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Machine Learning and the Future of Tax Valuation

The tax law handles many computational issues with extraordinary efficiency. Need to compute employment taxes? The Internal Revenue Code (“Code”) lays out the rate for doing so. Need to ascertain the dollar amount deductible for business mileage expenses? Treasury regulations provide a formula based upon the number of miles driven.

But the same computational efficiencies do not routinely extend to asset valuations. As we discuss in in a recent article, administration of the tax law in this realm is plagued with problems. Admittedly, the problem is not universal; for example, it does not extend to (i) items that are bought … Read more

Skadden Discusses Court Decision Striking Down Women on Boards Law

On May 13, 2022, a judge of the Los Angeles County Superior Court ruled in Crest v. Padilla, Case No. 19STCV27561, that California’s statute requiring California-based public companies to have one to three women on their boards of directors (S.B. 826), depending on their board size, violated the equal protection clause of the state constitution. Although the decision, which following a bench trial, does not specifically address the related requirement in S.B. 826 that companies disclose board member information to the secretary of state, the court’s decision enjoins enforcement of the entire law.

After determining that the taxpayer plaintiffs could … Read more

Voting for Socially Responsible Corporate Policies

Voting is important in the modern public corporation.  Shareholders often vote on corporate referendums, they vote to elect directors, and the directors vote on major corporate policies.  Yet, despite the significance of voting, there has been little research exploring whether it’s effective in different situations, such as when a company is considering environmental and social objectives.

In a recent paper, my coauthors and I examine voting on corporate policies when investors care about both maximizing firm value and achieving one or more social objectives.  We find that the push towards socially responsible corporate policies may lead to worse corporate … Read more

SEC Chair Gensler Testifies Before U.S. House Financial Services Subcommittee

Good morning, Chairman Quigley, Ranking Member Womack, and members of the Subcommittee. I’m honored to appear before you for the second time as Chair of the Securities and Exchange Commission. It is good to be here alongside Federal Trade Commission Chair Khan. As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

The Gold Standard of Capital Markets

I’d like to open by discussing two key years in economic policymaking: 1933 and 1934.

We were in the midst of the Great Depression.

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Does the Threat of Securities Class Actions Add Value for Shareholders? Evidence from China

Securities class actions (SCA) are an important governance mechanism in the U.S. securities market, but there is a significant debate about their costs and benefits to investors. SCA are intended to serve two key functions in investor protection: disciplining and deterring fraud and compensating aggrieved investors. On the one hand, SCA are more efficient and powerful than individual securities suits and, thus, can enhance investor protection. As for deterrence, there is growing evidence that lowering directors’ and officers’ (D&Os) liability risk using corporate charter provisions, D&O insurance coverage, or liability law changes can exacerbate agency problems by reducing managerial vigilance … Read more

Wachtell Lipton Discusses Addressing Market Volatility and Risk in M&A Agreements

Significant volatility continues to disrupt the equity markets, with the major stock indexes swinging multiple percentage points often on a daily basis.  Inflation, rising interest rates, the Ukraine crisis, continuing effects of Covid-19, lasting supply chain issues, a difficult regulatory environment, and uncertainty regarding the global and U.S. economies have had an undeniable impact on the pace of M&A activity so far in 2022.  While the opening months of 2022 have witnessed a number of significant transactions despite these headwinds, most have been all-cash deals, with only a handful of large stock or cash and stock mergers announced to date, … Read more

The Causes and Consequences of Repurchasing Shares

Corporate payouts have reached record levels. Over the past half-century, publicly-held U.S. firms have more than tripled inflation-adjusted dividends, while real share repurchase values have ballooned from $5 billion in 1971 to almost $1 trillion in 2018 and become the dominant form of payout. Given the magnitude of these distributions, it is not surprising that they have garnered the attention of researchers and the skepticism of politicians, who have suggested that buybacks are used in ways that are contrary to the health of the economy and workers. In fact, Democrats recently proposed a 1 percent excise tax on stock buybacks … Read more

SEC Enforcement Chief Speaks on Delays of Defense Counsel

Ordinarily at an event like this one, I’d speak about all the ways in which we are working to protect investors, including our increased focus on the private fund space, the additional resources we’ve committed to our Crypto Assets and Cyber Unit, and other enforcement priorities. And I’d likely close by reassuring each of you in the defense bar that we’re not doing away with the White Paper and Wells processes, but rather streamlining them. But I’d like to take a different approach today given some recent experiences and observations. As is customary, my remarks today express my views, and … Read more

Purpose Proposals 

The shareholder proposal has long been an effective tool for shareholders to bring emerging corporate governance issues to the attention of a company’s board of directors, its managers, and their fellow shareholders. Over time, shareholder proposals have driven a variety of governance reforms, from eliminating staggered boards to adopting majority voting in director elections. Although the subjects of shareholder proposals vary substantially, and some fade quickly into obscurity, others gradually build sufficient support leading not only to their implementation but to their incorporation into future standards of good governance.

At the same time, shareholder proposals are controversial. Critics argue that … Read more

Debevoise & Plimpton Discusses SEC Guidance on Ukraine Disclosure Obligations

On May 3, 2022, the Division of Corporation Finance (“CorpFin”) of the U.S. Securities and Exchange Commission (“SEC”) provided guidance to companies of their disclosure obligations with respect to the direct or indirect impact that Russia’s invasion of Ukraine and the international response have had or may have on their business (the “Guidance”).[1]  As on other occasions, the SEC accompanied the Guidance with a sample letter outlining the questions the SEC may ask an issuer regarding its disclosure of relevant implications arising from Russia’s invasion of Ukraine and the sanctions and export controls imposed in response by various jurisdictions.… Read more

Public Corporations’ Bylaws as Standard Form Contracts

Vast corporate growth over more than a century has weakened shareholder voting rights, as highlighted by, among other things, the rise of dual-voting stock IPOs. The extent of that growth, and the lack of people’s power to negotiate with corporations, provide legal justification for the possible application of standard contracts law to corporate law in general, and especially to the laws regulating publicly-trade corporations.

Applying standard contracts law to corporate bylaws was first recognized in Israel in 1997 by the Israeli Supreme Court and applied to cooperative corporations (and in later opinions to other types of corporations). In this … Read more

Davis Polk Discusses CFPB “Dormant” Authority to Examine Wide Range of Companies

The CFPB plans to use its authority to examine any company providing consumer financial products or services that the CFPB has “reasonable cause” to believe poses risks to consumers.

The CFPB has announced its intention to invoke its “dormant” statutory authority to examine any company providing consumer financial products or services that it has “reasonable cause” to believe poses risks to consumers.1 The authority the CFPB is referring to is a catch-all provision in Title X of the Dodd-Frank Act that can capture a wide range of companies that offer consumer financial products or services to individuals as well … Read more

The Connection Between a Firm’s Investor Base and Media Coverage

The financial media provide information to investors by monitoring firms for fraud, excessive CEO pay, and other questionable behavior, as well as mundane activities such as periodic earnings announcements. However, it is unclear why certain firms get extensive media coverage, along with the resulting benefits, while most do not. We examine the extent to which media coverage varies with firms’ investor base. Specifically, we study in our paper whether and to what extent different types of debt and equity investors, who all vary in their reliance on publicly available information, influence media coverage.

Why Should the Media Care About

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SEC Chair Gensler Talks Security-Based Swaps Market to ISDA

Thank you for the kind introduction. It’s good to be back with the International Swaps and Derivatives Association (ISDA) again.

As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

Swaps emerged in the 1980s to provide producers and merchants with a way to lock in the price of commodities, interest rates, and currency rates. Our economy benefits from a well-functioning swaps market, as it’s essential that companies have the ability to manage their risks.

When I first appeared before this group, as Chair of the Commodity Futures Trading

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Does Going Private Affect Peer Firms’ Disclosures?

Disclosure by publicly listed companies provides critical information to the capital markets and benefits not only firms’ stakeholders but also the overall economy (e.g., Badertscher et al. 2013; Shroff et al. 2017; Barrios et al. 2021). However, the number of U.S. public companies has decreased steadily over the past 25 years. Compared with many other developed markets, the U.S. has few public firms, and this “listing gap” has drawn much attention from market participants, legislators, and regulators. In an influential study, Doidge, Karolyi, and Stulz (2017) conclude that a high number of public companies exiting the public equity market explains … Read more

Sullivan & Cromwell Discusses California Governor’s Executive Order on Blockchain

On May 4, California Governor Gavin Newson signed an executive order that is intended “to foster responsible innovation, bolster California’s innovation economy, and protect consumers” and “create a transparent regulatory and business environment for web3 companies which harmonizes federal and California approaches, balances the benefits and risks to consumers, and incorporates California values such as equity, inclusivity, and environmental protection.”[1]  The executive order outlines several priorities to advance these aims.  The executive order indicates that supporting blockchain technologies and crypto-related assets, in connection with other policy concerns, such as consumer protection, and aligning with the federal government’s approach to … Read more

Dual Class Shares in the Age of Common Ownership

Mark Zuckerberg has virtually all his personal wealth invested in Meta Platforms (formerly Facebook). His incentives as controller of Meta are thus clear: Maximize firm value and private benefits of control, irrespective of the effect that might have on other firms. Meanwhile, BlackRock manages $10 trillion invested in thousands of corporations. Its incentives are equally clear: Maximize the value of its portfolio, irrespective of what happens to any given firm therein. Modern day corporations are thus dominated by two kinds of shareholders with drastically different objectives: Firm value maximizing (FVM) shareholders à la Zuckerberg and portfolio value maximizing (PVM) shareholders … Read more

Davis Polk Discusses DOJ’s Focus on Corporate Crimes of Evading Sanctions, Export Controls

At a recent New York City Bar Association event, Deputy Attorney General Lisa Monaco emphasized the Department of Justice’s focus on sanctions evasion and export control violations as key to its work to combat corporate crime.

The DAG’s discussion

At a recent New York City Bar Association event, Deputy Attorney General Lisa Monaco emphasized the centrality of national security to the Department of Justice’s white collar enforcement efforts. In particular, Monaco pointed to the enforcement of sanctions evasion and export control violations as key to the Department’s work to combat corporate crime. “One way to think about this is as … Read more

Do Venture Capital Funds Overstate Their Performance? The Effects of FOIA

Venture capital (VC) has become an increasingly important asset class for institutional investors such as endowments, pension funds, insurance companies, and sovereign wealth funds, as well as for wealthy individuals. A large amount of money is involved: U.S. VC-backed companies raised nearly $300 billion in 2021. Moreover, there is a great deal of hype related to the potential benefits of VC. Everyone is aware of examples of phenomenally successful VC investments, including in Amazon, Facebook, and Tesla. And a quick Google search reveals many sources touting VC returns of 15 to 30 percent (and sometimes much higher).

The appeal of … Read more

SEC Chair Gensler Speaks at Conference on Financial Market Regulation

The field of economic research is central to our work at the SEC. It helps shape every aspect of our policymaking, from the early design phase to the proposing releases to the consideration of public comments to the adopting releases. It helps us determine the size of fines for enforcement actions. It provides important context for every one of our meetings. I look forward to hearing more about the presentations from today’s conference.

As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

I want

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Does Stakeholder Outrage Affect Executive Compensation?

One-third of S&P 1500 CEOs reduced their base salary in 2020 as the onset of the coronavirus pandemic caused widespread economic disruption. These pay cuts were often accompanied by press releases that emphasized notions of CEOs “leading from the front,” “being all in this together,” and “sharing the pain” of the pandemic with employees. In a new article, we document that a more complex adjustment to CEO pay occurred during this time.  In a controlled analysis of executive compensation, we find that, while many CEO base salaries declined during 2020, the total compensation for all CEOs increased by nearly … Read more

Hedge Funds Versus Private Equity in Hostile Restructurings

July 31, 2020, was an ill-fated day for financier Dan Kamensky. It began on a bright note, as his billion-dollar hedge fund stood to profit from a possible settlement in Neiman Marcus’ bankruptcy.[1] Not only had the Official Committee of Unsecured Creditors on which he served reached a tentative settlement from which they would receive shares in one of Neiman’s valuable subsidiaries, but it looked like Kamensky’s hedge fund could be in the exclusive position to purchase discounted shares from other unsecured creditors who wanted to cash out right away. That is, until 3:15 P.M. that day, when he … Read more

The Twitter Board Bears Personal Responsibility for a Bad Outcome in the Twitter Sale

Let’s be clear about this: The Twitter board was under no legal compulsion to accept Elon Musk’s offer for the company and, from a corporate governance structural point of view, was in an unassailable position until the 2024 shareholders meeting.  The single motivating factor in its decision, apparently, was that the deal was a good one for Twitter shareholders, without apparent regard for how Musk might run the company and the consequence for the social media infrastructure that Twitter had created, much less the public welfare.  In my opinion, the board’s conduct was shockingly near-sighted, and the predictable adverse consequences … Read more

Arnold & Porter Discusses Attacks on Board Diversity Initiatives

Nasdaq’s Board Diversity Rule, approved by the Securities and Exchange Commission (SEC) in August 2021, is the subject of an ongoing, high stakes court battle in the United States Court of Appeals for the Fifth Circuit. The attorneys general of 17 “red” states have faced off against the SEC, the ACLU, an “Ad Hoc Coalition of Nasdaq-Listed Companies,” and a group of “Investors and Investment Advisers.” In an amicus filing, the attorneys general argue that the rule violates the Equal Protection Clause of the Constitution, undermines traditional state authority in the area of corporate governance, and forces companies to … Read more

Do IPOs of Companies with an Innovative “Up-C” Structure Harm Public Shareholders?

The umbrella partnership corporation (“Up-C”) IPO structure allows an entity taxed as a partnership to go public by creating a shell corporation that sits above, and whose sole asset is units of, the historic partnership.  Unlike a traditional IPO where all owners hold shares of the public corporation, in an Up-C structure, shares of the public shell corporation are sold to the public while the pre-IPO owners continue to own their economic interests directly in the historic partnership (see Shobe 2017, Supercharged IPOs and the Up-C, for an overview).  A primary benefit of the Up-C IPO structure is that, … Read more

The Rise of ESG and the Role of Inside Counsel

ESG, sustainability, and stakeholder capitalism are at the center of the global dialogue on the future of the corporation. They are being driven by an evolving legal and regulatory landscape, market dynamics, and societal expectations. In particular, ESG is increasingly perceived by investors, lenders, employees, local communities, suppliers, and customers as an integral part of a company’s business model and an organic element of value creation. In this post, we explore the role that legal, compliance, and governance[1] professionals – whom we refer to, collectively, as inside counsel – play in respect of ESG.

Inside counsel are increasingly taking … Read more

Too Much Information? Increasing Firms’ Information Advantages in the IPO Process

Traditionally, high-growth private firms in the United States have used the public equity markets as their primary source of external financing to fund innovation and expansion. For this reason, well-functioning capital markets have been instrumental to the U.S. economy, supporting job creation and economic growth. In recent decades, however, there has been a decreasing number of U.S. companies going and staying public, attracting significant concern from regulators. In particular, the U.S. Securities and Exchange Commission (SEC) is concerned that firms using private rather than public sources of financing limits investment opportunities for ‘Main Street’ investors and reduces the availability of … Read more

Skadden Discusses What Regulatory Focus on Consolidation May Mean for Private Equity Buyers

Merger control authorities in many jurisdictions are taking a more aggressive and expansive approach when reviewing industry-consolidating transactions, and some are using the merger clearance process to advance policy objectives involving areas far beyond those of traditional competition. In addition, more than 50 countries have implemented regimes giving antitrust regulators discretion to review any transaction, regardless of minimum revenue or asset thresholds. As a result, companies need to provide for the possibility that their deals will draw regulators’ attention, even when the targets have little or no revenue.

In the U.S., the Biden administration and congressional leaders are exerting influence … Read more

How Takeovers Affect  Firms’ Voluntary Disclosure

How does the possibility of being taken over affect the disclosure of information by the management of the target firm? This has been a question of considerable interest in the accounting and finance literature because transparency is very important for a well-functioning takeover market. Whereas some argue that a target firm’s management will withhold information to increase the acquirer’s uncertainty about firm value and deter the takeover, others argue that the management will increase disclosures to inform existing shareholders about the firm’s fair value and prevent value-decreasing or opportunistic takeovers. The empirical evidence is mixed. In my recent article, I … Read more

Debevoise & Plimpton Discusses SEC’s Proposed SPAC Rules and Investment Banks

The new rules relating to special purpose acquisition companies proposed by the Securities and Exchange Commission on March 30, 2022, would, if adopted, have far-reaching effects on investment banks involved in business combination transactions involving SPACs. The proposed rules aim to remove perceived disparities in disclosures and investor protections as between traditional initial public offerings and de-SPAC transactions.[1] In this update, we focus on how the proposed rules may impact investment banks involved in SPAC IPOs, de-SPAC transactions or financings for de‑SPAC transactions.

Investment banks often play multiple roles, and have multiple interests, in connection with de-SPAC transactions. The … Read more

Deep Learning Mutual-Fund Risk Assessment and Performance

The ripple effects of the COVID-19 pandemic have increased market volatility and even caused markets to close in some countries. These fluctuations substantially affected mutual funds, leading to fire sales of their assets and SEC scrutiny of their risk management. Investors responded quickly and withdrew more than $40 billion from mutual funds in the first two months of the pandemic. With nearly half of the households in the United States having their pension plans and life savings invested in mutual funds, understanding the risk-taking behavior of mutual funds is thus of prime importance for investors.

For fund managers, the ability … Read more

SEC Commissioner Speaks on IPOs and the Rise of SPACs

Thank you Hal [Scott] for that kind introduction and for inviting me to speak today. I am honored to precede such an esteemed panel of practitioners and academics. As always, I must give my standard disclaimer that my remarks are my own and do not necessarily represent the views of the Commission or its staff.

I cannot emphasize enough how important discussions such as today’s are – thinking through some of the most pressing questions in our markets. And, one of those areas is Special Purpose Acquisition Companies, or SPACs. Now, of course, this was an issue that we were

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What Does CEO Turnover Data Tell Us About Succession Planning?

Over the past several decades, researchers have taken a serious look at the quality of CEO succession planning at publicly traded corporations. The results have not been encouraging. The evidence suggests that many companies are slow to terminate an under-performing CEO, are caught flat-footed in the event of a sudden CEO departure, and are often unprepared to identify a viable or permanent successor.

The research, however, is not without its shortcomings. A central challenge facing researchers is that it is very difficult for outside observers to determine whether the board in fact terminated the CEO. Rarely does a board explicitly … Read more

ISS Discusses Japanese Board Independence and Diversity

A recent ISS analysis of Japanese board composition finds a marked uptick in board independence and female board representation. At the close of Japan’s March 2022 “mini-season”, ISS found a 13percentage point jump in companies with at least a one-third independent board (based on the Tokyo Stock Exchange (TSE) classification), and a 12-percentage point increase in boards with at least one female director for companies listed on TSE’s Prime (the former First) listing section, compared with the same time in 2021 March.

Based on the 200+ companies listed on the TSE’s Prime listing section that held their 2022 AGMs during

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How Disclosure and Information Intermediaries Strengthen the Credibility of Initial Coin Offerings

The crypto-tokens market has recently emerged as an alternative source of financing for entrepreneurial ventures, with approximately $27 billion raised globally through March 2022.[1] These ventures issue blockchain-based digital “crypto-tokens” to raise external capital through an initial coin offering (“ICO”). In return, a token provides holders with various benefits, such as “utility” value through access to the venture’s current or future product (or service), potential participation in future profit distributions, and the ability to trade the token on crypto-exchanges (e.g., Binance and Coinbase).

The “ICO” designation is inspired by initial public offering (“IPO”) whereby private firms list shares on … Read more

SEC Chair Gensler Speaks on U.S. Bond Market

Thank you. It’s good to be with City Week again. As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of the Commission or SEC staff.

Since we are in London (at least virtually), I wanted to note that this year marks the 60th anniversary of the first James Bond film. I know there are various commemorations of this storied franchise going on in the U.K., but I want to focus my remarks on the lead character’s name.

Bond. James Bond.

Ian Fleming, the author of the spy novels,

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Why We Should Keep Teaching Dodge v. Ford Motor Co.

The question of corporate purpose has been much in the news of late, triggering renewed attention by legal scholars to corporate social responsibility, ESG, and shareholder value maximization. Many of these scholars have been strongly influenced by the late Lynn Stout’s work on the topic. Ten years ago, Stout published her book, The Shareholder Value Myth, [1] which built on her earlier article, Why We Should Stop Teaching Dodge v. Ford.[2] As the latter title suggests, Stout’s principal doctrinal foil was the Dodge case.[3]

Stout’s focus on Dodge was well chosen, since the case and “its statement … Read more

Debevoise & Plimpton Discusses SEC Enforcement Action Highlighting Whistleblower-Related Rules

On April 12, the Securities and Exchange Commission (the “SEC” or the “Commission”) announced settled charges against David Hansen, the co-founder and former Chief Information Officer of a Las Vegas technology company, for violations of Rule 21F-17(a). In settling the charges, Hansen agreed to pay a civil penalty of $97,523. The action, which garnered a spirited dissent from Commissioner Hester Peirce, offers a few important takeaways for companies hoping to avoid running afoul of Rule 21F-17(a) should an employee share concerns about conduct that potentially violates the securities laws.

Rule 21F-17(a). Rule 21F-17(a) prohibits “any action to impede an … Read more

Why Corporate America Should Pay Attention to the Proposed EU Directive on Corporate Sustainability Due Diligence

On February 23, 2022, the European Commission issued its long-awaited proposal for a Directive on Corporate Sustainability Due Diligence (the Proposed Directive). Under the Proposed Directive, large companies operating in the EU market must identify, prevent, and mitigate any actual or potential adverse human rights and environmental impact in their own operations, in their subsidiaries, and at the level of their established direct or indirect business relationships in their value chain. Adverse human rights and environmental impacts are keyed to violations of a long list of human rights and environmental obligations laid out in international conventions and declarations, irrespective of … Read more

Skadden Discusses Antitrust Enforcers’ Supply Chain Initiative

On February 17th, the Department of Justice (DOJ) announced an initiative to protect supply chains from anticompetitive behavior amid global disruptions and persistent inflation. The initiative is yet another example of the Biden Administration’s aggressive approach to antitrust enforcement since inauguration. From the Administration’s “whole-of-government” approach to policing anticompetitive conduct, to abandoning the Vertical Merger Guidelines and recently challenging several mergers, now to the new supply chain initiative, the new Administration has muddled the antitrust landscape and made enforcement less predictable. Despite the altered environment and new initiative, however, certain basic principles of antitrust law have not changed—simply passing costs … Read more

Do Investors Prefer Women CEOs at Firms Targeted by Activists?

Shareholder activism is playing a larger role than ever in companies’ decisions about their operations and reporting, with over 4,600 firms targeted worldwide from 2013 to 2018. Shareholder activists can have several motives for going after a company, from trying to improve its corporate governance by increasing efficiencies and dropping unprofitable segments to trying to improve the company’s reputation by making its practices more ethical and ecologically sound. Recent trends show that investment funds are making it easier for more investors to become involved in activism, which has led to regulatory concerns about the power of these activists and their … Read more

Sullivan & Cromwell Discusses the Implications for Financial Institutions of Proposed SEC Climate Disclosure Rules

On March 21, 2022, the Securities and Exchange Commission proposed, in a 510-page release, climate-related disclosure rules for public companies. Although the proposed rules do not impose industry-specific requirements, in certain areas they would have a particularly significantly impact on companies in the financial sector. In particular, the disclosure of Scope 3 greenhouse gas emissions (which capture financed emissions) and climate scenario analysis will likely be mandatory for many financial institutions. Voluntary climate-related transition plans, targets and goals, which many financial institutions have adopted or set, would also need to be disclosed under the proposed rules. In addition, financial … Read more

Congress Should Grant the SEC Oversight of Digital Asset Spot Markets

The Commodity Futures Trading Commission (CFTC) has classified Bitcoin and Ether – and by extension other cryptocurrencies that are similarly structured – as commodities (courts have also upheld this classification). While the CFTC regulates commodity derivatives, they do not regulate commodity spot markets, although they do have enforcement authority for fraud and manipulation in commodity spot markets. The practical effect of this structure is that cryptocurrency exchanges in the U.S. are not regulated at the federal level (they are required to register with the Financial Crimes Enforcement Network (FinCEN) and obtain state money transmitter licenses). This glaring weakness in digital … Read more

Wachtell Lipton Puts Spotlight on Boards: Spring 2022 Update

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.

The war in Ukraine and broader geopolitical implications, the coronavirus pandemic and ongoing efforts to return to a “new normal,” as well as other trends and technologies which have been accelerating the pace of disruption, are raising a host of … Read more

The Importance of Independent Internal Investigations

Internal investigations have become a necessity in today’s increasingly complex legal environment. They are now considered standard practice for businesses responding to serious allegations of financial misconduct and, when properly conducted, play a critical role in determining the credibility of the allegations, the identity of the responsible parties, and the impact of the fraud on the company’s financial statements. Many have argued that internal investigations will minimize the risk of regulatory enforcement after financial misconduct. This presumption is not just wishful thinking on the part of business leaders or attorneys, as regulators themselves promote internal investigations as a means through … Read more

Skadden Discusses Proposed 2022 Amendments to Delaware Corporation Law

On April 12, 2022, the Corporation Law Section of the Delaware State Bar Association (DSBA) approved proposed amendments to the Delaware General Corporation Law (DGCL) that include provisions that, if enacted, would authorize exculpation clauses limiting or eliminating the monetary liability of certain officers, make appraisal rights available to beneficial owners of stock and facilitate domestications of non-U.S. entities and consummations of other corporate transactions related to domestications.

Exculpation of Senior Officers

Since its adoption in 1986, Section 102(b)(7) has authorized a corporation’s certificate of incorporation to contain an exculpation clause that limits or eliminates the personal liability of its … Read more

The Innovation and Reporting Consequences of Financial Regulation for Young Life-Cycle Firms

Over the last several decades, financial regulators have increaAdd Newsed governance and reporting requirements for publicly listed firms, frequently with the goal of improving the reliability of financial information available to investors. The implicit assumption in such regulation is that the benefits of improved financial reporting to financial statement users exceed the direct and indirect costs borne by the implementing firms. Former SEC Chair Mary Jo White articulated this trade-off in a 2016 speech at the SEC-Rock Center’s Silicon Valley Initiative: “[P]art of the SEC’s mission is to facilitate capital formation, so it is important that our rules … Read more

Davis Polk Discusses Robust Antitrust Agenda of DOJ and FTC

At a recent Enforcers Summit, leaders of various U.S. and international antitrust enforcement agencies set forth their enforcement priorities. The new heads of the U.S. antitrust agencies emphasized that the agencies are primed to litigate more cases, challenge more mergers, and use all enforcement tools at their disposal. Both U.S. and global enforcement agencies also emphasized their belief that antitrust law must evolve to police anticompetitive conduct in digital and labor markets.

Enforcers emphasized trials, criminal antitrust penalties, and using all the tools at their disposal to combat anticompetitive conduct

The U.S. Department of Justice’s (DOJ’s) Assistant Attorney General for … Read more

Moonshots

In the last half-century, technological progress has stagnated. The century from 1870 to 1970 brought electricity, running water, telephones, television, automobiles, and airplanes. Life expectancy at birth rose from 45 to 72. But since the early 1970s, progress has been incremental. Innovation has become synonymous with computers and smartphones because there have been so few transformative technologies in other fields.

Some economists believe that the economy has simply picked the low-hanging fruit. But there are plenty of emerging technologies with the potential to reignite productivity growth – including artificial intelligence, renewable energy, and nanotechnology. The problem is that each of … Read more

Cleary Gottlieb Discusses the LIBOR Act, State Law, and Litigation Risks

On March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act  (the “LIBOR Law”).[1] The objectives of the legislation are to facilitate the transition of legacy LIBOR contracts that either (a) lack LIBOR fallback provisions entirely or (b) contain inadequate LIBOR fallback provisions and to avoid related “disruptive litigation”.[2]

When Does the LIBOR Law Apply?

The LIBOR Law applies to contracts that use, as a Benchmark rate, the one-month, three-month, six-month and twelve-month tenors of U.S. Dollar LIBOR as of the applicable LIBOR Replacement Date (each, a “LIBOR Contract”).[3]Read more

Business Risks Stemming from Socio-Economic Inequality

Socio-economic inequality has risen over the last 40 years in almost every part of the world and has been exacerbated by the COVID-19 pandemic. Inequality does not only affect societies – it can also have a significant impact on the success of business. We analyze the ways that socio-economic inequality creates material risks to business and how, despite these risks, there are very few ways for companies to consistently and effectively disclose them to investors. To address this challenge, we look for guidance to another systemic risk facing business: climate change.

Sources of Inequality and Risks to Business

On a … Read more

Cleary Gottlieb Discusses SEC’s Proposed Climate-Change Disclosure Rules: The Climate Note to Audited Financial Statements

On March 21, 2022, the U.S. Securities and Exchange Commission issued for public comment a rule proposal that, if adopted, would require reporting companies to provide certain climate-related information in their registration statements and annual reports filed with the SEC. This memorandum addresses part of the proposal — the proposed amendments to Regulation S-X to require a new footnote in audited financial statements – and concludes with some general takeaways and possible issues for inclusion in comment letters on the proposal. Please see the other two memoranda in this series for a discussion of the GHG emissions and attestation report Read more

Why Delaware and England Win the Global Corporate Law Race

What makes the corporate laws of some jurisdictions more attractive for entrepreneurs and investors than others in the global arena? Within the United States, the competition among state laws is a popular explanation for Delaware’s corporate law prominence. However, interjurisdictional competition over corporate law is not limited by U.S. borders. In recent decades, an international market for corporate law has emerged; consequently, foreign countries compete with Delaware to supply corporate law.

In our recent paper, we used qualitative methods based on interviews with mergers and acquisitions (M&A) practitioners from the United States, United Kingdom, continental Europe, and Israel and … Read more

Arnold & Porter Discusses Today’s SEC Examination Priorities, Tomorrow’s SEC Enforcement Actions

Rounding out a series of quarter-end announcements from the US Securities and Exchange Commission (SEC), the Division of Examinations (Exams) announced its 2022 examination priorities on March 30, 2022. These priorities reflect SEC Chair Gary Gensler’s stated view that the examinations program is crucial to the SEC’s work to protect investors and instill trust in markets. Exams will focus on, among other things, (i) private funds, (ii) broker-dealers, (iii) Environmental, Social, and Governance (ESG) or impact investing, (iv) financial technology (FinTech) and crypto-assets, and (v) information security (InfoSec) and operational resiliency. In addition, a week before the 2022 examination priorities … Read more

A Tokenized Future: Regulatory Lessons from Crowdfunding and Standard Form Contracts

Cryptocurrencies and other digital assets (“crypto”) are surging in popularity.  If cryptos are securities (“investment contracts” under the Howey test), they must be sold in accordance with the federal securities laws.  This likely requires registration with the Securities and Exchange Commission (SEC) and initial and ongoing public filings – the same arduous process that exists for public companies with centralized management teams rather than decentralized autonomous crypto networks.

For those cryptos found to be securities, there is a regulatory scheme in place, as ill-suited to the occasion as it may be.  For cryptos that are not securities, there is substantial … Read more

SEC Chair Gensler Speaks Further on Climate-Risk Disclosure Proposal

Thank you. It’s good to be with Ceres for today’s investor briefing. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

As you all likely know by now, in March, the Commission voted on a proposal to mandate climate-risk disclosures by public companies.

A Long Tradition

Let me put the proposal into the context of our long tradition of disclosures.

The core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and

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Going Private Outside Delaware: Holes in the Director Raincoat and Other Concerns

Meade v. Christie et al., an interlocutory appeal in a shareholder class action challenging a going private merger, is currently pending before the Iowa Supreme Court.[1] The appeal will test the strength of a director-liability shield law patterned on the Model Business Corporation Act template. It also presents questions of corporate law that pertain to going private transactions and are largely unsettled outside of Delaware.

A key question in Meade (and one of first impression in Iowa and other MBCA states) is whether the MBCA director shield exception for “intentional infliction of harm on the corporation or the shareholders”Read more

Skadden on Revisiting Share Repurchases in Volatile Times

In light of the recent increased volatility in the global financial markets,1 a number of companies have raised questions regarding the desirability of repurchasing shares at reduced market prices. This alert addresses questions surrounding share repurchases that companies should consider as they evaluate the advantages, disadvantages, legal implications and strategic considerations of share repurchases in a turbulent market.

Overview

As a preliminary matter, any company contemplating a share repurchase should consider the limitations set forth within the Coronavirus Aid, Relief, and Economic Security Act, passed into law on March 27, 2020; the Consolidated Appropriations Act, 2021, passed into law … Read more

Boardroom Gender-Diversity Reforms and Institutional Monitoring

The past decade has seen an explosion of boardroom gender diversity reforms worldwide. As of 2014, 23 countries have amended governance codes and 14 countries have enacted laws to increase gender diversity on corporate boards. While investors play a critical role in engaging with company boards and are increasingly focused on social equity, the evidence is scant on how these reforms affect investors’ monitoring role. This gap also contrasts with regulators’ reliance on investors to help ensure firms’ faithful implementation of the reforms. In our paper, we assess the change in the association between institutional ownership and female directorships following … Read more

Wachtell Lipton Discusses SEC’s Proposed Climate-Related Disclosure Rules and Audit Committees

The SEC’s proposed amendments to Regulations S‑K and S‑X to require new climate-related disclosures will, if adopted, require an expansion in the scope and responsibilities of audit committees.  As described in our prior memo, the rules contemplate domestic and foreign issuers disclosing, in registration statements, annual reports and audited financial statements, information on board and management climate-related risk oversight and governance, material climate-related risks and opportunities over the short-, medium- and long-term, Scopes 1 and 2 greenhouse gas (GHG) emissions, impact of climate-related events on line items of audited financial statements, and climate-related targets, goals and transition plans (if any).  … Read more

Controlling Tunneling Through Lending Arrangements

In a recent article, I examine how common provisions in lending arrangements (drawing from the LMA and LSTA modal agreements) handle the problem of value diversion in debtor companies. “Tunneling,” which is the expropriation of company value by corporate insiders (Johnson et al. 2000), has been largely considered a problem mainly for (minority) shareholders, as residual claimants. With fixed claims, creditors are typically not concerned with value diversion unless the debtor approaches insolvency. Yet my analysis shows that lending arrangements – including security interests, undertakings, (non-)financial covenants and other restrictions – can nonetheless be effective in monitoring, … Read more

SEC Chair Gensler Talks Registration of Security-Based Swap Execution Facilities

Today [April 6], the Commission is considering a proposal to create a framework for the registration of security-based swap execution facilities (security-based SEFs). I am pleased to support this proposal because, if adopted, it would increase the transparency and integrity of the traditionally opaque over-the-counter security-based swap market, fulfilling a mandate under the Dodd-Frank Act of 2010 to register and regulate the platforms that trade these instruments.

The 2008 financial crisis had many chapters, but a form of security-based swaps — credit default swaps — played a lead role throughout the story. Thus, as part of the Dodd-Frank Act, Congress

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To Call a Donkey a Racehorse: The Fiduciary Duty Misnomer in Corporate and Securities Law

In a new article, I address a subject that has been ignored for too long:  The fiction of meaningful fiduciary standards in the corporate and securities laws contexts. My article explores the standards that legislatures and courts apply to corporate fiduciaries and demonstrates that the commonly-held framework does not reflect the situation that in fact prevails.

Officers and directors as fiduciaries to the corporations they serve is a recurrent theme in corporate law.  Although not as vibrant under the federal securities laws, fiduciary duty concepts also arise there with some frequency (such as in the insider trading context as seen … Read more

SEC Says “Control Deficiency” Gave Enforcement Staff Access to Privileged Documents

The Commission has identified a control deficiency related to the separation of its enforcement and adjudicatory functions within its system for administrative adjudications.  When this deficiency was identified, the Chair immediately notified the other Commissioners and directed the staff to undertake remedial measures and commence a comprehensive internal review to assess the scope and potential impact of the issue.  We are now releasing the findings of that review as it relates to two adjudicatory matters currently in litigation in federal court.  In both matters, the review found that agency enforcement staff had access to certain adjudicatory memoranda, but that this

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The Limits of Enlightened Shareholder Activism

One of the more visible market shifts over the past decade is the rise of what might be called “enlightened shareholder activism” – the use of shareholders’ governance rights to encourage corporations to take action around environmental, social, and governance (“ESG”) concerns.  A prominent example is the successful campaign in 2021 of “Engine No. 1,” an impact-investing hedge fund that put three directors on the board of ExxonMobil.  The 2022 proxy season seems poised to be another where ESG proposals gain strong support from investors.  

Enlightened shareholder activism has been fueled by regulatory and market changes that have strengthened shareholder … Read more

Sullivan & Cromwell Discusses Court Decision Invalidating California Board Diversity Law

On April 1, 2022, in Crest v. Padilla, California Superior Court Judge Terry Green granted summary judgment in favor of plaintiffs who had challenged AB 979, one of California’s two board diversity statutes, as violating the California Constitution.  The complaint in Crest v. Padilla was filed in 2020 by three California taxpayers who sought to enjoin the California Secretary of State from using taxpayer funds in effectuating or ensuring compliance with AB 979.  The California Secretary of State has not yet indicated whether it intends to appeal the Court’s order.  Regardless of the outcome of the challenge to AB … Read more

Climate Change, Corporate Valuation, and the Proposed SEC Disclosure Regulations

On March 21, 2022, the Securities and Exchange Commission (SEC) released its statement on proposed mandatory climate risk disclosure. In the statement, Chairman Gensler said, “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.” Gensler added, “In making decisions about disclosure requirements under the federal securities laws – including decisions about today’s climate-related disclosures – I am guided by the concept of materiality. As the Supreme Court has explained, information is … Read more

SEC Chair Gensler Speaks on Crypto Markets

Thank you. It’s great to be with you all at this event, particularly as the University of Pennsylvania is my alma mater. I was over at Wharton, and what I knew of the law school is that the library stacks were a great place to study. It was so quiet there, though I don’t know if that’s still the case.

As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

Today, you’ve invited me to talk about the roughly $2 trillion crypto markets.

In February,

Read more

Should All Trading While in Possession of Inside Information Be Illegal?

In a new article, I answer in the affirmative the question posed in the title of this post. In the United States, we should replace our current regime of muddled and confused insider trading law with a sweeping prohibition on trading when in possession of inside information, much like the prohibition already in place in the European Union.

Why should insider trading be outlawed? How we answer this question shapes our policy recommendations. One way to answer is to look at how the inside information was obtained. Was it taken in breach of a fiduciary duty? Is the information … Read more

Wachtell Lipton Discusses Board Oversight of ESG and the 2022 Proxy Season

Last year’s proxy season saw investor support for an unprecedented number of ESG proposals, on issues ranging from climate change to human capital management to diversity, equity and inclusion.  Proxy advisory firms increasingly recommended that shareholders vote for such proposals.  We also saw the emergence of ESG-driven withhold campaigns targeting individual directors.  This upcoming 2022 proxy season will likely remain hotly contested as investors, proxy advisors and other stakeholders further scrutinize companies’ ESG credentials.  The Securities and Exchange Commission’s recent guidance limiting exclusion of Rule 14a-8 proposals and proposed new rules on climate-related disclosures, and the new ISS and Glass Read more

When Biden Met Crypto: Thoughts on the President’s Executive Order

On March 9, 2022, President Biden signed an executive order (“the Order”) requiring federal agencies to submit reports on how cryptocurrencies relate to various issues, including money laundering, investor protection, international cooperation, central bank digital currencies (“CBDC”), and systemic risk. Here, we offer some perspective and suggestions on those issues.

First, consider money laundering. Typically, anti-money-laundering regulation aims to block money received from crime or terrorism from flowing into traditional financial institutions. Cryptocurrencies create concerns because they can be purchased (more or less) anonymously and without intermediaries. That raises two questions: (1) who should regulation target in the absence of … Read more

ISS on Addressing the Looming Water Crisis in Investment Portfolios

Water means life. More than half of our bodies consist of water, and it is an indispensable resource for production of food and other goods. It is fundamental for societies and ecosystems alike. While water covers approximately 70 percent of our planet’s surface, only 0.5 percent is freshwater that is readily available in lakes and river systems. Over the last few decades these freshwater resources have come under increasing pressure due to population growth, climate change, and unsustainable production and consumption patterns.

According to the UN World Water Development Report 2020, global demand for water has been increasing by

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How to Translate Climate Disclosure into Investor Action

Massive investment is required if mankind is to meet, and master, the challenges presented by global climate change.  A recent report by McKinsey & Company posits that capital spending on energy and land-use infrastructure alone will need to exceed $9 trillion annually over the next 30 years if we are to prevent global warming from causing massive and irreversible damage to the planet’s ecosystem.  To put these numbers into perspective, the required yearly investment dwarfs the Gross Domestic Product (GDP) of nearly every country in the world, including economic powerhouses like Japan, Germany, and the United Kingdom.

Understandably, the … Read more

SEC Chair Gensler on SPACs, Shell Companies, and Projections Proposal

Today [March 30], the Commission is considering a proposal to strengthen investor protections in special purpose acquisition companies (SPACs). I am pleased to support this proposal because, if adopted, it would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings (IPOs).

Aristotle captured an overarching principle with his famous maxim: Treat like cases alike.[1]

SPACs present an alternative method to go public from traditional IPOs. I don’t just mean the first stage — when the

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SEC Commissioner Dissents on Shell Companies, Projections, and SPACs Proposal

Thank you, Chair Gensler, Renee [Jones], Charles [Kwon], and Jessica [Wachter] for the presentation. The Commission’s 2022 budget request includes additional resources to address “an unprecedented surge in non-traditional IPOs by special purpose acquisition companies.”[1] If we adopt the rule that we are voting on today, we will not need additional resources to deal with Special Purpose Acquisition Companies (“SPACs”). The proposal—rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported—seems designed to stop SPACs in their tracks. The proposal does not stop there; it also makes a lot of sweeping interpretations of the

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Exequity Discusses Board Committee Oversight of ESG

Over the past two years, Environmental, Social, and Governance (ESG) matters have become an increasingly important issue in the boardroom. This trend is accelerating today as a growing number of investors and stakeholders expect companies to both produce strong stock price returns and demonstrate ESG improvements. Many companies are responding to investor pressures by providing enhanced disclosures on existing ESG practices. In turn, boards are broadening their mandates to add ESG.

To understand how boards are disclosing the scope of their oversight responsibilities, Exequity reviewed the board committee charters[1] of the S&P 100 constituents. Our research reveals the overall … Read more

SEC Investment Management Chief Speaks on Doing Investment Companies Well

Good morning. Thank you, Eric, for your kind introduction. I appreciate the ICI’s invitation and I hope – if you decide ever to renew it – that I’ll be able to join you all in person someday.

Please allow me, if I may, to make clear that my comments today are my own and do not necessarily reflect the views of the Commission, the Commissioners, or the SEC Staff.[1]

As Eric mentioned in his introduction, I am new to this position. Indeed, today marks the end of only my third month on the job. The SEC announced my appointment

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Unpacking the SEC’s Climate-Related Disclosures: A Quick Tour of the Issues

[Editor’s Note: We present this and the following two pieces as a symposium on the U.S. Securities and Exchange Commission’s proposed climate-disclosure rules released on March 21, 2022.]

After a considerable delay, the SEC finally told us last week in SEC Release No. 33-11042[1] where it is going on climate-risk disclosures. The business community’s reaction was predictable and seemingly orchestrated: “We are shocked and dismayed!” “The costs are enormous!” The Wall Street Journal described the SEC as the pawn of the “left-leaning” BlackRock (ignoring that it is hard for radicals to attract the nearly $10 trillion in assets that … Read more

Is Now the Right Time to Mandate Costly Climate Disclosure?

In August 2021, the United Nations Intergovernmental Panel on Climate Change (“IPCC”) found that “unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to [the Paris Agreement’s goal of] 1.5°C or even 2°C [by 2050] will be beyond reach.”[1]  The IPCC’s conclusions, among others, prompted President Biden’s government-wide mandate to advance climate policy, as articulated in a series of executive orders.[2]

The Securities and Exchange Commission (“SEC”) responded with gusto, hiring its first-ever Senior Policy Advisor for Climate and ESG,[3] directing the SEC’s Division of Corporation Finance to enhance its … Read more

Will It Float?: The Legitimacy of the SEC’s Authority for Climate Risk Disclosures

On March 21, 2022, the SEC formally launched one of the most significant initiatives ever taken in its nearly 90-year history: proposals for disclosure of climate-related risks. (SEC, The Enhancement and Standardization of Climate-Related Disclosures for Investors. Sec. Act. Rel. No. 11042 (March 21, 2022)). It is a masterpiece of understatement to observe that few firms, public or private, and certainly no investor, will be untouched by forces unleashed by climate change.  Among SEC registrants, the effects of climate change will be many, albeit the magnitude of their impacts on each will vary. Thus, the historical significance of this SEC … Read more

New Department of Labor Investment Rules Could Be Big Win for Everyone but Labor

Few constituencies benefited more from the election of Joe Biden than the socially-responsible investor community, which saw the most-hostile presidential administration replaced by the most supportive.[1] The point is best illustrated by the departure of Labor Secretary Eugene Scalia, who was perceived by labor to be a “union buster,”[2] and the arrival of former Boston Mayor Marty Walsh, the first union member to serve as secretary in decades.[3] New investment rules proposed by Walsh’s Department of Labor governing trillions of dollars in retirement funds are set to undo much of the harm to environmental, social, and governance … Read more

“Shadow Trading” Becomes Insider Trading

On January 14, 2022, the U.S. District Court in San Francisco denied a motion to dismiss charges filed by the Securities and Exchange Commission under an expansive new theory of insider trading liability. In a matter of first impression, the court ruled in SEC v. Panuwat[1] that a defendant with material nonpublic information (“MNPI”) about an issuer may incur insider trading liability by trading in the securities of a different and unrelated issuer that could possibly be affected by public announcement of the first issuer’s MNPI. As discussed below, this new insider trading theory – now being called “shadow … Read more

To Remove or Not To Remove: Is that the Question in 1933 Act Securities Cases?

When the removal provisions of the Securities Act of 1933 (1933 Act) and the Class Action Fairness Act of 2005 (CAFA) conflict, the 1933 Act should prevail. The conflict arises in cases involving initial offerings of noncovered securities when plaintiffs file in state court, seek class treatment, and base their claims solely on alleged violations of the 1933 Act. In these cases, CAFA appears to broadly allow removal to federal courts, while the 1933 Act strictly prohibits it. Courts are currently split on which statute should prevail,[1] but the recent trend appears to be in favor of removal under … Read more

SEC Chair Gensler Speaks on Removal of Credit-Ratings References from Reg M

Today [March 24], the Commission voted to propose removing references of credit ratings from Rules 101 and 102 of Regulation M (Reg M). I was pleased to support today’s proposal because, if adopted, it would fulfill a mandate issued by Congress in the wake of the 2008 financial crisis.

In Section 939A of the Dodd-Frank Act of 2010, Congress directed federal agencies, including the SEC, “to remove any reference to or requirement of reliance on credit ratings” from our rules and to substitute an appropriate standard for credit-worthiness.[1]

The SEC has completed much of this work, and the only

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Does Media Exposure Affect Financial Reporting Quality Through Auditors?

The media play an important role in capital markets. Media coverage can attract the attention of investors and the public at large and affect the decisions of management. As such, the media can have a corporate governance role in disciplining firms and their managers. For example, prior research indicates that, following negative media exposure, weak boards are more likely to take corrective actions such as replacing the CEO and board chair, increasing the proportion of outsiders on the board, and decreasing the use of staggered boards.

In a recent study, we investigate the possibility that, in addition to this direct … Read more

Sullivan & Cromwell Discusses SEC’s Proposed New Cybersecurity Risk-Management Rules for Investment Advisers and Firms

On February 9, 2022, the Securities and Exchange Commission (the “SEC”) voted 3 to 1 (Commissioner Peirce dissenting[1]) to propose cybersecurity risk management rules and amendments for registered investment advisers, registered investment companies and business development companies (the “proposal”).[2]  The proposed rules and amendments are designed to reduce cybersecurity risks to clients and investors and enhance the SEC’s ability to oversee advisers and funds.  As proposed, the rules would require SEC-registered advisers and funds to adopt and implement written policies and procedures reasonably designed to address cybersecurity risks and registered advisers to confidentially report significant cybersecurity incidents … Read more

The SEC’s September Enforcement Spike

The Securities and Exchange Commission (SEC) periodically reports on its performance to the public and Congress, emphasizing metrics such as the number of enforcement actions (“cases”) filed (see, e.g., SEC, 2018, 2020). Former co-directors of the Division of Enforcement acknowledge the potential dangers of focusing on quantitative measurements: “the raw number of cases filed or the total amounts of fines and penalties assessed during an arbitrary time period such as a single fiscal year—cannot adequately measure the effectiveness of an enforcement program…[and] can result in a misalignment of incentives and objectives” (SEC 2018). We examine this concern by testing whether … Read more

Debevoise Discusses New Cyber Incident Reporting for Critical Infrastructure

On March 15, 2022, President Biden signed the Cyber Incident Reporting for Critical Infrastructure Act of 2022 (the “Act”) into law, requiring critical infrastructure entities to report covered cybersecurity incidents to the Cybersecurity and Infrastructure Security Agency (“CISA”) within 72 hours and report ransom payments to CISA within 24 hours of payment. The Act, which was incorporated into the 2022 Consolidated Appropriations Act and does not take immediate effect, requires CISA to undertake rulemaking to define key elements, including what types of entities constitute critical infrastructure, how a cybersecurity incident is defined, and what should be included in reports to … Read more

Corporate Criminal Enforcement as a Defense to Companies’ Political Influence

Countries around the world are reforming their laws governing corporate criminal liability. Jurisdictions and scholars arguing against broad corporate liability, often rely on the claim that corporate civil liability should be as effective because it can impose equally large sanctions on companies. Yet corporate liability is only effective when enforcement officials have the resources and political will to pursue large politically-influential corporations. At the federal level in the U.S., companies need to be subject to both criminal and civil liability for their misconduct. Federal civil enforcement is less effective than criminal enforcement because large companies can more easily leverage their … Read more

SEC Chair Gensler on Proposed Mandatory Climate Risk Disclosures

Today [March 21], the Commission is considering a proposal to mandate climate-risk disclosures by public companies. I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions and would provide consistent and clear reporting obligations for issuers.

Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions. Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are

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SEC Commissioner Peirce Criticizes Proposed Mandatory Climate Risk Disclosures

Thank you, Chair Gensler.  Many people have awaited this day with eager anticipation.  I am not one of them.  Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability, and reliability to company climate disclosures.  The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures.  We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency.  For that reason, I cannot support the proposal.

The proposal turns the disclosure regime on its head.  Current SEC disclosure mandates

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Max Oversight Duties: How Boeing Signifies a Shift in Corporate Law

In September 2021, the Boeing 737 Max debacle turned into an important moment in corporate law. A Delaware court allowed a derivative lawsuit brought by Boeing shareholders to proceed, based on the theory that Boeing’s directors breached their oversight duties by not doing enough to monitor, prevent, and react to fatal airplane safety issues. In a new essay, I explore what the Boeing decision means for director oversight duties and use it to discuss broader trends in corporate law.

Boeing signifies and puts an exclamation mark on a new era of heightened oversight duties (dubbed Caremark duties, after Delaware’s … Read more

Sullivan & Cromwell Discusses Federal LIBOR Transition Legislation

On March 15, 2022, President Biden signed into law the “Consolidated Appropriations Act, 2022,” which enjoyed significant bipartisan support and contains, as Division U, the “Adjustable Interest Rate (LIBOR) Act” (the “LIBOR Act”).[1]  The LIBOR Act provides a uniform national approach for replacing U.S. dollar LIBOR (“LIBOR”) as a reference interest rate in so-called “tough legacy” contracts (contracts that do not include effective fallback provisions, for example, because they have no provisions for a replacement benchmark or their fallback provisions would require the use of a LIBOR-based rate or a poll to determine a rate) for a time when … Read more

How FinTech Affects Corporate Takeover Markets

Investment in financial technology, or FinTech, has increased dramatically over the past decade – from a total value of $9 billion worldwide in 2010 to well above $100 billion in recent years, with a peak of $215 billion in 2019. In addition to investments from venture capital, private equity, and public equity firms, companies have spent substantial amounts on acquiring disruptive technologies through mergers and acquisitions. For example, digital-payments platform Square, founded by Twitter co-founder Jack Dorsey, acquired the FinTech firm Afterpay in August 2021, resulting in Australia’s biggest-ever takeover. Goldman Sachs acquired FinTech firms United Capital in 2019 and … Read more

Skadden Discusses DOJ’s White Collar Crime Enforcement Priorities

Remarks made by U.S. Department of Justice (DOJ) officials at the March 2022 American Bar Association’s (ABA’s) National Institute on White Collar Crime (the White Collar Conference) reflect the DOJ’s prioritizing white collar criminal enforcement under the Biden administration.1

On March 3, 2022, U.S. Attorney General Merrick Garland and the head of the DOJ’s Criminal Division, Assistant Attorney General Kenneth Polite, announced at the conference the DOJ’s areas of focus for 2022. Unsurprisingly, those themes were topics covered throughout the conference and included: (i) additional resources for investigating and prosecuting corporate crime (including cybercrime and crypto crime, as listed below); … Read more

The SEC’s Proposed Cyber 8-K Disclosure

On March 9, 2022, the SEC proposed rules mandating cybersecurity disclosure, including a new Item 1.05 for Form 8-K, which requires current reporting of cybersecurity incidents deemed by the registrant to be material.

In a 2018 article published in the Harvard Business Law Review, Columbia Law Professor Eric Talley and I identify trading patterns suggestive of informed trading prior to the disclosure of cybersecurity breaches.  We argue that trading of this type raises complex and, in context, unique concerns over price discovery, liquidity, and efficient allocation of resources.  Profits from such trading may increase hackers’ incentives to exploit security vulnerabilities, … Read more

Cleary Gottlieb Discusses SEC’s Proposed Changes to Beneficial Ownership Reporting

On February 10, 2022, the Securities and Exchange Commission (the “SEC”) issued for public comment proposed rules that will, if adopted, significantly affect how investors report their beneficial ownership on Schedules 13D and 13G.[1] The principal changes would:

  • accelerate the filing deadlines for Schedules 13D and 13G beneficial ownership reports;
  • clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; and
  • expand the definition of beneficial ownership to include certain cash-settled derivative securities.

In this memo, we summarize the proposed changes and the implications for issuers, activists, … Read more

The “S” in ESG: Human Capital Management

Over the past decade, ESG has morphed from a fringe concern into one of the most prominent topics in corporate governance – and a flourishing research area as well.[1] Nevertheless, some notable blindspots remain. Based on a recent survey, the vast majority of legal ESG scholarship limits the analysis to just two ESG factors: (1) climate risk, and (2) corporate diversity. These are hugely important issues, but a close look at developments on the ground reveals that there is a lot more to ESG. As it is practiced today, ESG also covers a wide range of matters related to … Read more

Skadden Discusses Agency Perspectives on the Merger Guidelines Review

On Jan. 18, 2022, the Federal Trade Commission (FTC) and the Department of Justice’s (DOJ) Antitrust Division announced a joint public inquiry related to the federal merger guidelines, with the goal of “strengthening enforcement against illegal mergers.” Members of the public are encouraged to provide comments pursuant to the joint request for information through March 21, 2022. After considering these public comments and other available evidence, including their own research, the agencies are expected to publish revised proposed guidelines for public comment. In announcing the joint inquiry, the agency heads identified and explained some of their concerns with current antitrust … Read more

Time for a Broad Prophylactic against Congressional Insider Trading  

In 2011, Peter Schweizer published a book, Throw Them All Out, exposing some questionable means by which politicians manage to increase their personal wealth 50 percent faster than the average American does.

Schweizer suggested that trading on material nonpublic information is one way members of Congress achieve outsized returns on their investments. He cited one study that found:

  • The average American investor underperforms the market.
  • The average corporate insider, trading his own company’s stock, beats the market by 7 percent a year.
  • The average senator beats the market by 12 percent a year.

Schweitzer’s book was followed by … Read more

ISS Discusses Women on California Boards

Since 1995, US presidents have issued a series of annual proclamations designating March as Women’s History Month to celebrate the contributions women have made to the US and recognize the specific achievements women have made over the course of American history in a variety of fields. In the first of a series of short insights looking at the role of women in corporate America, we focus on women on boards in California.

Key Takeaways:

  • More women joined boards in California than men in 2021
  • Only 2% of boards in California have no women
  • The number of women directors is now

Read more

Reviving Bank Antitrust

Antitrust is back. The Chicago School relegated antitrust policy to obscurity during the latter half of the 20th century, but a new cohort of antimonopoly scholars has recently rekindled concerns about industrial consolidation and corporate “bigness.” This antitrust revival has spurred an unlikely coalition of ideologically diverse policymakers to pursue aggressive merger enforcement and de-concentration strategies in technology, pharmaceuticals, transportation, and healthcare. Harnessing this momentum, President Joe Biden issued an executive order shortly after his inauguration, directing his administration to “combat the excessive concentration of industry” and “promote competition” throughout the economy.

To date, however, the new antitrust movement … Read more

Cleary Gottlieb Discusses End of Mandatory Arbitration for Sexual Misconduct Cases

On March 3, 2022, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act[1] into law.  The law amends the Federal Arbitration Act (“FAA”) to prohibit the use of mandatory arbitration provisions to resolve sexual harassment and sexual assault claims, allowing survivors the option of litigating their claims in court.

Background

The use of mandatory arbitration provisions in employment and other contracts for claims involving sexual harassment and sexual assault has garnered increased public scrutiny in the past few years.  Today, more than 60 million Americans are currently subject to mandatory arbitration clauses, requiring binding … Read more

Stakeholder Capitalism as ESG-Constrained Shareholder Capitalism

Intense debates are alive and well on the nature and meaning of corporate purpose and corporate personhood. In a new paper, I analyze proposals by the U.S. Securities Exchange Commission to require that all reporting companies make periodic, mandatory Environmental, Social, and Governance (ESG) disclosures of comparable, standardized, and quantifiable metrics.

Shareholder capitalism leaves the protection of customers, employees, and other non-shareholder stakeholders to areas of law other than corporate law.  This delegation by shareholder capitalism is problematic because, as Tim Wu has written, it “ignores public choice theory and the obvious incentives of corporations who are told Read more

SEC Chairman Gensler Speaks Before the Investor Advisory Committee

It’s good to be back with the Investor Advisory Committee (IAC) again. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

I’d like to acknowledge the departure of Committee members J.W. Verret and Paul Mahoney. J.W. has served as the Assistant Secretary and Chair of the Market Structure Subcommittee. Paul has served in a number of roles, including IAC Chair during a transitionary period. Both have been active, engaged members of the Committee. Thank you for volunteering your time to make important contributions to

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Power and Pay in the C-Suite

Over the past few decades, chief executive officer (CEO) pay has risen spectacularly, as has debate regarding why this has occurred and whether policy should or can correct it. Yet one glaring fact about the C-Suite eludes much of the corporate governance literature and executive compensation policy reforms and proposals: The C-Suite, particularly the CEO role, has long been and continues to be dominated by men.

Despite making up half the workforce, few women lead companies in corporate America. Only 8 percent of CEOs of Fortune 500 companies are women, and women make up less than a quarter of C-level … Read more

SEC Chairman Gensler Speaks on Proposal for Mandatory Cybersecurity Disclosures

Today [March 9], the Commission is considering a proposal to mandate cybersecurity disclosures by public companies. I am pleased to support this proposal because, if adopted, it would strengthen investors’ ability to evaluate public companies’ cybersecurity practices and incident reporting.

We’ve been requiring disclosure of important information from companies since the Great Depression. The basic bargain is this: Investors get to decide what risks they wish to take. Companies that are raising money from the public have an obligation to share information with investors on a regular basis.

Over the years, our disclosure regime has evolved to reflect evolving risks

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SEC Commissioner Peirce Dissents on Cybersecurity Proposal

Thank you, Renee, Ian, and Jessica. Cybersecurity risk is top of mind for everyone. The Commission’s consideration of this topic—whether for investment advisers, as we did a month ago,[1] or public companies, as we are doing today [March 9]—is, therefore, reasonable. We must approach this topic, of course, through the prism of our mission. We have an important role to play in ensuring that investors get the information they need to understand issuers’ cybersecurity risks if they are material. This proposal, however, flirts with casting us as the nation’s cybersecurity command center, a role Congress did not give us. … Read more

Initial Public Offerings and Optimal Corporate Governance

Do companies adopt optimal governance arrangements when they go public?  This question has been a hotly debated topic in corporate law and governance and one that I examine in a recent paper.

At the time of an initial public offering (IPO), a company offers a package of governance arrangements to the outside investors.  The arrangements include dual versus single class structure, staggered or un-staggered board, an exclusive forum provision (with respect to either corporate law or federal securities law claims), and robust or narrow shareholder rights with respect to nominating directors, calling special shareholder meetings, or having access to the … Read more

Debevoise Discusses Russia, Sanctions, and Digital Assets

In response to ongoing Russian military action in Ukraine, U.S. authorities have imposed several tranches of new sanctions against Russia, particularly against Russia’s financial industry, including its major banks and the Central Bank of Russia. On February 26, President Biden and leaders of other European countries announced their intention to remove certain Russian banks from the SWIFT financial messaging system, a measure that was enacted by the European Union on March 2, 2022, and applies to seven Russian banks, cutting them off from SWIFT’s secure network for transmitting financial messages between financial institutions (e.g., payment instructions).

As … Read more

SPACs and PIPEs as Efficient Tools for Corporate Growth

A SPAC can be understood as an alternative to an IPO, with investors using a large investor, a PIPE, to find out whether the SPAC founder has really chosen a good target or is simply rushing to get a big payoff before investors must be repaid. The PIPE is an expert that gets paid to certify a SPAC, and it is compensated accordingly.

While many sophisticated observers believe that SPAC shareholders receive a bad bargain because their shares are subject to dilution, there is less of an argument to be made for protecting target management from aggressive sponsors. The relevant … Read more

Davis Polk Offers Update on SEC’s New Investment-Management Rules and Lawsuits

Rules and regulations

SEC proposes expanded cyber oversight after Gensler signals more on the way

The Securities and Exchange Commission (SEC) proposed new cybersecurity rules for investment advisers and investment companies that would require policies and procedures, annual reviews, reporting to the SEC, disclosures to investors, and recordkeeping.  The rules would subject investment advisers and investment companies to increased enforcement risk.  Please see Davis Polk’s client update for further information on the proposal.

SEC proposes new rules and amendments to enhance private fund investor protections

The SEC’s proposed new rules and amendments include new requirements related to quarterly statements, private … Read more

The Most Dangerous Branch: Is the Supreme Court Dismantling the Administrative State?

At first glance, the question posed above may sound slightly paranoid. Still, sometimes a measure of paranoia may be justified. In any event, this column is less a prediction of the future than a review of what is actually happening, particularly over the last month. Consider the following three cases:

Case 1: The press is now focusing on West Virginia v. EPA,[1] which was argued before the Supreme Court last week. West Virginia and the coal industry have appealed a lower court decision that upheld the EPA’s authority under the Clean Air Act to regulate greenhouse gasses … Read more

Cadwalader Discusses the SEC’s Regulatory Posture on Climate Risk

Climate change-related risks to the U.S. financial system are attracting increasing public attention in recent years and are raising questions about how U.S. financial regulators, including the U.S. Securities and Exchange Commission (the “SEC”), will address such risks.  The SEC is on the precipice of issuing a proposed new rule regarding climate risk disclosures by public companies.

Although the attention being given to climate change financial risks is relatively new, the debate over the regulatory approach to climate change financial risks is merely the latest episode in a long-running series:  A reality-TV contest pitting principles-based financial regulation against … Read more

How to Reconcile Corporate Interests with Broader Social Interests

The widely accepted primary purpose of corporations is to maximize profit or value to shareholders, otherwise known as “shareholder primacy.”  Shareholder primacy represents not only the prevalent objective of corporations but also a norm: A seminal case in corporate law, Dodge v. Ford Motor Co., set the cardinal principle that a corporation must serve the interests of shareholders rather than the interests of its employees, customers, or the community.

The court decision has set shareholder primacy as a legal obligation, not just a business objective, and created a distinction between corporate interests and the interests of other stakeholders such … Read more

SEC Investment-Management Chief Speaks at Investment-Adviser Conference

Good morning. Thank you, Karen, for your kind introduction and for inviting me to speak today. I am delighted to join you for my first public address as the Director of the Division of Investment Management.

Let me begin, if I may, by making clear that my remarks today are my own and do not necessarily reflect the views of the Commission, the Commissioners, or the SEC staff.[1]

Just over two months ago, I was both an academic and a student, studying the economic history of post-bellum America, a time when the country emerged from war to confront income

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Learning by Doing in Mergers and Acquisitions

In his classic 1962 paper, “The Economic Implications of Learning by Doing,” Nobel laureate Kenneth J. Arrow argued that firms can gain proficiency through the repetition of activity. Since then, learning by doing, or LBD, has been widely studied across business and economics disciplines. Researchers have come to realize that firms can obtain significant cumulative experience and achieve efficiency in operations, production, and innovations using LBD (e.g., Irwin and Klenow, 1994; Jovanovic and Nyarko, 1996; Beck and Wu, 2006).

In a new study, we revisit the LBD hypothesis in the context of mergers and acquisitions (M&A). We argue that firms … Read more

Skadden Discusses How Biden Administration Has Made Merger Clearance Less Predictable

The Biden administration has demonstrated a clear pro-enforcement approach to antitrust, implementing numerous directives and changes, driven in part by concerns about the power of Big Tech, and by progressives who want antitrust enforcement to further their social goals.

These efforts have brought more uncertainty in the short term as the antitrust agencies and the business community adjust. Whether 2022 brings more dramatic, rather than incremental, changes will depend on whether Congress revises the antitrust laws and if the agencies successfully challenge deals and conduct in court.

Key Players

The main faces of antitrust enforcement in the Biden administration are … Read more

Are CEO Political Donations Linked to the Risk of SEC Enforcement Actions?

The potential for corporate campaign contributions to skew government policy has attracted considerable attention. Empirical studies generally support the notion that firms gain regulatory advantages through their involvement in the political process (e.g., Correia, 2014; Naughton, Rogo and Zheng, 2021). The notion that corporations also benefit financially from political influence has led to demands for making  their lobbying more transparent (e.g., Bebchuk, Jackson, Nelson, and Tallarita, 2020), both to protect shareholders and to uphold the integrity of the U.S. political system. In contrast, individual donations by executives are believed to be relatively benign, seen generally as motivated by ideology rather … Read more

Cleary Gottlieb Discusses SEC’s BlockFi Settlement and Crypto Lending

On February 14, 2022, the Securities and Exchange Commission announced a settled enforcement action charging BlockFi Lending LLC (“BlockFi”) with allegedly failing to register its interest-bearing crypto lending product as a security, failing to register itself as an investment company, and making false statements about its product.  BlockFi agreed to pay a total of $100 million in fines to the SEC and a consortium of states.[1]  As the SEC noted in the settlement Order, BlockFi publicly announced on the same day that it intended to register a new interest-bearing crypto product as a security, and the Commission provided BlockFi … Read more

Environmental Protection and Sovereign Debt Restructuring

Some countries have a compelling argument for why they should not be expected to join the planetary effort to fight climate change. These are countries facing the need to restructure their external debt. By definition, sovereigns that cannot pay what they are already contractually obligated to pay will not have excess cash to devote to environmental conservation or other measures to assist with limiting climate change. As incongruous as it may sound, however, it is precisely this subset of countries undergoing a debt restructuring that may have an alternative avenue for funding these projects.

Background

Most modern sovereign debt restructurings … Read more

Gibson Dunn Offers 2021 Year-End Securities Litigation Update

Federal securities filings continued to slow during the second half of 2021.  The volume of new securities cases filed in 2021 fell by 36% compared to 2020, and 51% compared to 2019.  Nonetheless, federal and state securities laws continue to develop in the courts.  This year-end update summarizes major developments since our last update in August 2021:

  • The second half of 2021 was relatively quiet with regard to noteworthy securities litigation activity from the Supreme Court. We discuss the settlement of a case that would have asked the Court to decide whether the PSLRA’s discovery-stay provision applies in state court,

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The SEC Acts on Short-and-Distort Petition

On February 25, 2022, the Securities and Exchange Commission proposed rules to enhance the transparency of short positions in equity securities.  One proposal would require confidential, monthly reporting of short sellers’ individual positions, which would then be aggregated by security and disclosed to the public.  A second proposal would establish a new buy-to-cover order-marking requirement for broker-dealers.

In its proposing release, the SEC explained that the purpose of these rules is to deter manipulative short selling campaigns:

In determining  the  proposed  reporting  requirements  under  Proposed Rule  13f-2  and  Proposed Form  SHO, the  Commission  is  mindful  of  concerns  that  certain  … Read more

Skadden Discusses New Pressure on Companies to Disclose Political Policies and Contributions

Political activities of corporations are increasingly subject to scrutiny on environmental, social and governance (ESG) grounds. Demands that corporations and their political action committees (PACs) justify their contributions based on candidates’ voting records on ESG issues came to the fore with the North Carolina gender bathroom bill in 2016. This evolved to a more general focus on LGBTQ+ and other ESG issues, such as diversity and climate change, and culminated with the events at the U.S. Capitol on January 6, 2021. That resulted in many companies reevaluating their political-giving programs. Some temporarily paused all political giving, while others suspended contributions … Read more

Do Jobseekers Value Diversity Information?

Recent social movements have generated a renewed emphasis on promoting diverse and inclusive workplaces. For example, institutional investors have increased their investments in firms that demonstrate strong commitments to diversity, and regulators also increasingly require firms to describe the extent to which their culture is diverse and inclusive. Yet, it remains unclear whether employees ultimately value diversity information and whether it factors into their job search. This issue is of particular importance given the scarcity of diversity information available to employees, with 17 percent of public firms disclosing either numerical metrics of gender or racial workforce diversity in their 2020 … Read more

How Firms’ Simultaneous Release of Information Affects Market Feedback

Can managers obtain more useful feedback from capital markets by disclosing pieces of information separately and at different times instead of bundling the information and releasing it at once? It is well known that capital markets’ response to firms’ announcements may reveal useful information for corporate managers, especially if the success of an investment opportunity depends on external factors, such as the position of competitors or expectations about consumer demand. In a recent study, we document that the extent to which managers can extract valuable signals from stock prices may depend on how much information is released simultaneously.

Consider a … Read more

Cravath Discusses Dollar Cost Averaging of Long-Term Incentive Grants

“Dollar cost averaging” is an investment strategy whereby investors spread a desired investment amount into periodic investments over a period of time, which mitigates the price risk inherent in investing the entire amount at an inopportune moment. Virtually all public companies grant equity-based compensation as the most significant portion of their executive compensation program. These awards provide an important link between executive and shareholder interests. Market practice is generally to grant these awards in “one shot” toward the beginning of the fiscal year, and the grants are, therefore, dependent on the share price at that moment in time. From time … Read more

Toward a “Tender Offer” Market for Labor Representation

For decades, corporate America has succeeded in delivering ever higher profits for shareholders by squeezing workers.  Whether the basic driver is labor monopsony, or a lack of worker power to capture economic profits at corporations, or increasingly ruthless business and legal practices, there appears to be a fundamental power imbalance between workers and the providers of financial capital.  The result has been rich financial returns and stratospheric stock prices for shareholders, and increased economic and personal misery for workers.

Labor unions are supposed to provide a solution to these problems.  They are designed to exercise the collective power of workers … Read more

Wachtell Lipton Discusses the Growing Enforcement Focus on Cryptoassets

Underscoring that misconduct surrounding cryptoassets has become a top U.S. enforcement priority, the Department of Justice announced on February 17 the appointment of Eun Young Choi as head of a dedicated National Cryptocurrency Enforcement Team.  The NCET’s mandate is to oversee complex investigations and prosecutions of criminal misuses of cryptocurrency, including where involving virtual currency exchanges, mixing services, and facilitators of money laundering.  The appointment comes on the heels of DOJ’s seizure last week—its largest financial seizure ever—of over $3.6 billion of bitcoin from, and arrest of, the alleged perpetrators of a massive 2016 hacking incident targeting the Bitfinex exchange.  … Read more

An Academic Critique of the SEC’s GameStop Report

On October 18, 2021, SEC staff released a long-awaited report on equity and options trading in connection with the meteoritic rise of GameStop’s share price in January 2021.  The staff report addressed several issues surrounding the GameStop episode, but one of the most widely reported was the conclusion that neither a short squeeze nor a gamma squeeze caused the increase in GameStop’s share price.  Rather, staff concluded, “it was the positive sentiment, not the buying-to-cover, that sustained the weeks-long price appreciation of GameStop stock.”[1]

As members of the Ad Hoc Academic Committee on Equity and Options Market Structure Conditions … Read more

Cleary Gottlieb Discusses Delaware Ruling on Appraisal Petitioners’ Discovery Demand

In Wei v. Zoox, Inc., the Delaware Court of Chancery found that an appraisal petition had been filed for the sole purpose of gathering discovery to be used in drafting a fiduciary duty complaint challenging a merger where the former stockholders had lost standing to seek books and records under Section 220 due to the rapid closing of the merger.  Nonetheless, in a novel ruling, the court permitted the appraisal petitioners to pursue some discovery in the appraisal action, limited to what would have been available to them under Section 220 had they not lost standing to seek such … Read more

Debevoise & Plimpton Discusses the Policy Debate over Developing a U.S. Central Bank Digital Currency

For much of the past century, consumers and commercial end users could access the Federal Reserve’s balance sheet directly in only one way—by holding physical currency or coin issued or distributed by a Federal Reserve Bank. A major drawback, however, is that Federal Reserve Bank notes and coins are bearer instruments that must be physically held and transferred in order to effect transactions. Although the United States also offers digital money in the form of deposit balances at Federal Reserve Banks, only commercial banks are directly eligible to access this money through Federal Reserve Bank master accounts.

Due to a … Read more

ISS Discusses Shareholder Class Actions Related to Covid-19

As the world completes a full two years of navigating the perils of the Coronavirus pandemic, U.S. shareholders continue to file class action complaints alleging companies with various acts of fraud related to COVID-19.

As previously reported by ISS Securities Class Action Services, the very first COVID-19 related class action was filed on March 12, 2020 in USDC Florida (Southern) against Norwegian Cruise Line Holdings. Shareholders alleged the Miami-based company with deceptive sales tactics and misleading updates to the investor community related to its business and operations.

Since the Norwegian Cruise Line complaint was filed, ISS SCAS has tracked a

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Strategically Staying Small: Regulatory Avoidance and the Community Reinvestment Act

Banks operate in one of the nation’s most heavily regulated industries, where policy intervention aims for wide-ranging goals that include limiting risk, protecting consumers, and ensuring fair treatment of individuals through equal access to credit. The Community Reinvestment Act (CRA), enacted in 1977, is a much-studied example, though unlike most banking regulations, which restrict banks, the CRA encourages them to extend credit to targeted groups within certain communities. Though a number of studies (e.g., Agarwal, Benmelech, Bergman, and Seru (2012), Saadi (2020)) have examined whether the CRA encourages risky lending, our new paper looks at a different potential consequence of … Read more

Skadden Discusses Delaware Law Authorizing Captive Insurance for D&O Coverage

On February 7, 2022, Delaware’s governor signed a bill amending the Delaware General Corporation Law (DGCL) to expressly authorize Delaware corporations to purchase and maintain directors’ and officers’ (D&O) liability insurance by or through captive insurance companies. This amendment, described further below, permits coverage for liabilities incurred by a corporation’s directors, officers, employees and agents, even in certain situations where the corporation would not be permitted to indemnify for such liability.

Background

When directors and officers face claims in their capacity or status as such, their defense costs generally will be indemnified or advanced by the corporation. However, there are … Read more

Legal Guardrails for a Unicorn Crackdown

The SEC is undertaking an historic effort to redraw the boundary between public and private companies.  After years of watching – and sometimes encouraging – the explosive growth in less tightly regulated private markets and the proliferation of so-called “unicorns,” the agency is now reclaiming jurisdiction.

A key arrow in the agency’s regulatory quiver is its authority under Exchange Act Section 12(g) to force private companies to “go public” when they reach a certain size. The provision requires any company whose shares are “held of record” by more than 2,000 persons to take on the obligations imposed by federal securities … Read more

Cleary Gottlieb Discusses Delaware Ruling on Post-Signing Value Changes in M&A Appraisals

In a noteworthy new post-sale appraisal ruling, the Delaware Court of Chancery in BCIM Strategic Value Master Fund, LP v. HFF, Inc.[1] awarded the petitioner additional consideration based on an increase in the value of the target company that arose between signing and closing.  The unique facts of this case, and particularly the sustained outperformance of the target in the interim period before closing, are worth keeping in mind in evaluating the risk that a successful appraisal proceeding can increase the amount of consideration payable in a public company acquisition.  Below we break down the Court’s analysis in determining … Read more

(Un)Intended Consequences of Regulatory Enforcement in M&A

A growing literature highlights the important effect of economic and political policies on mergers and acquisitions (M&A). M&A often involves major issues of corporate investment and resource allocation, and so inefficient interference in the M&A market can have significant and long-lasting economic impact. In a new paper, we investigate whether antitrust enforcement by the Department of Justice (DOJ) or the Federal Trade Commission (FTC) has the substantive and lasting effect of deterring U.S. mergers and acquisitions.

The DOJ and the FTC follow strict procedures for regulatory interventions, as described in the Horizontal Merger Guidelines[1], updated in 2010. These … Read more

ISS Discusses Proposed Shareholder Class-Action Against ING Groep

ING Groep N.V. – a company that offers banking services to private clients, small businesses, large corporations, financial institutions, and governments worldwide – is at the epicenter of a proposed shareholder class action. Investors are looking to remediate the significant loss experienced due to the findings of money laundering and financial terrorism… and the subsequent fines assessed against it.

In 2018, ING Groep admitted that criminals had been able to launder money through its accounts and agreed to pay a €775 million penalty to Dutch authorities to settle a probe. Dutch financial crime prosecutors alleged that ING had not properly

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Wachtell Lipton Discusses Corporate Bankruptcy and Restructuring: 2021-2022

While the Covid‑19 pandemic continued into 2021, the sharp rise in corporate bankruptcies that we saw in 2020 did not.  Due to unprecedented government assistance and the continued availability of credit at historically low interest rates, companies that survived 2020 were generally able to avoid Chapter 11 in 2021, even in industries significantly impacted by the pandemic.

The biggest story line of 2021 was the use of Chapter 11 by companies facing large volumes of tort litigation.  Although Chapter 11 has for decades been used as a tool to resolve mass tort situations, especially in asbestos-related cases, the range and … Read more

The Breakdown of the Public–Private Divide in Securities Law

Securities law in the United States has traditionally been designed around a set of lines – the “public–private divide” – which separate public companies, public capital, and public markets from private companies, private capital, and private markets. Until the early 2000s, the lines were successful in establishing two largely coherent legal realms – a highly regulated public realm and a lightly regulated private realm – with investor protection by way of disclosure and governance obligations limited to the public realm. A series of bold and often-inconsistent reforms, however, has transformed this longstanding regime into a low-friction system where public capital … Read more

Sullivan & Cromwell Discusses Reopened Comment Period for SEC’s Pay-Versus-Performance Disclosure Rule

On January 27, 2022, the U.S. Securities and Exchange Commission (the “SEC”) reopened a 30-day comment period (beginning today) on proposed rules requiring registrants to disclose how executive compensation actually paid by a registrant relates to the financial performance of that company.[1]  Stakeholders may submit comments both on the original proposed rules and on 22 new questions raised by the SEC.  The new questions suggest several potential additional requirements under consideration, including expanding the performance measures to be disclosed in relation to executive compensation.

BACKGROUND

Section 953(a) of the Dodd-Frank Act

In 2010, Section 953(a) of the Dodd-Frank Wall … Read more

SEC Chair Gensler Speaks on Private Fund Advisers Proposal

Today [February 9], the Commission is considering rules and amendments under the Investment Advisers Act to improve the efficiency, competition, and transparency of the activities of private funds’ advisers. I support this proposal because, if adopted, it would help investors in private funds on the one hand, and companies raising capital from these funds on the other.

Why do private funds matter?

First, they matter because they’re large, and they’re growing in size, complexity, and number. These funds, including hedge funds, private equity funds, venture capital funds, and liquidity funds, currently have approximately $18 trillion in gross assets.

Beyond their

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SEC Commissioner Peirce Speaks on Private Fund Advisers Proposal

Today’s [February 9] proposal represents a sea change. It embodies a belief that many sophisticated institutions and high net worth individuals are not competent or assertive enough to obtain and analyze the information they need to make good investment decisions or to structure appropriately their relationships with private funds. Therefore, the Commission judges it wise to divert resources from the protection of retail investors to safeguard these wealthy investors who are represented by sophisticated, experienced investment professionals. I disagree with both assessments; these well-heeled, well-represented investors are able to fend for themselves, and our resources are better spent on retail

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SEC Commissioner Crenshaw Speaks on Private Fund Advisers Proposal

Investment advisers are their clients’ fiduciaries. This means that investment advisers are legally obligated to serve their client’s best interest.[1] This standard of conduct is not an aspirational goal. It must be meaningful and offer the real protections investors reasonably expect and deserve. And this standard of conduct is not limited to the context of an adviser’s relationship with retail clients or registered funds. Private fund investors, including entities such as pension funds, charitable organizations, and college endowments, rely on the protections afforded by the Advisers Act and benefit from advisers’ obligations to place their clients’ interest first.[2]

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Wachtell Lipton Discusses What Mattered and What to Expect in White-Collar and Regulatory Enforcement

The Biden administration has just completed its first full year in office, and the talk has been tough.  New leadership at DOJ, the SEC, the FTC, the CFTC, and other regulatory and law enforcement agencies have issued statements and policy revisions signaling their intention to train more focus on white-collar and regulatory enforcement.  We correctly predicted this tougher stance in our wrap-up memorandum last year.  What we did not anticipate was the announcement of policies that, depending on how they are implemented, could resurrect what we have viewed as ill-conceived approaches to eligibility for cooperation credit, monitorship imposition, civil penalties, … Read more

What ESG-Related Disclosures Should the SEC Mandate?

The Financial Economist Roundtable (“FER”) met in July 2021 to discuss current efforts to measure and require disclosure of firms’ ESG activities.[1]  The views of individual FER members about specific issues often differ, but the consensus was that financial regulators should be cautious in mandating disclosures.

Public comments by the current SEC commissioners suggest two opposing views: (1) increase disclosure substantially to include disclosure of environmental outcomes or (2) maintain the status quo because current rules for disclosing material risks cover environmental and social (E&S) activities.  We recommend increased disclosure, but we also recommend that the SEC not mandate … Read more

Simpson Thacher Discusses Revised Hart-Scott-Rodino Thresholds

The Federal Trade Commission (“FTC”) has announced revised monetary thresholds for the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (“HSR Act”). The revised thresholds were published in the Federal Register on January 24, 2022 and will be effective on February 23, 2022, applying to all transactions that close on or after that date.

The primary revisions to the thresholds are increases to the “size-of-transaction” and “size-of-person” tests for filing under the HSR Act. Most notably, transactions valued at $101.0 million or less will not be reportable under the HSR Act. The thresholds are tied to GNP, and this is a significant … Read more

Why the Campaign Against Corporate Personhood Is Misguided

Considerable controversy has surrounded the Supreme Court’s sharply divided decisions in Citizens United and Hobby Lobby. Critics argue that giving business corporations unwarranted constitutional protections entrenches corporate power at the expense of democracy by putting legal fictions on the same political plane as human beings. The powerful intuitions and normative concerns underpinning these objections are captured in familiar slogans, such as “End Corporate Rule,” “Corporations Are Not People,” and “We the People, Not We the Corporations.”

Rallying around such catchphrases is a broad social movement demanding that rights be restricted to human beings and corporate personhood be abolished (see … Read more

SEC Chair Gensler Speaks to FSOC on Money Market Funds, Open-End Bond Funds, and Hedge Funds

Thank you, Secretary Yellen, for focusing the Council’s attention on financial resiliency with regard to three key parts of our capital markets — particularly money market funds, open-end bond funds, and hedge funds.

The fund industry gives retail and institutional investors the opportunity to pool their assets, get investment advice, and attain diversification and efficiency. These pools of assets have become a significant part of our markets. There’s $5 trillion in money market funds, nearly $7 trillion in open-end bond funds, and $9 trillion in gross assets under management in hedge funds.

The nature, scale, and interconnectedness of these fund

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The Second Circuit Was Wrong in Reversing Ex-Deutsche Bank Traders’ Libor Convictions

On January 27, in United States v. Connolly, the U.S. Court of Appeals for the Second Circuit misstated and misapplied the law of fraud in reversing the criminal convictions of former Deutsche Bank traders Matthew Connolly and Gavin Black.  The court’s order of acquittals over the findings of a jury and following a diligently fair trial was especially unfortunate given how difficult it is for the government to prove criminal conduct in the trading divisions of large global financial institutions.

The Connolly case was one of numerous prosecutions in the United States and the United Kingdom that charged traders … Read more

Davis Polk Discusses Developments in Regulation Related to Private Equity

Rules and regulations

SEC proposes amendments to bolster private fund reporting

On January 26, 2022, the Securities and Exchange Commission (SEC) voted to propose certain amendments to Form PF designed to facilitate the SEC’s oversight of private fund advisers and bolster its investor protection efforts. The proposed amendments are also designed to enhance the Financial Stability Oversight Council’s ability to monitor and assess systemic risks presented by the private fund industry. See our client alert highlighting the key elements of the proposed amendments.

Industry update

SEC statement regarding Form CRS disclosures

On December 17, 2021, the SEC Standards of Conduct … Read more

Do Firms Redact Information from Material Contracts to Conceal Bad News?

The Securities and Exchange Commission (SEC) regulates and monitors companies to increase transparency and protect investors. The securities laws consider the companies’ interests and allow them to make requests to redact certain information in SEC filings and not publicly disclose such information for a specified period of time, if the information is both proprietary and immaterial to investors – proprietary in the sense that disclosure may reveal trade secrets or information about profitability that harms companies’ competitiveness. There has been an overall uptick in confidential treatment requests in recent years.

Although prior studies provide evidence that companies use redactions to … Read more

Skadden Discusses How New SEC Standards May Prompt Rise in Climate-Related Securities Suits

In 2010, the Securities and Exchange Commission (SEC) provided public companies with interpretive guidance on existing SEC disclosure requirements as they applied to climate change developments. The guidance did not alter disclosure requirements but suggested that, under the existing framework, companies might be required to disclose some climate-related risks and developments.

In March 2021, the SEC announced that, in response to investor demand it had established a task force within its Division of Enforcement whose mandate is to identify gaps in existing SEC disclosure requirements regarding climate and other ESG matters. The SEC also published a corresponding request for comment. … Read more

What Role Do Boards Play in Companies with Visionary CEOs?

CEOs, in particular founder-CEOs, are often visionaries with strong beliefs about the right strategic direction for their firms. For example, Apple CEO and founder Steve Jobs was known to be obsessed with product quality and design. The strategy to produce the highest quality products was deeply ingrained in the company and part of Jobs’ vision. Apple’s board of directors was likely less obsessed or convinced than Jobs and hence more willing to revise the organization’s strategy in response to new information. How should a board of directors that does not necessarily share the visionary CEO’s strong convictions advise and monitor … Read more

Sullivan & Cromwell Discusses Delaware Chancery’s First Fiduciary-Duty Opinion on SPACs

On January 3, 2021, in In re MultiPlan Corp. Stockholders Litigation,[1] the Delaware Court of Chancery denied a motion to dismiss a complaint brought by SPAC stockholders against the SPAC, its sponsor and its directors.  Plaintiffs alleged that defendants breached their fiduciary duties in connection with the de‑SPAC transaction by issuing a false and misleading proxy statement that failed to disclose the impending loss of the target’s largest customer, which led to a significant drop in stock price following the de-SPAC transaction.

Notably, the Court held that the entire fairness standard of review would apply to assess the … Read more

The Virtues of Keeping the Ownership of Business Enterprises Anonymous

In October of 2021, news media across the world reported on what was said to be the largest leak ever of offshore data, exposing the rampant use of anonymous shell companies by the rich and the powerful. Branded the Pandora Papers, the leak featured a Panamanian law firm that purportedly created at least 14,000 shell companies and trusts in offshore jurisdictions – entities with no real business operations or assets that are frequently used to facilitate illicit activities ranging from drug trafficking to tax evasion. The Pandora Papers leak followed other massive document-leaks over the past several years that have … Read more

Davis Polk Discusses Second Circuit Reversal of LIBOR-Based Fraud Convictions

On January 27, 2022, the Second Circuit reversed the wire fraud convictions of two traders for their purported roles in the London Interbank Offered Rates (LIBOR) manipulation scandal, which previously resulted in a number of resolutions by banks.  In United States v. Connolly, the Second Circuit held that there was insufficient evidence to prove that the traders’ requests for LIBOR rate submissions to colleagues were false, fraudulent, or misleading.  The court’s reversal marks the likely end to this highly publicized case and signals potential challenges for prosecutors seeking wire fraud convictions in the context of index manipulation schemes.

Following … Read more

How to Effectively Regulate Related-Party Transactions

Related party transactions (RPTs) are a common corporate governance concern that cuts across many jurisdictions but remains hard to regulate. Allowing value-increasing RPTs while preventing the value-decreasing ones in a cost-effective way is a challenging task for regulators. Jurisdictions do it in different ways but, in general, use either procedural safeguards or substantive standards enforced by the courts (or a combination of both). In two recent papers, I pursue the question of how to design an effective and efficient RPT regulation, based on a discussion of two prevalent oversight tools.

In one paper, I examine the court review of RPTs … Read more

Sullivan & Cromwell Discusses FTC, DOJ Review of Merger Guidelines

On January 18, 2022, Lena Kahn, Chair of the Federal Trade Commission (“FTC”) and Jonathan Kanter, Assistant Attorney General for the Antitrust Division of the U.S. Department of Justice (“DOJ”), held a joint press conference announcing the launch of a joint review of the Horizontal Merger Guidelines and Vertical Merger Guidelines (together, the “Merger Guidelines”).  The current Horizontal Merger Guidelines were issued in 2010, and the current Vertical Merger Guidelines were issued in 2020.  In September 2021, the FTC voted to withdraw its approval of the Vertical Merger Guidelines.  The DOJ has not withdrawn its approval of the Vertical Merger … Read more

Venture-Capitalist Directors and Managerial Incentives

Research has shown that venture capital (VC) firms substantially influence the overall economy. According to Gornall and Strebulaev (2021), among all U.S. public companies founded since 1968, VC-backed companies account for 77 percent of total market capitalization, 41 percent of total employees, and 92 percent of R&D spending. In addition, there is extensive literature discussing the role of VC firms at startup companies, where they do everything from providing advice and support to improving corporate governance to fostering corporate innovation. However, there is limited understanding about the role of VC at mature companies, especially VC’s impact on executive compensation.

Research … Read more

Paul Weiss Discusses DOJ Antitrust Division Head’s Approach to Merger Remedies

In a January 24 speech, Jonathan Kanter, the assistant attorney general in charge of the Antitrust Division of the DOJ, set forth his views on how the DOJ should approach merger remedies and signaled that the DOJ may be more willing to litigate merger challenges. While many of his statements are in line with existing DOJ guidance on acceptable merger remedies, his speech suggests that he may be less willing to accept a divestiture as a remedy for a problematic merger, especially when a deal involves dynamic markets. Where necessary, companies should be prepared to fashion appropriate and viable divestitures … Read more

Karmel’s Dissent: The SEC’s Use and Occasional Misuse of Reports of Investigation

A small number of investigations by the Securities and Exchange Commission (SEC) end with the filing of a report rather than a complaint or administrative order. Section 21(a) of the Securities Exchange Act of 1934 authorizes the SEC “to publish information” relating to any securities law violations that it discovers. When the SEC issues a report pursuant to this authority, it typically recites its factual findings and discusses how the described conduct violated the securities laws.

SEC reports of investigation represent the views of an expert administrative agency in the context of a particular case. They are also an opportunity … Read more

ISS Reviews ESG Equity Indices in 2021

With some exceptions, 2021 was a generally strong year for equity markets around the world. Impressively, passive ESG products such as ETFs garnered significant inflows of over $150 billion dollars and saw asset under management growth of over 80% globally. In 2021, ISS ESG marked the one-year anniversary of our initial proprietary index launches, the ISS ESG US Diversity Index and the Governance QualityScore (QGS) Index family. We also launched our ISS ESG EVA Leaders Index family, an innovative index approach combining corporate sustainability with economic profitability.

In this note we provide a short summary of the total return performance

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Fintech SPACs Have Been Swimming Naked – and the Tide Is Going Out  

Acorns Grow Inc., the financial technology and investing startup, said last week that it was abandoning its $2.2 billion merger with SPAC Pioneer Merger Corp., putting itself on the hook for a $17.5 million termination fee. Coming almost eight months after the deal was first announced, the news surprised many in the fintech and SPAC worlds.  It shouldn’t have.

SPACs – a method of going public touted as faster, simpler, and cheaper than a traditional IPO – are proving to be a severely flawed way to finance fintechs and other technology companies. Their stock prices have almost invariably declined sharply … Read more

SEC Chair Gensler Speaks on Rules Covering Government Securities Alternative Trading Systems

Today [January 26], the Commission is considering amendments to include significant Treasury markets platforms within Regulation ATS. I support these amendments because, if adopted, they would help promote resiliency and greater access in the Treasury market. We’re also considering modernizing our rules related to the definition of an exchange. Over the decades since Congress put in place the definition of an exchange, there have been many changes to platforms — in particular, that they are increasingly electronified. I think it’s important that we revise the SEC’s rules to reflect those changes.

In 2020, the Commission put out a request for

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SEC Commissioner Peirce Dissents on Proposal to Amend Regulation ATS

Events in the U.S. Treasury market (as well as the related repo market) over the past several years strongly suggest that the market for government securities suffers from inadequate levels of intermediation, liquidity, and transparency that in times of stress can dramatically decrease its ability to function properly and significantly increase risks to market participants.[1]  Commentators have suggested a number of possible reforms,[2] and, although I am skeptical of some of these suggestions, I agree that the Commission should be considering carefully how it might use its authority to make changes that could relieve some of these pressures

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Do Companies Lobby Against Mandatory Disclosure to Protect Proprietary Information?

Critics of mandatory public disclosure often argue that it may put disclosing firms at a competitive disadvantage by requiring them to  reveal potentially proprietary information to rivals. For instance, when the Financial Accounting Standards Board (FASB) proposed to mandate more disaggregated disclosure of segment information, many firms lobbied vigorously against the new rule (SFAS No. 131), arguing that it would be “competitively harmful to the reporting enterprise” (FASB 1997).

However, there is little evidence that reporting mandates actually result in competitive harm. More importantly, it is unclear whether the expressed concerns about proprietary costs reflect the true lobbying motive. Research … Read more

SEC Chair Gensler Speaks on Cybersecurity and Securities Laws

Thank you. It’s good to be with the Annual Securities Regulation Institute. As is customary, I’d like to note that my remarks are my own, and I’m not speaking on behalf of the Commission or SEC staff.

As some of you may know, I often like to talk about the founding of our nation’s securities laws in the 1930s.

So again, today, I’d like to discuss the ‘30s — but this time, I actually mean the 1830s.

In 1834, exactly a century before the SEC was established, the Blanc brothers in Bordeaux, France, committed the world’s first hack. The

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Climate-Risk Disclosures and “Dirty Energy” Transfers: “Progress” Through Evasion

At first glance, recent progress towards transparency in corporate climate-risk disclosures seems exceptional. Over 2,000 companies now publish annual reports showing their carbon emissions data (although most self-interestedly omit Scope 3 data). Many (including most recently ExxonMobil) have made a pledge to move to “net zero” carbon emissions by a given date (usually 2050, but some much sooner). We are awaiting SEC rules that will make ESG disclosures mandatory and likely compel U.S. issuers to use common metrics (and thereby make issuer-specific reports relatively comparable). The Financial Stability Oversight Council’s October 2021 report stressed that climate risk represents a serious … Read more

Wachtell Lipton Discusses Investor Priorities in 2022

Last year, major investors took unprecedented steps through engagement efforts and proxy voting to demonstrate their commitment to addressing the climate transition and board and workforce diversity and inclusion, with focus given to disclosure and reporting of key ESG metrics and how the board, including board committees, oversees these issues.  This year, major investors have indicated that they plan to revisit the same issues, but with focus on strategy, innovation and harnessing stakeholder capitalism to guide long-term value creation.

While still keen on companies to decarbonize, investors have highlighted the need to address supply-side risks (as evidenced by current energy … Read more

Peer Pressure in Corporate Earnings Management

Corporate earnings are an important source of information for many market participants, yet managers have a certain degree of discretion over the earnings that they report. Given this discretion, there is a large literature that tries to understand whether firms manage their earnings and why. Much of this literature focuses on individual characteristics of firms, such as operating and financial characteristics, and how they affect the decision to manage earnings. In contrast, in a current working paper, we focus on the idea that a firm’s peers might play a role in that decision as well. Specifically, we investigate whether there … Read more

Latham & Watkins Discusses Stricter SEC Requirements for the Rule 10b5-1 Affirmative Defense

On December 15, 2021, the Securities and Exchange Commission (SEC) issued a set of proposed amendments (the Proposal) regarding the adoption of trading plans that qualify for the affirmative defense against liability for trading on the basis of material non-public information (MNPI) under Rule 10b5-1 under the Securities Exchange Act of 1934 (the Exchange Act). These proposed changes would impose additional requirements on public companies and insiders.

Significantly, the Proposal would require a waiting period or “cooling off period” of 120 days for the director or officer of a company (or 30 days for the company itself) between the adoption … Read more

Reputation and Sustainability: Opportunities for Growth in Emerging Markets

We are witnessing a shift in global economic activity from advanced markets to emerging ones.  According to the World Bank Group (2021) Global Economic Prospects report, emerging markets and developing economies (EMDEs) have experienced higher real gross domestic product (GDP) growth rates than advanced economies for the past four years and are expected to continue to do so through 2022 and beyond.  Currently, EMDEs account for approximately 42 percent of the world’s GDP and are expected to account for more than 50 percent by 2035.  Additionally, EMDEs comprise 55 percent of the world’s population, and more than half of the … Read more

SEC Chair Gensler Speaks on How to Make Securities Regulation Dynamic

Thank you for the kind introduction. As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.

I’d like to share with you all that we lost an SEC alum, Robert Birnbaum, this past December. Though I didn’t get to know Bob personally, he accomplished a lot in his remarkable life. After leaving the SEC, he went on to lead the New York Stock Exchange.[1]

While at our agency, though, Bob contributed to a seminal report called the Special Study. This report was published in

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High-Yield Debt Covenants and Their Real Effects

The U.S. leveraged (high-yield) loan market has more than doubled since the Great Financial Crisis (GFC), with nearly $1.2 trillion in outstanding debt in 2019 (Leveraged Commentary and Analysis, LCD). The rise in high-yield corporate debt (bonds included) in the decade following the GFC has prompted concern in the U.S. and Europe, with central bankers and other policy makers frequently pointing to its potential to amplify any economic shock.

The problem with high corporate leverage is that it can lead to financial insolvency, which can trigger a contraction in demand like what we saw in 2020. Firms can be left … Read more