Proskauer discusses Supreme Court’s Omnicare Decision, Clarifying Liability for Statements of Opinion in Registration Statements

The U.S. Supreme Court ruled today that a statement of opinion in a registration statement cannot be actionable as a misstatement of fact under § 11 of the Securities Act of 1933 if the issuer actually believed the opinion expressed. However, the statement of opinion can be actionable on an omissions theory if the registration statement omits material facts about the issuer’s inquiry into, or knowledge about, the statement of opinion and if those omitted facts conflict with what a reasonable investor would have expected from a contextual reading of the statement of opinion.

The Supreme Court’s decision in Omnicare, Read more

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The Ideal Proxy Statement

We recently published a study (“2015 Investor Survey: Deconstructing Proxy Statements”) in collaboration with RR Donnelley and Equilar that examines how institutional investors use the information in corporate proxies to make voting and investment decisions. Full results are available here.[1]

We find that institutional investors are highly dissatisfied with the quality of information that they receive about corporate governance policies and practices in the annual proxy. Across the board, investors want proxies to be shorter, more concise, more candid, and less legal. Fifty-five percent of investors believe that the typical proxy statement is too long. Forty-eight percent believe … Read more

Davis Polk discusses SEC Issuance of Reporting Rules for Security-Based Swaps

On February 11, 2015, the Securities and Exchange Commission issued a final rule (the “Final Rule”) and proposed amendments (the “Proposed Rule”) on the reporting and public dissemination of security-based swap (“SBS”) information, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Notably, the SEC:

  • delayed establishing a final compliance schedule for SBS reporting;
  • left many details of SBS reporting, including many of the required data elements, the format of reports and the assignment of product identifiers for standardized SBS, to registered security-based swap data repositories (“SBSDRs”);
  • created an interim phase for the reporting of SBS information,

Read more

Morrison & Foerster discusses 2014 SEC Annual Conference Highlights and Plans for 2015

With Chair Mary Jo White in her second year at the helm, the Securities and Exchange Commission showcased its efforts, improvements, and enforcement successes at this year’s SEC Speaks Conference. The Commission highlighted that it brought a record number of cases—755 enforcement actions—in fiscal year 2014, and obtained $4.1 billion in monetary relief. The Commission continues to emphasize its increased use of data analytics in both its regulatory efforts and enforcement investigations. As usual, the Commission, and the Division of Enforcement in particular, used the Conference to present their case that the SEC is firing on all cylinders.

Insider Trading Read more

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Evidence on Contagion in Management of Earnings

In this paper, we study peer firm behavior to ascertain (i) whether exposure to financial misrepresentation fuels similar behavior or deters it among peer firms; and (ii) what factors increase or decrease the likelihood of contagion? The prior years have witnessed a remarkable increase in news about corporate misconduct including fraudulent financial reporting at companies such as Enron, WorldCom, and Tyco, the collapse of Arthur Andersen on allegations of lax or corrupt audit work, tax shelters structured by KPMG to assist clients in minimizing tax obligations, and the revelation of the $50 billion Ponzi scheme run by Bernie Madoff. Given … Read more

Wilson Sonsini discusses Proposed 2015 Amendments to the Delaware General Corporation Law

The Delaware Corporation Law Council—composed of members of the Delaware bar charged with proposing annual amendments to the Delaware General Corporation Law (DGCL)—has proposed several potentially significant amendments to the DGCL. Among other things, the amendments would seek to prohibit “fee-shifting” provisions in charters or bylaws. They would authorize forum selection provisions in charters and bylaws if such provisions allow claims to be brought in Delaware courts but prohibit them if they do not. The proposed amendments also would alter various aspects of the appraisal rights available to stockholders upon a merger.[1] The proposed amendments still need to be … Read more

Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws

Courts and commenters regularly describe corporate charters and bylaws as “contracts” among shareholders. This necessarily raises the question whether the Federal Arbitration Act (FAA)[1] – which requires that arbitration clauses in “contracts” be enforced according to their terms – applies to such documents in the same way it applies to ordinary contracts. In a series of decisions involving a single Maryland-based REIT, two courts separately held that corporate bylaws are akin to ordinary contracts and equally subject to FAA analysis.[2] However, in my forthcoming article, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, … Read more

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Delaware Throws a Curveball

Since the Corporation Law Council of the Delaware State Bar Association announced earlier this month that it was recommending statutory amendments to prohibit “loser pays” fee shifting bylaws and charter provisions (and thus overrule the Delaware Supreme Court’s 2014 decision in ATP Tour v. Deutscher Tennis Bund[1]), a predictable reaction has followed. Plaintiff’s attorneys and most academics applauded the decision, fearing that the alternative would be the death knell of private enforcement. In contrast, conservatives have attacked the proposed legislation, seeing it as the end of Delaware’s position as the champion of “enabling” corporate legislation and predicting that … Read more

mary jo white

Chair White explains Disqualifications, Exemptions and Waivers Under the Federal Securities Laws

Thank you, Bill, for that very kind introduction.  I am honored to be here.I see that you have an ambitious agenda over the next two days discussing some of the hardest legal challenges companies are facing today.  We at the SEC also have a very ambitious agenda of priorities of interest to you, including completing mandated Dodd-Frank and JOBS Act rulemakings, continuing to optimize our equity and fixed income markets, enhancing our monitoring and oversight of the asset management industry, making further progress on our disclosure effectiveness review, continuing to strengthen our critical exam program, which addresses the areas posing

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Simpson Thatcher discusses SEC Filing Sarbanes-Oxley Clawback Action Against Two Former CFOs

On February 10, 2015, the Securities and Exchange Commission (“SEC”) filed settled administrative cease-and-desist proceedings against two former chief financial officers (“CFOs”) of Saba Software, Inc. for their failure to reimburse the company for the stock-sale profits and bonuses they received in the 12 months following the filing of periodic reports necessitating restatement, as required under Section 304(a) of the Sarbanes-Oxley Act.[1] The two respondents consented to the entry of the cease-and-desist order without admitting or denying the findings therein.

The clawback action stems from the falsification of Saba’s time records over a period of more than four years, … Read more

Clifford Chance discusses Setting a New Benchmark

The Council of the EU has reached political agreement on the EU Benchmark Regulation (the Regulation). The legislation will impose controls on a range of financial market activity that uses interest rate, currency, commodity and other indices to set prices and contract values. Although not yet finalised the new rules are expected to be published later this year and apply in 2016. The Regulation is expansive in scope, covering not only indices such as LIBOR and the DAX but also many other less obvious ‘benchmarks’. The new rules could lead to the transformation or even disappearance of some benchmarks, presenting … Read more

PwC discusses Market Making Exemption Under the Volcker Rule

With less than six months to conform to the Volcker Rule’s proprietary trading restrictions, large banks are working quickly to build out their compliance programs. Last summer, they scrambled to build systems to report monthly seven metrics by September 2, 2014, as required by the rule.[1] Now banks’ focus has moved to proving their trading desks’ exemptions from the proprietary trading restriction as part of their compliance programs that must be in place by July 21, 2015.[2]

Among these exemptions, market making is becoming the most predominantly used. However, the desks taking this exemption (“market making desks”) face … Read more

Steven McNamara

Ethics, Cost-Benefit Analysis, and the HFT Debate

Last year’s best-seller by Michael Lewis, Flash Boys,[1] ignited a firestorm of debate on the subject of high-frequency trading, or HFT. Lewis’s central claim is that the stock markets are “rigged,” with HFT shops skimming sizable amounts off of trades by other, slower traders. The exchanges are allegedly in on the game, as they enable HFT through co-location, private data feeds, and the development of complex special order types, all in return for sizeable fees. Although SEC Chair Mary Jo White quickly rejected Lewis’s claim,[2] public debate continued and a number of lawsuits were filed against the exchanges and … Read more

Trevor Norwitz

Delaware Poised to Embrace Appraisal Arbitrage

Delaware corporations and their advisers have been eagerly awaiting the response of the Delaware legislature to the recent surge in appraisal arbitrage and judicial pronouncements allowing this activity and suggesting that lawmakers should step in if they perceive a problem. It now appears based on a proposal released by the Delaware Corporation Law Council that the legislature may act as soon as this week. If the lawmakers follow the recommendations of the Council (which they usually do) the changes will likely disappoint Delaware corporations, make mergers and acquisitions in that important state more difficult, reduce deal flow, and lead to … Read more

WilmerHale discusses SEC Probe of Corporate Interactions with Whistleblowers

According to a February 25, 2015 Wall Street Journal report, in recent weeks the SEC has sent requests to a number of companies seeking years of nondisclosure agreements, employment contracts and other documents as part of an agency probe into the potential silencing of corporate whistleblowers.[1] The reported probe comes as SEC officials have expressed concerns about “pre-taliation”—the alleged use of express provisions in employment agreements, codes of conduct and severance agreements designed to deter employees from voluntarily communicating with the SEC. Chief of the SEC’s Whistleblower Office, Sean McKessy, has repeatedly warned that the agency’s Enforcement Division is … Read more

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Guiding Through the Fog: Financial Statement Complexity and Voluntary Disclosure

“I am raising the question here and internally at the SEC as to whether investors need and are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with us. […] In some cases, lengthy and complex disclosure may indeed be a direct result of the Commission’s rules.”

– SEC Chair Mary Jo White[1]

Regulators have long voiced concerns over the effectiveness of overly complex and lengthy financial statements in communicating information to investors. Detailed and lengthy disclosures can increase information processing … Read more

ali-li-weining

Managers’ Career Concerns and Asymmetric Disclosure of Bad versus Good News

Managers are concerned about how their current performance would influence their current employer’s and the labor market’s assessment of their ability. An unfavorable assessment of their ability can have significant adverse effects, including termination and poor job prospects thereafter. Thus, career concerns are likely to motivate managers to work hard and generate good performance. We further argue that career concerns may also motivate CEOs to withhold bad corporate news and gamble that subsequent corporate events will turn in their favor, enabling them to bury the bad news.  To test our prediction, we consider two situations when CEOs’ career concerns are … Read more

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The Fragmented Regulation of Investment Advice: A Call for Harmonization

Discussions about regulating investment advice have largely focused on whether to harmonize the laws governing two categories of individuals within the securities world—registered investment advisers and stockbrokers.  The discussion has overlooked insurance brokers who often times also provide investment advice.  Our article broadens the focus by arguing that harmonizing the regulation of investment advice necessarily requires reforms reaching beyond securities regulation and into insurance regulation as well.  We argue that consistent standards should govern the investment advice provided to retail investors.  Given the current regulatory fragmentation, this may only be accomplished by adopting a federal Investment Advice Act.

Today’s fragmented … Read more

tim-deniz-umit

Outside Insiders: Do Limited Partners Obtain Valuable Information about Stocks Backed by their Venture Capital Funds?

If a party obtains information about a public firm before its initial public offering (IPO), and the party themselves is not an insider of the firm, should they be allowed to profit from the information after the IPO? We investigate this question in our research paper, “Outside Insiders: Do Limited Partners Obtain Valuable Information about Stocks Backed by their Venture Capital Funds?” As the title implies, we find that this situation can occur when the IPO is backed by a Venture Capitalist (VC).

Venture Capital backed IPOs account for more than half of all IPOs. In the years … Read more

Simpson Thacher discusses Proxy Access: Whole Foods Delays Annual Meeting, While Several Other Companies Adopt Proxy Access Bylaws

Many public companies continue to consider their options in responding to proxy access shareholder proposals following the Division of Corporate Finance’s unusual announcement that it will not opine on “the application of Rule 14a-8(i)(9) during the current proxy season.”[1] But over the last few days, several companies have made notable decisions. Whole Foods Market, Inc., which had led the charge earlier this proxy season by obtaining no-action relief from the Securities and Exchange Commission (“SEC”) on the ground that it was planning to submit a conflicting management proposal to shareholders, announced on February 13 that it has decided to … Read more