Securities Regulation

Hobson’s CHOICE: The Financial CHOICE Act of 2017 and the Future of SEC Administrative Enforcement

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Professor John C. Coffee, Jr. of Columbia Law School is scheduled to speak on June 22 before the Securities and Exchange Commission’s Investor Advisory Committee, which asked him to address the CHOICE Act’s impact on the SEC’s enforcement powers. These are his remarks:

The Financial CHOICE Act of 2017 has now passed the House of Representatives on a strict party-line vote (winning not a single Democratic vote), but its prospects in the Senate seem dim. Nonetheless, a fair chance exists that individual provisions of this bill will make it through the Senate in one or more watered-down compromises. But which … Read more

King & Spalding Discusses Potential Effects of SEC Disgorgement As a Penalty

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In the week since the Supreme Court’s unanimous decision in Kokesh v. SEC,[1] which rejected the Securities and Exchange Commission’s longstanding position that disgorgement was an equitable remedy not subject to the five-year statute of limitations in 28 U.S.C. § 2462, many have commented about the increased need for the SEC’s enforcement attorneys to complete their investigations quickly and the frustration  that hidden ill-gotten gains would never be recovered due to the five-year limit.  These are important and valid ramifications, and we include them in this article.

But the Kokesh decision raises other potential consequences that have not … Read more

Arnold & Porter Discusses the Federal Reserve’s Focus on Fair Lending

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Fair lending compliance and community benefit plans are increasingly important factors in the merger and acquisition (M&A) approval process. In 2016 and the first quarter of 2017, the Board of Governors of the Federal Reserve System (Federal Reserve) approved 20 bank or bank holding company M&A applications. Fair lending compliance history was an essential element of the regulatory analysis in these cases. While the Federal Reserve focused on compliance issues beyond fair lending —such as the Bank Secrecy Act, overdraft policies, residential servicing, commercial real estate concentration, and enterprise risk management—fair lending was one of the hottest compliance issues that … Read more

Paul Weiss Discusses Recent Delaware Appraisal Decisions

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Two decisions by the Delaware Court of Chancery in the past two weeks reached seemingly disparate outcomes on fair value for the companies involved, but together stand for the general trend of recent appraisal decisions that deal price is the best indicator of fair value if the price resulted from a fair and robust sale process. However, the court will rely on other methods to determine fair value if the record suggests that the process could not have resulted in a deal price that is a reliable indicator of fair value (for example, where there were board conflicts or other … Read more

How Principles of Good Governance Can Improve Oversight of Financial Regulatory Institutions

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Financial regulatory institutions are at the center of intense debates over how to supervise financial firms and markets. They are also the focus of an important and growing body of literature that is mainly concerned with the question, “Who should regulate the regulators.” Financial regulatory institutions are usually audited as part of the review of a particular country by international organizations such as the International Monetary Fund, the World Bank, or the OECD. In practice, this means that the structure of financial regulatory institutions and the conduct of financial regulators are not regularly and consistently monitored.

In our recent … Read more

Proskauer Rose Discusses Mega-Mergers

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Efficiencies, economies of scale, and the general desire to improve the customer experience are the lifeblood of all mergers. And one of the most common efficiencies in any deal comes from enhanced purchasing power, or the ability to lower costs through increased volume. Long before a deal is announced, merging parties will create clean teams focused on comparing costs, hoping to leverage the better rates that one firm or the other has negotiated with key vendors. This low hanging fruit – simply moving volume from high-cost vendors to lower cost ones – is among the most basic, least speculative efficiencies … Read more

Skadden Discusses Potential Impacts of the Financial CHOICE Act

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On June 8, 2017, the House of Representatives passed, by a 233-186 vote (with all Democrats and one Republican voting against), the Financial CHOICE Act of 2017, a bill principally designed to reverse many features of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). The House Financial Services Committee majority has provided both an executive summary and a comprehensive summary of the current bill. It is unclear at this time what action the U.S. Senate will take with regard to the bill in its current form.

While the vast majority of the bill relates to the … Read more

Sullivan & Cromwell Discusses Insider Trading Charges

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On May 24, 2017, the United States Attorney for the Southern District of New York announced the arrests and criminal indictment of four individuals for alleged insider trading on the basis of confidential information about upcoming federal government actions that was obtained from a government employee.  A fifth defendant pleaded guilty and is cooperating with prosecutors.  Four of the five individuals also were named in a civil complaint filed by the Securities and Exchange Commission for the same conduct.

Theodore Huber, Robert Olan and Jordan Fogel served as investment professionals at an investment adviser to funds focused primarily on the … Read more

Reviving Shareholder Reliance in Securities Fraud Cases

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To be a public company in the United States is to be subject to an array of federally-imposed disclosure requirements. In my forthcoming article, Reviving Reliance, I describe how the private causes of action available to enforce these requirements have failed to keep pace with the changing purposes of mandatory disclosure. I trace the problem to the functional elimination of the element of reliance from claims brought under Section 10(b) of the Securities Exchange Act[1] via the adoption of the fraud-on-the-market doctrine. I ultimately conclude that courts can better effectuate federal policy by drawing distinctions between actual reliance … Read more

Can Regulators Prevent Corporate Scandals? What 200 Years of History Tell Us

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Are regulatory interventions in financial markets delayed reactions to market failures, or can regulators pre-empt corporate misbehavior? Given the high economic and social costs associated with corporate scandals, and the substantial resources countries dedicate to preventing such misconduct, the answer to this question is of utmost importance.

Anecdotal evidence suggests that regulatory activity has a strong reactive component. History offers several prominent examples: The British Joint Stock Companies Act of 1844 followed widespread business failures and bankruptcies, the U.S. Securities Act of 1933 and the Securities Exchange Act of 1934 are often seen as a reaction to the Great Depression … Read more

Proskauer Rose Discusses SEC Insider Trading Investigations

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The SEC has continued to pursue a number of insider trading cases this year, both large-scale and small.  Some of those matters involved trades that yielded relatively small amounts of profits: $40,000-$60,000.  Why does the enforcement division spend resources on these smaller cases?  First, they serve as a reminder that violations can be identified, even if trades are relatively small.  And the cases are relatively easy to prove when a connection to an insider source can be readily identified.  More importantly, these cases demonstrate that the SEC is uncovering new leads through data analysis.

It is worth noting that the … Read more

Davis Polk Discusses Target’s Cyber Breach Settlement

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On May 23, Target Corp. reached a record $18.5 million settlement with 47 states and the District of Columbia to end investigations into Target’s data breach in 2013.  The settlement highlights the growing list of specific measures that companies are expected to have in place to mitigate the risk of cyber breaches.

In 2015, Target reached a class action settlement with consumers that required the company to implement certain measures to protect customer information. In re Target Corporation Customer Data Security Breach Litigation No. 14-2522 (D. Minn. Mar. 18, 2015).  Comparing the measures that were required in the 2015 settlement … Read more

Paul Weiss Discusses Dismissal of Breach of Duty and Quasi-Appraisal Claims

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Recently in In re Cyan, Inc. Stockholders Litigation, the Delaware Court of Chancery dismissed a fiduciary duty claim and a request for a quasi-appraisal remedy in connection with the acquisition of Cyan, Inc. by Ciena Corporation. Relying on principles of existing Delaware case law, the court held that the business judgment rule applied to the Cyan board’s decision to approve the mostly stock-for-stock merger, a holding further reinforced under the doctrine set forth in Corwin v. KKR Financial Holdings LLC because Cyan shareholders had voted to approve the deal. The shareholders alleged numerous board conflicts (including that certain directors were … Read more

Skadden Discusses Disclosure Trends

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The Brexit vote and President Donald Trump’s election and proposed regulatory and other reforms have led to worldwide geopolitical uncertainty. We expect reporting companies will continue to disclose risk factors relating to these events in their quarterly and annual filings in the foreseeable future.

We previously examined the Form 10-Q quarterly reports of public reporting companies registered with the U.S. Securities and Exchange Commission (SEC) that were filed after the Brexit referendum on June 23, 2016, through August 31, 2016 (the Initial Analysis). (See our October 3, 2016, client alert “SEC Disclosure Brexit Trends.”) In that analysis, we … Read more

Proskauer Rose Discusses How Labor Department’s New Fiduciary Rule Affects Investment Fund Managers and Advisers

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The U.S. Department of Labor’s (DOL) final rule significantly expanding when a person is considered to be a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code) as a result of providing investment advice is set to become applicable at 11:59 PM (local time) on June 9, 2017. The expanded final rule might cover certain marketing and other related activities common to the investment management industry (including the private investment fund industry).

The final rule was initially set to become applicable on April 10, 2017, but the DOL delayed the final rule’s … Read more

Harmful, Harmless, and Beneficial Uncertainty in Law

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Law is full of vague standards, legally relevant facts are frequently unclear, sanctions and damages are often uncertain, and the likelihood of detection is rarely known precisely. In our forthcoming paper, we ask how these sources of uncertainty, common in any legal system, affect the utility of risk-neutral actors such as business firms. We conclude that the answer depends on the source of uncertainty and the specifics of the enforcement environment.

Our most consequential finding is that an increase in legal or factual uncertainty harms firms when enforcement is targeted, meaning that greater deviations from what the law demands lead … Read more

Proxy Delivery Methods Show How Managers Rely on the Retail Shareholder Vote

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Previous research on shareholder voting has placed most of the emphasis on the role of institutional shareholders. In our recent study, however, we provide evidence that managers strategically rely on the support offered by retail shareholders to ensure that their agenda passes and to communicate strong overall shareholder support during times of poor performance.

Our study is designed around the introduction of electronic proxy delivery. In 2007, the Securities and Exchange Commission (SEC) implemented rules allowing for electronic delivery of proxy materials. The revised system allows firms to choose between the traditional, mailed “full-set delivery” of proxy materials and the … Read more

The Supreme Court Meets Lehman Brothers

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The U.S. Supreme Court will soon decide an unusual, yet important, case brought by investors in bonds issued by Lehman Brothers, the infamous investment bank that collapsed in September 2008. The case, CalPERS v. ANZ Securities, Inc., is not about whether those investors were defrauded: It is widely known that Lehman concealed its exposure to subprime mortgage loans and complex derivatives, just as it used accounting gimmicks to hide risks. The investigation after Lehman’s bankruptcy showed incontrovertibly that its investors had been wronged.

Nor is the case about whether those investors could properly recover in class action litigation alleging … Read more

Paul Weiss Discusses Dismissal of Breach of Fiduciary Duty Claims

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In In re Massey Energy Company Derivative and Class Action Litigation, the Delaware Court of Chancery recently dismissed shareholders’ derivative and putative direct claims alleging that Massey’s former directors and officers caused the company to willfully disregard safety regulations. Despite finding that shareholders had stated a “viable” claim that the directors had breached their duty of oversight under In re Caremark International, Inc. Derivative Litigation – claims that are difficult to plead successfully – the court found that they nevertheless lacked standing because they no longer held shares of the corporation due to an intervening merger.

Background

In April … Read more

Skadden Discusses Director Disinterestedness and Independence in Delaware

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Delaware law provides important tools for directors to maintain control of derivative lawsuits.1 One such tool is the “demand requirement” embodied in Court of Chancery Rule 23.1, which requires that before a stockholder acts on behalf of the corporation, the stockholder must either demand that the board take action or establish that demand would be futile. The seminal opinion of the Delaware Supreme Court in Aronson v. Lewis established the test used by Delaware courts in determining whether a plaintiff stockholder’s demand would have been futile: Has the plaintiff stockholder seeking to proceed with a claim on behalf of … Read more