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Understanding Runs in the Shadow Banking System

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

Gibson Dunn Discusses Proxy Advisers’ 2017 Voting Guidelines

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

PwC Discusses Election’s Impact on Advisers’ Duty to Retirement Investors

We believe the recent election will have less impact on the Department of Labor’s (DOL) fiduciary duty rule than some in the media are currently speculating.[1] While some provisions may be modified by a new Administration, we believe the rule’s core framework will remain intact. The industry has already made significant progress toward complying with the rule, and there is general recognition of the importance of removing conflicts of interest between financial advisers and retirement investors. A Trump Administration is unlikely to want to immediately restore such conflicts that could harm the very voters who propelled him into office.… Read more

Cooley Explains How Dodd-Frank May Come Under Fire

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

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Staggered Boards and Long-Term Firm Value, Revisited

For a long time, the academic literature has largely supported the view that staggered boards — which require challengers to win at least two election cycles to gain a board majority — entrench directors and managers to the detriment of shareholders.[1] Empirically, this view was based on the finding of a negative association between having a staggered board and firm value. In our new article, “Staggered Boards and Long-Term Firm Value, Revisited,” forthcoming in the Journal of Financial Economics, we reconsider the staggered board debate using a comprehensive sample period (1978–2015) and document evidence that suggests the … Read more

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Deputy AG Sally Yates Doubles Down on Promise to Pursue Individuals

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

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An Efficient Investment-Risk Model of Compliance

Corporate compliance — the internal processes that firms use to ensure that their employees do not violate applicable laws and regulations — has become big business. Regulation of business continues to grow, punctuated by landmark laws that have re-shaped the financial services (the Dodd-Frank Act) and health care (the Affordable Care Act) industries in the United States. Further, federal regulators have substantially ramped up their enforcement of numerous existing laws such as the Foreign Corrupt Practices Act and those governing insider trading. Corporations are dedicating greater resources towards internal compliance, both within legal departments and increasingly in separate and independent … Read more

Sullivan & Cromwell Discusses Hacking and Cyber Threats to Director Communications

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

Mutual Funds and the Regulatory Capture of the SEC

Regulatory agencies are created to act in the public interest but often end up acting in the interests of those regulated. This is known as regulatory capture. The theory of regulatory capture may be given both a broad and narrow interpretation. Under a broad interpretation, a group of entities seeking regulatory favor or “a special interest” affect state intervention in various areas, including taxation, monetary policy and legislation. Under a narrow interpretation, special interest groups manipulate regulators directly.

Mutual fund assets in the U.S. currently exceed $16 trillion, and these assets generate more than $100 billion per year in revenue … Read more

Paul Weiss Discusses M&A at a Glance for October

M&A volume in October 2016 increased to record levels, as measured by total dollar value, largely due to a spike in the number of megadeals, with eight October deals valued at or above $10 billion dollars. Total deal volume in the U.S. and globally rose in October 2016, by 163% to $341.10 billion and by 75.6% to $549.10 billion, respectively—the highest monthly deal volume totals since the inception of this publication in April 2012.  Despite the increase in M&A volume, however, the number of deals continued to fall towards record-low territory, with U.S. deals falling by 8.5% to 668 and … Read more

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Why Public Benefit Corporations?

Of all the social and economic challenges to the current state of Delaware corporate law, perhaps the most potentially revolutionary is the shift in attitudes about the very purpose of corporations.  Delaware corporate law holds as a core precept that the corporation’s goal is to maximize shareholder value.  Corporations’ freedom to serve the goals of other corporate constituencies (such as employees, customers, or the communities in which the companies operate) or to serve broader goals such as protecting the environment or aiding the poor is constrained by the requirement that any such efforts be primarily aimed at improving the bottom … Read more

Weil, Gotshal Discusses Universal Proxy Cards in a Trump Administration

On October 26, 2016 the U.S. Securities and Exchange Commission proposed proxy rule amendments that would require, in a contested election of directors, the public company and the shareholder activist to each use a “universal” proxy card – i.e., a card that includes the names of both parties’ nominees.  Under the proposal, shareholders would be able to vote by proxy for a mix of company and dissident nominees of their choosing (i.e., “splitting the vote”).  Currently, split-ticket voting can be accomplished only by attending the shareholder meeting and voting by ballot.  The proposed changes are an attempt by the SEC … Read more

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Quacks or Bootleggers: Who’s Behind Hedge Fund Regulation?

Attempts by U.S. federal officials to regulate corporate governance have been criticized by prominent scholars as “quackery.”[1] Major reforms like Sarbanes-Oxley and Dodd-Frank may in fact do far more harm than good. But what if these efforts at healing our financial system are more than just poorly designed and executed? What if, instead, they are achieving precisely what they were designed to achieve? What if they were designed not by quacks but by bootleggers?

In 1999, Bruce Yandle, emeritus dean and professor of economics at Clemson University, proposed a public-choice economics version of the old saying, “politics makes strange … Read more

Shearman & Sterling Discusses U.S. Election’s Effect on International Sanctions

The election on November 8 has significant implications for international sanctions, particularly with respect to Iran, Cuba, and Russia. Although we do not want to be unduly alarmist, President-elect Trump’s statements on the campaign trail, should they be carried through to policy in his Administration, certainly suggest a U-turn in US policy. With respect to Iran and Cuba, the possibility of such a change in direction will need to be taken into account by persons and companies who have begun to enter into commercial arrangements with those countries in the expectation that the recent easing of sanctions would continue. With … Read more

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What Corporate Law’s Emphasis on the Long Term Might Mean

To read influential corporate lawyers, legal academics, and jurists, shareholders are an alarmingly myopic bunch who demand that corporate directors and managers make short-term decisions that sacrifice long-term value. The group receiving the most scolding of late is hedge fund activists. Leo E. Strine, Jr. the chief justice of the Delaware Supreme Court and a commentator on corporate law, says we “must recognize that directors are increasingly vulnerable to pressure from activist investors and shareholder groups with short-term objectives, and that this pressure may logically lead to strategies that sacrifice long-term performance for short-term shareholder wealth.” Delaware corporate law enshrines … Read more

Debevoise & Plimpton Discusses The SEC’s Robare Decision

On November 7, 2016, the U.S. Securities and Exchange Commission (the “Commission”) overturned an Administrative Law Judge’s (the “ALJ”) initial decision[1] and issued an opinion In re The Robare Group, Ltd., Advisers Act Rel. No. 4566 (Nov. 7, 2016), finding that investment adviser The Robare Group, Ltd. (“TRG”) and its principals, Mark Robare and Jack Jones (collectively, the “Respondents”), negligently failed to fully and fairly disclose potential conflicts of interest arising from an arrangement with a mutual fund manager (the “Fund Manager”) pursuant to which the Fund Manager paid Robare for maintaining client assets in certain mutual funds … Read more

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Shareholder Activism in the Era of Trump: What Strategy Works?

In the approaching Era of Trump, we are likely to see much deregulation, reduced public enforcement, and possibly some curbs on private enforcement.  Corporate compliance efforts may also be downsized, and compliance officials may learn again to defer to the judgment of the entrepreneurs in the corporation’s profit centers.  If a bubble develops in financial stocks (as seems more than possible), some corporate debacles and scandals become predictable.  What defenses do shareholders have in this brave new world?

Here, Wells Fargo & Co’s decision to claw back a record $60 million from two senior executives ($41 million from CEO John … Read more

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SEC Chair White Offers a New Model for Enforcement

Good morning and thank you, Dean (Trevor) Morrison (of New York University Law School) for that very kind introduction. It is a pleasure to be here today and I want to thank the NYU Program on Corporate Compliance and Enforcement and the NYU Pollack Center for Law and Business for co-sponsoring this program. These programs provide important forums for sophisticated dialogue on critical white collar enforcement issues, which have an increased prominence post-financial crisis. I am honored to join your list of distinguished speakers.

Consistent with the core missions of these programs, I will talk to you today primarily about

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Community Banks Play an Important Role in International Trade

Small and medium-size enterprises (SMEs) play a significant role in the global economy, accounting for a substantial portion of employment and domestic production. According to some estimates, SMEs’ contribution to gross domestic product exceeds 51 percent in high-income countries, consistent with the general consensus that SMEs are “engines” of economic growth. With an increasing number of SMEs engaging in international transactions, their influence on the volume of international trade has increased as well. In the U.S alone, SMEs represented 97 percent of all importers and 98 percent of all exporters, and accounted for 31 percent and 33 percent of imported … Read more

Ropes & Gray Discusses Recent Proxy Access Developments

To date, nearly 300 companies have adopted proxy access bylaws, including over 40 percent of S&P 500 companies. Given the widespread adoption of proxy access by large U.S. companies, it was only a matter of time before a shareholder actually used proxy access. And, on November 10, 2016, activist investor firm, GAMCO Investors (“GAMCO”), became the first investor in the United States to use a company’s proxy access bylaw to nominate a director candidate for inclusion in a company’s proxy materials.

Separately, the staff of the SEC’s Division of Corporation Finance recently issued four no-action letters involving requests to exclude … Read more

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How Venture Capital Improves the Market Value of Firms that Go Public

It is well established that venture capitalists can improve the product market value — the quality of projects and employees — at the private firms they invest in, either by making the firms more efficient (Chemmanur, Krishnan, and Nandy (2011)) or through monitoring (see, e.g., Gompers (1995) or Lerner (1995)). However, entrepreneurs and investors also talk about venture capitalists helping to create value for the firm in the financial market at the time the firm goes public. The channels through which such value is created, however, are less well-understood. In our new paper, available here, we explore a new … Read more

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SEC Investor Advocate Talks Dodd-Frank and Regulation’s Future

Today (November 16), we will consider the future of financial regulation and, more specifically, whether the Dodd-Frank Act went too far.[1].  I am I happy to share my views with you, but before I begin, I must give the standard disclaimer that my remarks are my own and do not necessarily reflect the views of the Commission, the Commissioners or my colleagues on the Commission staff.

The Dodd-Frank Act, of course, was adopted in the wake of the financial crisis—which, as you’ll recall, was no ordinary crisis.  As of January 2011, when the Financial Crisis Inquiry Commission issued

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Debevoise & Plimpton Discusses OCC and CFPB’s Approaches to FinTech

This is the fourth in a series examining the increased regulatory scrutiny on new and innovative financial technologies (“FinTech”).[1]

This update considers the initiatives of two federal regulatory agencies—the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”)—and their approaches to balancing regulation with FinTech innovation.[2] In examining these two models, we first discuss the OCC’s recent issuance of a framework regarding responsible innovation and the establishment of an office to implement the framework. Then, we discuss the CFPB’s Project Catalyst, and its recent report on its efforts … Read more

SEC Announces Chair Mary Jo White’s Departure Plans

Securities and Exchange Commission Chair Mary Jo White, after nearly four years as the agency’s head, today announced that she intends to leave at the end of the Obama Administration.  Under Chair White’s leadership, the Commission strengthened protections for investors and the markets through transformative rulemakings that addressed major issues highlighted by the financial crisis.  The Commission also instituted a new approach to enforcement that has resulted in greater accountability and record actions through, among other things, the use of admissions of wrongdoing and enhanced data analytics and technology.

Chair White, who became the 31st Chair of the SEC in … Read more

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Restructuring Venezuelan Debt

As sovereign borrowers and their creditors know all too well, the legal framework governing their respective rights and obligations (the so-called international financial architecture) lacks an effective means to enforce payment in most circumstances or to modify payment obligations when the debtor is unable to honor the original terms of its debts. The recent case of Argentina exemplifies both of these shortcomings.  Venezuela’s debt instruments and debt management techniques developed over time nonetheless hold out the promise that the country may forge a path to a successful rearrangement of its debts when a government committed to sound economic policies and … Read more

Cleary Gottlieb Discusses Further Easing of Cuban Sanctions

On October 14, 2016, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the Department of Commerce’s Bureau of Industry and Security (“BIS”) announced revisions to the Cuban Assets Control Regulations (“CACR”) and the Export Administration Regulations (“EAR”), respectively, continuing the incremental easing of the U.S. embargo on Cuba.  Simultaneously, the President announced a new Presidential Policy Directive for U.S.-Cuba normalization (“Cuba PPD”), which aims to underpin the Obama Administration’s vision for normalizing relations with Cuba with government-wide guidance.  However, the vision remains in important respects aspirational; statutory constraints on Cuba policy continue to limit the … Read more

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What Is a Personal Benefit for a Tipping Violation?

The financial services industry is watching the Supreme Court closely in anticipation of a decision in Salman v. United States,[1] which will be the Court’s first insider trading case since United States v. O’Hagan in 1997.[2]  Salman concerns the tipping violation the Court recognized in Dirks v. SEC[3] in 1983 and calls on the Court to consider the requirement that an insider receive a personal benefit in exchange for disclosing material, nonpublic information to a tippee.  The meaning of the personal benefit requirement has been controversial and led to a difference between the Ninth Circuit in … Read more

PwC Discusses OCC’s Scrutiny of Bank Sales Practices

U.S. regulators, led by the Office of the Comptroller of the Currency (OCC), are starting to examine sales practices at large and mid-size banks. They will likely first focus on whether banks have opened accounts for customers without consent as recently highlighted in press reports. Examiners will consider deposit accounts, credit cards, and other unsecured lines of credit, which can generate customer fees or impact credit scores. Many banks have been actively preparing for these exams, and several are far along in conducting their own self assessments (with a couple recently announcing preliminary results).

Beyond this historical inquiry, regulators will … Read more

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Scattered Information’s Value to Investors

The more an investor can learn about a financial security’s value, the better his trades and the higher his profits can be.  But research is costly, and trading on one’s own information inevitably affects prices, which then reveal some of the results of that costly research to others for free.  This “information leakage” or “information free-riding” problem raises an important question: When is it worth the effort to learn about an asset’s value?  That question has taken on a new dimension as firms globalize and diversify.

The value of a financial security may comprise several distinct elements that depend on … Read more

Arnold & Porter Discusses Proposed CFTC Rules for Cross-Border Swaps

The Commodity Futures Trading Commission (CFTC) recently proposed new regulations that will significantly affect international swap transactions.[1] At present, international swap market participants look to the CFTC’s 2013 Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations (Cross-Border Guidance or Guidance)[2] in order to determine whether they must register with the CFTC as Swap Dealers or Major Swap Participants (MSPs), and whether and how the CFTC’s business conduct standards apply to their businesses. The proposed new regulations would formally codify certain provisions of the Guidance while refining and superseding some others.

The CFTC has … Read more

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The Last Days of Stock Exchange Listings for Sovereign Debt?

On October 25, 2016, the Argentine province of Santa Fe issued $250 million in international bonds. One aspect of this offering is highly unusual for international sovereign debt: the bonds are not listed on any of the major global stock exchanges.

Such offerings are almost always listed, and usually on the Luxembourg Stock Exchange. Why did Santa Fe decide to stray from the herd? Perhaps it realized that there was little value to be gained from listing on an exchange.

In our recent paper, “The Sovereign-Debt Listing Puzzle,” we investigate what purpose is served by listing sovereign bonds … Read more

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Corporate Governance for a Changing World: Report of a Global Roundtable Series

Between 2014 and 2016, European law firm Frank Bold and the Modern Corporation Project at Cass Business School of City, University of London, hosted a global series of roundtables on corporate governance in which we engaged with over 260 practitioners, academics, and regulators. On the basis of these roundtables we have recently presented a report, available here, with concrete suggestions for the development of corporate governance.

Mainstream corporate governance models have been narrowing since the 1970s in order to put the maximisation of shareholder value at the centre of corporate attention. The resultant focus on short-term share price leads … Read more

Sullivan & Cromwell Discusses UK Court Ruling Giving Parliament a Say on Brexit

Following the referendum vote on June 23, 2016, the UK government proposed to notify the European Council by March 31, 2017 under article 50(2) of the Treaty on European Union of the UK’s decision to leave the EU.

The UK government’s proposal to give this notification without the prior approval of Parliament was challenged in the High Court in London.  Judgment was given by the Court on November 3.

The Court held that the UK government does not have the ability to use its residual powers under UK constitutional law (known as “prerogative powers”) to notify the UK’s withdrawal from … Read more

Gibson Dunn Discusses Legal Implications of Expanded Use of Blockchain Technology

The use of digital currencies, like Bitcoin, is becoming widespread. To date, much of the focus on digital currencies has been directed at their potential to substitute for or complement fiat currencies, but the true innovation lies in their underlying infrastructure – the decentralised ledger of transactions called the ‘blockchain’, which could have extensive effects in myriad applications.

By way of background, Bitcoin’s system is decentralised – no central authority tracks, approves or secures transactions on the Bitcoin network. To achieve security and usability, Bitcoin’s database (the Bitcoin blockchain) utilises cryptography. The Bitcoin blockchain is a publicly viewable ledger that … Read more

Ropes & Gray Offers Update on Brexit and European Data Protection

Following the “Leave” result of the United Kingdom’s referendum on its membership in the European Union, there has been uncertainty regarding the implementation of the General Data Protection Regulation (GDPR) due to come into effect on 25 May 2018. Our report on the GDPR explains the key changes to Data Protection Law.

On 24 October 2016, the Secretary of State for Culture, Media and Sport, Karen Bradley MP, confirmed that the UK will still be in the EU in 2018 and will be opting-in to the GDPR. As a result, businesses collecting or using personal data while providing goods or … Read more

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Commissioner Kara Stein Offers a Vision for Data at the SEC

Thank you, Michael [Barr], for that kind introduction.  Thank you also to the University of Michigan and the Office of Financial Research for organizing this important conference.  I am pleased to be here with you today.  This conference is a vital opportunity to discuss some of the forces shaping financial markets and regulation.

“What hath God wrought.”  That message, sent from Washington to Baltimore in 1844, signaled the arrival of the telegraph.  Originally an exclamation, but sometimes written as a question, it captures both the wonder and uncertainty that new technologies can inspire.[1]  The telegraph proved to be a transformative … Read more

Latham & Watkins Discusses New SEC Guidance on CEO Pay Ratio Rules

The staff of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) has issued new guidance on the SEC’s rules requiring companies to disclose the pay ratio between their CEO and median compensated employee. The staff’s new Compliance and Disclosure Interpretations (the C&DIs) provide helpful clarity on how to determine the relevant employee population and the median employee for purposes of the ratio, although questions remain.

Background

In  August 2015, pursuant to Section 953(b) of the Dodd Frank Act, the SEC adopted the CEO pay ratio rules (the Rules), which added a new Item 402(u) of Regulation … Read more

Morrison & Foerster explains why CFPB Makes FinTech Headlines

The Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) made headlines in FinTech on October 24, 2016. First, the Bureau released its first-ever Project Catalyst report on promoting consumer-friendly innovation (the “Report”). The Report summarizes the work conducted by Project Catalyst to date and sets forth in broad strokes some of the financial innovations that the CFPB is encouraging. While the Report does not represent new policy, it provides a helpful glimpse into the key developments in financial services that the Bureau is encouraging or monitoring.

On the same day, Director Richard Cordray addressed Money 20/20 in Las Vegas, Nevada, … Read more