Beaver, Cascino, Correia and McNichols

Bankruptcy in Groups

Group bankruptcies tend to be large (e.g., Global Crossing, Maxwell, MG Rover, Parmalat) and affect a significant number of stakeholders. Business groups constitute a common way for ultimate owners to exercise control over a large number of companies while containing their risk exposure to different parts of the business through limited liability. In countries with underdeveloped financial infrastructures, business groups overcome difficulties in accessing external finance by reshuffling funds within the corporate structure. The bankruptcy of business groups can be extremely complex, especially if the group’s assets are spread over multiple jurisdictions. The nature of business group structure and operations … Read more

Proskauer discusses the D.C. Circuit’s Rejection of District Court Challenges to Pending SEC Administrative Enforcement Proceedings

The U.S. Court of Appeals for the District of Columbia Circuit held that federal District Courts do not have subject-matter jurisdiction to entertain challenges to ongoing SEC administrative enforcement proceedings. A party to a pending administrative proceeding must defend against that proceeding and then seek review from the SEC Commissioners and, eventually, the federal appellate courts.

The D.C. Circuit’s decision in Jarkesy v. SEC follows the Seventh Circuit’s August 2015 decision in Bebo v. SEC in rejecting preemptive constitutional attacks on pending SEC administrative proceedings. In a potentially significant sentence, however, the D.C. Circuit observed that “[t]he result might be … Read more

Guo, Finke and Browning

The Unsophisticated Sophisticated: Old Age and the Accredited Investors Definition

Accredited investors are eligible to participate in unregistered securities offerings such as private equity, venture capital and hedge fund private placements under the SEC’s Regulation D. Based on current SEC Rule 501, an individual investor is qualified as an accredited investor if he has an annual income over $200,000 ($300,000 for a married couple) or a net worth over $1 million excluding primary residence.

The purpose of SEC Regulation D is to preserve a balance between investor protection and capital formation. Exempting some securities issuers from registration and disclosure requirements provides easier access to outside capital by reducing transaction costs … Read more

Wachtell Lipton discusses Delaware Supreme Court Holding that Fully Informed Stockholder Approval of Third-Party Mergers Shields Transactions from Review

In an important ruling last week, the Delaware Supreme Court reaffirmed that control of Delaware companies lies in the boardroom and held that the deferential business judgment rule is the “appropriate standard of review for a post-closing damages action” when a third-party merger “has been approved by a fully informed, uncoerced majority of the disinterested stockholders.”  Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015) (en banc).

The ruling affirms the Court of Chancery’s dismissal of a case challenging KKR’s $2.6 billion acquisition of KKR Financial Holdings LLC (“KFN”), about which we previously wrote.  … Read more

Richard Berner

Remarks by OFR Director Richard Berner at the Third Annual Workshop on Financial Interconnectedness

Thank you to the organizers and BIS for the opportunity to address this research conference on “Global Financial Interconnectedness.” The OFR was established to identify, monitor, and assess threats to financial stability, so improving our collective understanding of the interconnectedness of the global financial system is essential for achieving the OFR mission.

The financial crisis exposed critical gaps in our analysis and understanding of the financial system, in the data used to measure and monitor financial activities, and in the policy tools available to mitigate potential threats to financial stability. These gaps in analysis, data, and policy tools contributed to … Read more


Four Ways to Improve SEC Enforcement

The enforcement program at the Securities and Exchange Commission has been the subject of severe criticism in recent years, and occasional changes to the system have not begun to root out the deeper, structural defects in the investigation and charging process at the SEC.  Reforms going to the essence of the way the Division of Enforcement operates are needed.

The three fundamental problems with SEC enforcement are that the Commission and the Division of Enforcement (1) advance legal theories that are outside settled boundaries, (2) misunderstand or mischaracterize the factual record, and (3) fail to accord fair and impartial treatment … Read more

Jeffrey Boles

Financial Sector Executives as Targets for Money Laundering Liability

Levying record-breaking fines and other punishments, government regulators have maintained a sharp enforcement focus over the past decade on banks and other financial institutions as potential enablers of money laundering activity. The complex web of existing AML laws and accompanying regulations require these institutions to monitor their operations for potential money laundering activity and report suspicious transactions and other customer behavior to government agencies. Consequences for violating AML laws could be disastrous for many institutions, as they may face crippling criminal and civil penalties for facilitating money laundering or for failing to monitor their operations properly for possible money laundering … Read more

Christian Chamorro-Courtland

Collateral Damage: Adopting the LSOC Model and Insurance in the US Futures Markets

It is confounding that futures customers currently receive a lower level of protection than cleared swaps customers under US law. This legal phenomenon has occurred because the law in the US derivatives markets developed in a piecemeal fashion over several decades.

The Commodity Exchange Act (“CEA”) was designed to include protections for the collateral (known as margin) that futures customers post with their Futures Commission Merchants (“FCM”).[1] Section 4d (a) contains a ‘segregation requirement’, which places the margin of a futures customer into a trust account. This prohibits an FCM from “using” a customer’s margin for its own purposes … Read more

bhandari, iliev and kalodimos

Public versus Private Provision of Governance: The Case of Proxy Access

The tradeoffs between facilitating private contracting or imposing a one-size-fits-all solution by regulatory mandate are often unclear. In the field of corporate governance, predicting which approach would be more efficient is particularly complicated. Because the optimal level of shareholder rights may vary across firms, a universal public mandate may be a blunt solution when compared to private contracting. On the other hand, agency problems may impede private market forces, as when entrenched boards resist changes desired by shareholders.

In our new working paper, “Public versus Private Provision of Governance: The Case of Proxy Access,” we study a unique … Read more

Daniel Saavedra

Renegotiation and the Choice of Covenants in Debt Contracts

Incomplete contracting theories build on the idea that it is either not feasible or too costly for contracting parties such as borrowers and lenders to write contracts that perfectly anticipate all future scenarios. As a result, transacting parties are left exposed to the risk that they might face a costly future renegotiation. This expectation can in turn lead to inefficiencies in terms of investment or other value-enhancing corporate decisions. Despite the widespread use of incomplete contracting theories, few if any empirical studies have directly examined the extent to which future renegotiation considerations affect debt contract structures. My paper contributes to … Read more

Karakaş and Mohseni

Staggered Boards and Private Benefits of Control

Our paper titled “Staggered Boards and Private Benefits of Control” adds a new perspective to the ongoing debate about whether staggered (or classified) boards of directors lead to entrenchment. The novelty of the paper is focusing directly on private benefits of control by taking advantage of a new market-based measure of the value of voting rights, which is interpreted as a lower bound for private benefits.

In a firm with a staggered board, only a fraction (usually one-third) of the board members are up for election at an annual shareholder meeting. Thus staggered boards provide a potent anti-takeover … Read more

Ian Ramsey

Takeover Dispute Resolution in Australia and the United States – Takeovers Panel or Courts?

Takeover disputes can be fiercely contested. Given this, there is an important question about the forum for these disputes. Traditionally, takeover disputes were resolved by the courts. However, in recent years, there has been a trend to have these disputes resolved by Takeovers Panels. The countries with these Panels include Australia, the United Kingdom, Hong Kong, Singapore, India, Ireland, New Zealand, Switzerland and South Africa.

Takeover dispute resolution in the United States is undertaken by the courts. According to Cornerstone Research, in 2014, 93% of all mergers and acquisitions deals in the United States valued at over US$100 million were … Read more

Fried Frank explains FinCEN’s Proposed Rule Subjecting Investment Advisers to AML Compliance Requirements

On August 25, 2015, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed a rule that would subject investment advisers that are registered with the U.S. Securities and Exchange Commission (SEC) to certain formal anti-money laundering (AML) compliance program and reporting requirements. The proposed rule seeks to expand the Bank Secrecy Act’s (BSA) definition of financial institutions to cover investment advisers. Currently, the AML compliance rules apply to entities such as banks and broker-dealers, but not to investment advisers and private funds. As a result, the adoption of the proposed rule would have three primary effects, requiring investment advisers to: … Read more


The Governance Implications of DOJ’s New Corporate Conduct Enforcement Guidelines

The September 9 Department of Justice release of guidelines on corporate prosecution is a significant development that should be taken seriously by governing boards across industry sectors. The new guidelines, with their substantially increased focus on individual accountability, will likely affect the board’s approach to legal compliance, internal investigations and interaction with management on matters of regulatory concern. An attentive, yet measured response would be consistent with the board’s fiduciary duty of care.

The guidance, presented in the form of a memo to federal prosecutors from Deputy Attorney General Sally Quillan Yates, concentrates on seeking individual accountability for corporate wrongdoing. … Read more

Georges Ugeux

Could Solvency II Threaten the Financial Stability of European Insurance?

The European insurance sector has approximately 6.8 trillion euros of assets under management. It is the largest European institutional investor, a fundamental element of financial stability and provides support for the global economy. Additionally, the European insurance sector is a significant source of jobs, providing employment for more than one million people. The chart below illustrates the share of GDP represented by insurance premiums, generally defined as penetration ratios.[1]

Solvency II, Figure 1
What is Solvency II?

The Solvency II Directive[2] is a set of regulatory requirements for the European insurance industry. Adopted in 2009, the Directive was slated to take effect … Read more

Hillary Allen

The Possibilities and Practicalities of Financial Product Preapproval

Both parties to a complex financial instrument are likely to be sophisticated – this has led many to wonder why complex financial products need to be regulated at all. However, when the stability of the financial system is at stake, the parties to the transaction shouldn’t be the primary focus. Policymakers should instead be concerned with the externalities that complex financial products can generate for third parties.

Financial innovation – the process by which financial institutions develop new and complex financial products – increases the complexity of the financial system. Complexity is a destabilizing force: not only does complexity make … Read more

Joshua White

The Evolving Role of Economic Analysis in SEC Rulemaking

Four years ago, the SEC set out to improve its cost-benefit approach in rulemaking. After enduring a series of judicial setbacks (e.g., Business Roundtable v. SEC) and criticisms from the Members of the Senate Banking Committee, the SEC conducted an introspective review to identify weaknesses and inconsistencies in its economic analysis process. This assessment resulted in the March 2012 publication of a memorandum (hereafter, the ‘New Guidance’) that formulates how the SEC would conduct cost-benefit analysis moving forward.[1]

The New Guidance mandates that every SEC economic analysis must include: (i) a stated need for rulemaking; (ii) a well-defined … Read more

Colin McCubbins

Special Assessments

Local governments in the United States have long relied on special assessments to fund the provision of goods and services.[1] The assessment is a halfway house between the ad-valorem property tax that pays for public goods, such as schools or highways, and an individual charge or fee for service that pays for individual goods, such as for sewerage or electricity; they are parcel taxes levied on neighborhoods for club goods, such as park construction or street lighting. In many locales, parcel taxes depend not on the value of a property but instead are proportional to the expected benefit that … Read more

Bens, Cheng & Neamtiu

The Impact of SEC Disclosure Monitoring on the Uncertainty of Fair Value Estimates

Fair Value Accounting is arguably the most controversial financial reporting topic debated over the past decade. Conceptually, the idea behind fair value accounting is appealing: if a Balance Sheet is dated as of December 31, 2015, then all of the items reported on that report should be valued as of that same day. After all, the objective of the Balance Sheet is to provide a “snapshot” of the makeup of the firm – its assets and whether these are financed by debt or equity – at a point in time. With this objective, why not value these components at their … Read more

Cahill Gordon discusses Cybersecurity Developments and the Growing Role of Senior Executives and Directors

From the 2013 Target Corporation breach to this year’s attacks on Primera Blue Cross and American Airlines Group Inc., the issue of cybersecurity has emerged at the forefront of risks to be confronted by corporations across a spectrum of industries.1 Given the catastrophic risks and consequences that have emerged from recent cyberattacks and the litigation, regulatory, and enforcement trends that are driving the evolution of relevant legal standards, both senior executives and directors should be proactive in their oversight and monitoring of the implementation and continued refinement of their company’s cybersecurity controls and processes.

I. Government Enforcement and Regulatory Read more