fraud and two of false accounting. The facts of the case are summarised by the SFO in its official press release, which is accompanied by a copy of the judgment of the … Read more
Cyber risk is a major concern to corporations and investors. Recent academic studies point out that firms suffer large negative returns when they disclose that they have suffered a data breach (e.g., Akey, Lewellen and Liskovich (2018) and Kamiya et al (2019)) and that informed market participants are able to trade on this information before it becomes public (Mitts and Talley (2018)). These studies and many articles in the popular press often consider these events to be idiosyncratic. However, cyber risk can also contribute to aggregate information risk since the current financial system entrusts information to several centralized custodians that … Read more
Bank behavior and how it relates to bank fragility and systemic risk have been in the spotlight since the 2007-2009 financial crisis. Regulators claim that bankers’ compensation structures played a role in encouraging behavior which contributed to the financial crisis. Despite this, we know little about how finance industry executives are compensated. Executive compensation research typically does not distinguish finance industry executives from non-finance industry executives, and on many occasions it excludes executives in financial industries. Our new article, How Are Bankers Paid?, fills this void, studying how executive compensation in the finance industry differs from that of non-financial … Read more
The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a major public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. A very significant June decision by the Delaware Supreme Court interpreting the Caremark doctrine that limits director liability for an oversight failure to “utter failure to attempt to assure a reasonable information and reporting system exists” prompts this update. … Read more
Regulatory arbitrage refers to structuring activity to take advantage of gaps or differences in regulations or laws. Examples include everything from tax shelters and shadow banking to the cross-border mobility of corporations. Scholarly discussion of regulatory arbitrage has tended to focus on possible solutions: harmonization, conflicts-of-law rules, and anti-avoidance regimes.
In a new paper, forthcoming in the European Business Organization Law Review, I focus instead on developing a better understanding of the limits to regulatory arbitrage. Given the benefits to companies that engage in it, why don’t we see more regulatory arbitrage? What constrains it? The most notable past … Read more
Corporate leaders may wish to revisit the important yet sensitive topic of reporting relationships in compliance programs following the release of new guidance from the Department of Justice’s Criminal Division.
That guidance, entitled Evaluation of Corporate Compliance Programs, (The “New Guidance”) discusses in detail the three main thematic questions that prosecutors should apply in evaluating corporate compliance programs and how those questions can be used to elicit information as to compliance program adequacy and effectiveness. One of those thematic questions is whether the corporation’s compliance program is being implemented effectively. The autonomy of compliance program leadership is one … Read more
As always, I want to begin by thanking our Staff for the hard work reflected in today’s release. In particular, Tom McGowan and Sheila Swartz provided helpful briefings to my Office, addressing a wide range of questions in connection with this proposal.
Today’s proposal addresses margin requirements for security futures. We haven’t revisited those rules in almost two decades, so updating them makes sense. But the majority simply proposes to lower the required margin without seriously analyzing the consequences of doing so or assessing alternatives. The proposal favors deregulatory intuition over market-driven analysis, so I respectfully dissent.
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Private ordering has become a common way to restructure key aspects of public corporation governance. Stockholder activists and boards of directors alike are testing the bounds of the freedom to contract in the charter and bylaws, adopting provisions aimed at reshaping the balance of power in corporations. In considering recent efforts, the courts have largely shown a willingness to uphold these governance arrangements. With no sign that courts will restrict corporate governance contracting and every indication that the private ordering trend will persist, the focus of legal battles will shift from the validity of contract provisions to their meaning. … Read more
A few months ago there was an article in the Washington Post about the baby on board signs that seem to be on so many cars. The article’s timing was perfect because I had just seen one of those signs and remember wondering why they seemed to be making a come-back. At one point, those signs were everywhere, on almost every car. Then they seemed to disappear for a while, but now they are back. The article gave the history of the signs, which first hit rear windows in 1986, assessed the psychology behind their popularity, and reported on … Read more
Law is a reflection of society, and corporate law is no exception. As we wrestle with broader questions around social justice, (very real) environmental risks, and the proper balancing of our long term societal goals, the proverbial corporate pendulum continues swinging away from the shareholder primacy model and towards a more holistic approach of the role of the corporation in society. In this context, so called ESG issues – an acronym for environmental, social, and governance – have taken center stage in the corporate debate. Although still amorphous and evolving, the term ESG now generally stands for the proposition that … Read more
On June 12, 2019, in Cohen v. Capital One Funding,1 certain Capital One credit card holders filed a putative class action lawsuit in the U.S. District Court for the Eastern District of New York against
- special purpose entities (“Trusts”) that purchased and securitized credit card receivables from Capital One, and (ii) the trustees of those Trusts. Plaintiffs concede that, because Capital One is a national bank, the National Bank Act (“NBA”) preempts the application of New York usury laws to loans made by Capital One to New York credit card holders, and so plaintiffs did not name Capital One
… Read more
In a new paper, we analyze the major disconnect between the theory of corporate governance, its legal expression, and the reality of corporate ownership structures, based on an “indirect holding system” (IHS), which has evolved from complex existing technological limitations. We argue that distributed ledger technology (DLT) offers the potential to redesign the company registry and securities clearing and settlement systems for public companies and realign them with theory. While doing so, we also seek to transcend the hype around DLT. While carefully considering the current financial market’s path dependence, we assess the actual and substantial potential of DLT … Read more
Initial public offerings of companies with dual-class shares have made headlines in recent years. An increasing number of newly listed companies have introduced classes of stock with superior voting rights, which typically allow company founders and top executives to maintain company control even as their economic stake in the business may diminish. Dual-class companies include some of the most successful and highly-valued companies in the world, such as corporate giants Facebook Inc., Alphabet Inc. (parent of Google), and Berkshire Hathaway Inc. In 2019, some of the largest U.S. IPOs involved classes of stock with superior voting rights, including … Read more
Notwithstanding the attention corporate reputation gets as a concept, why it is valued, what it requires, and what is incompatible with a good reputation are given surprisingly short shrift. Institutional investors are increasingly pressuring companies to care about more than short-term profits, and indeed, to care about their social purpose, which is often at least arguably related to long-term profitability. There is a more general movement encouraging corporations to take into account corporate social responsibility and ESG (environmental, sustainability, and governance) concerns. There are also forces, notably after the 2008 financial crisis, pushing companies to take ethics and culture more … Read more
The general public can be a stakeholder in a firm, even when it does not have direct ownership. And as the public becomes more vested in a firm’s actions, the firm may be more likely to engage in corporate social responsibility (CSR) activities.
In a recent paper, we use public visibility as a proxy for the public’s stake in a firm. Based on 3,400 newspapers from 1994 to 2008, we measure visibility for the U.S. S&P 500 firms with the frequency of print articles per year concerning the firm. We find that visibility has a significant, positive relationship with the … Read more
The Board of Governors of the Federal Reserve System (FRB) issued two notable documents over the past two weeks involving confidential supervisory information (CSI): a cease and desist order against a former bank employee for improper handling of CSI and a request for comment on proposed changes to the FRB’s rules governing the disclosure of CSI.
Cease and Desist Order Against Former Bank Employee
First, in a stark reminder to employees in the financial services industry, the FRB issued a cease and desist order against a former employee of a non-bank subsidiary of a bank holding company for violation of … Read more
Shareholder activism is growing in popularity across the world and appears to deliver mostly benign results for firms and stockholders. However, testing the effects of activism is problematic. For at least 30 years, researchers have recognized the difficulty of causal inference when examining ownership and performance. Perhaps activists systematically target firms that are poised to improve anyway or select liquid stocks to cheaply acquire blocks. Despite a body of empirical evidence on the positive effects of activism, critics continue to warn of dangers: Activists hunt in highly-motivated and well-resourced wolf packs that exploit regulatory loopholes; they focus on short-term financial … Read more
Subsequent to the publication of yesterday’s Statement of Concerned Securities Law Professors, Professor Roberta Karmel, Centennial Professor of Law at Brooklyn Law School and a former Commissioner of the Securities and Exchange Commission, advised us that she also wanted to sign the Statement. The full list of signers should thus read:
John C. Coffee, Jr.
Adolf A. Berle Professor of Law
Columbia University Law School
John C. Coates
John F. Cogan, Jr. Professor of Law
Harvard University Law School
James D. Cox
Brainerd Currie Professor of Law
Duke University Law School
Senior Research Scholar
Columbia University Law School… Read more
M&A activity in the U.S. and globally for the month of May was generally consistent with April levels. The most notable changes in May were an increase in the number of sponsor-related deals by almost 75% to 187 in the U.S. and by almost 40% to 404 globally. The number of U.S. deals increased by 2.7%, to 760, while the number of global deals decreased by 5.2%, to 2,644. The total value of U.S. deals decreased slightly by 1.1%, to $138.88 billion, and the total value of global deals increased by 4.5%, to $287.57 billion. Average value of announced … Read more
We circulate this statement as law professors specializing in the field of securities regulation who are concerned that the Securities and Exchange Commission (the “Commission”) has moved in a new direction that is both contrary to its past practice and harmful to the interests of investors. In Release No. IA-5248 (“Commission Interpretation Regarding Standard of Conduct for Investment Advisers”) (June 5, 2019) (“Release 5248”), the Commission has turned its back on its history and reinterpreted the case law in a surprising manner that reverses what it said only a year ago. This month, in its very first sentence discussing the … Read more
In a previous client alert, we highlighted a recent U.S. sanctions regime aimed at deterring threats of election interference, which further expanded the U.S. menu of cyber-related sanctions. Across the Atlantic, as a step forward that demonstrates its voiced determination to enhance the EU’s cyber defense capabilities, on May 17, 2019, the EU established a sanctions framework for targeted restrictive measures to deter and respond to cyber-attacks that constitute an external threat to the EU or its Member States. The new framework is expounded in two documents, Council Decision (CFSP) 2019/797 and Council Regulation … Read more
What is the purpose or motivation of corporate criminal punishment? What kinds of punishments ought we impose? While such questions may seem lofty, they are important nonetheless. Strict pragmatists who reject the goal of developing penal theory and focus only on policies that might increase corporate punishment blind themselves. They accept that something must be done, but show little interest in the justification for and normative function of corporate criminal punishment. And they neglect a scholarly history that reflects little imagination and innovation.
Prof. Mihailis Diamantis of Iowa Law School recently brought a fresh idea to theory in corporate criminal … Read more
By enabling new modes of human interaction, technological advancements catalyze the evolution of regulatory frameworks, tools, and approaches. The rate at which computer technology evolves outpaces that of legislation and rule-making. Our economy is increasingly structured not only by traditional fiduciary actors, but also by software systems, which allow assets to permeate markets rapidly and at a greater scale. Rightfully, scholars and regulatory officials are examining the liability frameworks for software developers, and blockchain technologies dramatically demonstrate the challenge of scrutinizing an interconnected software system. Blockchain technologies emerged outside of institutions, and blockchain-based transactions bypass regulatory control.
We have explored … Read more
This spring, both Apollo and Blackstone announced that they would be converting from publicly traded partnerships to subchapter C corporations. In changing their legal forms of organization, they will join two other prominent private equity firms, Ares and KKR, which had earlier announced their intentions to convert from partnerships to corporations. The conversion of leading private equity firms to corporations has been seen as the vanguard of a mass conversion of businesses from pass-through entities and partnerships to corporations in response to tax rate changes that took effect in 2018.
The late-2017 tax reform, commonly knowns at the Tax Cuts … Read more
As the U.S. annual shareholder meeting season is coming to an end, we review the characteristics of newly appointed directors to reveal trends director in nominations. As of May 30, 2019, ISS has profiled the boards of 2,175 Russell 3000 companies (including the boards of 401 members of the S&P 500) with a general meeting of shareholders in 2019. These figures represent approximately 75 percent of Russell 3000 companies that are expected to have a general meeting during the year. (A small portion of index constituents may not have a general meeting during a given calendar year due to mergers … Read more
If short-termism shackles innovation, how do we break the chains? Our evidence suggests that increasing capital gains taxes for investors on short-term share appreciation is one possible solution.
Research shows that myopic focus on short-term earnings hurts investments in research and development (R&D), and one key driver of this corporate myopia is the pressure from shareholders with short horizons. The issue is that short-horizon investors are likely to devote their research efforts toward forecasting quarterly profits instead of trying to understand the long-term prospects of a firm’s R&D and investment portfolio. As a result, corporate managers worry that short-horizon investors … Read more
Several authors (Boone and Mulherin, 2007; Aktas, de Bodt, and Roll, 2010) have noted a paradox in the mergers and acquisition (M&A) market since 1990. While there have been few competing public bidders, hostile offers, or public-offer price revisions, the average premiums paid to acquire target firms have been substantial. On the surface, the combination of friendly deals and high premiums seems puzzling, given that target management is more likely to negotiate private benefits at a cost to shareholders in friendly deals, while hostile offers are more likely to induce multiple-bidder auctions, which should theoretically yield … Read more
There’s no doubting the popularity of EBITDA—earnings before interest taxes depreciation and amortization—as a measure of investment value. Analysts like EBITDA because it removes the vagaries of depreciation and taxes and is unaffected by company leverage ratios. EBITDA is certainly a useful indicator of the gross cash operating profit performance of a business. But is it a reliable way to measure the value of a company?
The short answer is, no, not at all. EBITDA is far less correlated to market value than is commonly thought, and it is riddled with omissions and distortions that make it a highly unreliable … Read more
Institutional ownership of companies has grown to the point that institutions today own approximately 80 percent of the market value of U.S. stocks. Recent academic research explores this rising ownership concentration and debates the growing importance of “passive” or “index” investors. This literature raises concerns that asset managers in general, and index funds in particular, may be becoming too powerful, while also exhibiting conflicts of interests. Some commentators, therefore, suggest that index funds have become so powerful, they will cast the deciding vote on any proxy battles between activist investors and corporate management. Others see a conflict of interest resulting … Read more
As alerted in our previous Advisories, LIBOR, the “world’s most important number,” is being phased out. Created almost 50 years ago on August 15, 1969—opening day of the Woodstock music festival—LIBOR began as a floating, market-determined interest rate for syndicated loans, but over time has become the benchmark interest rate for an estimated $350 trillion in outstanding financial arrangements around the world. These contracts include public and private loans and bonds; consumer financial products such as credit cards, mortgages and student loans, and some $200 trillion in interest rate derivatives.
Due in large part to concern that the determination of … Read more
In the wake of the Supreme Court’s holding in Cyan, Inc. v. Beaver County Employees Retirement Fund that state courts have concurrent jurisdiction over Securities Act claims, even if asserted as class actions, there has been an influx of Securities Act class actions filed in state courts. A key question has divided courts and commentators: Does the Private Securities Litigation Reform Act (“PSLRA”) discovery stay apply in state court? For example, in September 2018, a Superior Court in California held that the stay did not apply in state court, while in May 2019 a Superior Court in Connecticut … Read more
What do payday lenders, firearms retailers, porn stars, churches, coal mines, and condom companies have in common? All have complained that regulators pressured financial institutions to close their accounts over reputation-risk concerns. In a my article (available here), forthcoming in the Georgia Law Review, I explain that broad regulation of reputation risk does not reduce bank risk and unnecessarily politicizes bank regulators.
Financial regulators say reputation risk is the risk of negative public opinion or negative publicity. Wells Fargo, for example, hurt its reputation by opening millions of unauthorized customer accounts. Reputation is important to all businesses, but it … Read more
As the busiest part of the 2019 U.S. proxy season is behind us, we take an early look at the vote results of annual general meetings convened from January to May. As of now, approximately 70 percent of Russell 3000 annual general meetings expected during the calendar year have already taken place, and the figure will rise to close to 90 percent of all calendar-year annual meetings by the end of June. In our review of the vote results for the 1,812 Russell 3000 2019 annual general meetings that took place from January to May and are available in the … Read more