Not surprisingly, cognitive abilities predict many economic and social outcomes such as salary, job complexity, or success in investment decisions. What is surprising, however, is that almost all auditing research analyzing archival data on audit outcomes has assumed that all auditors are equally good at their work. This assumption is especially surprising because auditing involves a great deal of subjective judgments and decisions. Auditors assess various economic estimates that are subject to uncertainty arising from difficulty to predict the outcome of future events. Auditors moreover design and implement tests to evaluate the likelihood of errors in financial reporting.
In our … Read more
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
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
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
… 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
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
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
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).
As discussed in our September 18, 2013 blog post, Section 953(b) of the Dodd-Frank Act mandates that … 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
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