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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

Larry Fink’s 2022 Letter to CEOs

Dear CEO,

Each year I make it a priority to write to you on behalf of BlackRock’s clients, who are shareholders in your company. The majority of our clients are investing to finance retirement. Their time horizons can span decades.

The financial security we seek to help our clients achieve is not created overnight. It is a long-term endeavor, and we take a long-term approach. That is why, for the past decade, I have written to you, as CEOs and Chairs of the companies our clients are invested in. I write these letters as a fiduciary for our clients who

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Does Common Ownership Really Prompt Managers to Compete Less?

How common ownership affects competition is a source of acute disagreement among scholars and policymakers, with some who believe common ownership depresses competition seeking antitrust law reforms that would significantly constrain how investment funds operate. Neglected in this vigorous debate, however, is a careful analysis of how firm managers – the persons who in the first instance actually make the decisions that determine an industry’s competitiveness – would act differently in the presence of common ownership.

We conduct that necessary analysis in a new article, available here, in which we combine lessons from corporate governance scholarship and industrial organization … Read more

Cleary Gottlieb on Navigating a World Where Almost Everyone Is an Activist

In many ways, 2021 was a high-water mark for corporate activism. The levels of traditional shareholder activism rebounded from the lows reached during the early days of the COVID-19 pandemic. M&A activism increased substantially as shareholder activists sought to capitalize on the M&A boom. Large-cap activism returned as activists targeted Fortune 500 CEOs with increasing frequency. The year also saw the emergence of a new brand of ESG-themed shareholder activism in the wake of the Engine No. 1 activist campaign supported by CalPERS at ExxonMobil and the copycat ESG tactics deployed by other shareholder activists.

At the same time, ESG … Read more

Cleary Gottlieb Discusses the Virtual Board Room in the Post-Pandemic Era

Almost two years into the COVID-19 pandemic, it is clear that the corporate workplace has changed for good. As the world continues to reopen and companies return to the office, what we are returning to is not business as usual, but a new future of work – a future characterized by a shift from the traditional workplace to remote and hybrid models that provide opportunities to work in effective and efficient ways from anywhere. Companies are faced with challenges as they return to the office and are finding they need to adapt to remain competitive, attract talent and stay prepared … Read more

It’s Time to Regulate Stablecoins as Deposits and Require Their Issuers to Be FDIC-Insured Banks

In November 2021, the President’s Working Group on Financial Markets (PWG) issued a report analyzing the rapid expansion and growing risks of the stablecoin market.[1]  Stablecoins are digital assets that claim to maintain a “stable” value with reference to a designated currency (typically the U.S. dollar) or some other asset, index, or formula.  PWG’s report concluded that stablecoins pose a wide range of potential dangers, including inflicting large losses on investors, destabilizing financial markets and the payments system, facilitating money laundering, tax evasion, and other forms of illicit finance, and promoting dangerous concentrations of economic and financial power.

PWG’s … Read more

Cahill Gordon Discusses Proxy Advisers’ Voting Guidelines for 2022

Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis) have each issued their respective proxy voting guidelines for 2022, which include a number of noteworthy revisions, summarized below. The ISS updates are available here and will apply for shareholder meetings held on or after February 1, 2022 unless otherwise noted. The Glass Lewis updates, including updated guidelines for ESG initiatives, are available here and will apply for shareholder meetings held on or after January 1, 2022 unless otherwise noted.

ISS Updates

Say on Climate. ISS has adopted two frameworks for analyzing Say on Climate proposals, one … Read more

Essential Businesses and Shareholder Value

The COVID-19 crisis vividly demonstrated that Americans rely on certain for-profit corporations to supply the essentials of everyday life. Even in a crisis situation in which the government had assumed an extraordinary role and extraordinary responsibilities, it was deemed necessary for workers handling “essential” tasks to risk infection by continuing their work at private companies. Our society’s capacity to meet basic needs in a crisis thus seems entirely dependent on the capacity of private corporations, which in turn is determined by the decisions of the people with authority at these companies.

At the same time, those people have limited incentives … Read more

Financing Sustainable Entrepreneurship

At least since BlackRock boss Larry Fink’s annual letter to CEOs in 2019, investing in ESG assets has become a major topic among both retail and institutional investors. In a new article, we address the question of how economically attractive investments in ESG-oriented startups are.

Net capital inflows into sustainability-oriented firms and funds are soaring, and so are the valuations of ESG assets. Yet, the economics of sustainable investing are controversial among practitioners and academics. While many industry reports point to the high net capital inflows and favorable valuations of sustainable assets, financial economists warn that ESG-investing hype could be … Read more

ISS Discusses $4 Billion in Settlements Expected to Kick-Off 2022

As 2021 came to a close, the final tally of new U.S. shareholder class action complaints declined for the second straight year (this followed a record number of new cases from 2017 – 2019). Industry experts point to three factors for the two-year drop in newly filed cases: the ongoing COVID pandemic, a decline in merger objection complaints, and a strong, resilient stock market.

However, as previously reported by ISS Securities Class Action Services, the good news for investors is that the quantity of settlements – as well as the total value of settlements – continues to be strong throughout

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SPACs are on fire. Scholars and commentators have pointed out  the flaws of SPACs, including the various agency problems they generate (Klausner 2021), and their utilization by sophisticated investors to take advantage of unsophisticated investors (Spamann, 2021). These claims are supported by the under-performance of SPACs relative to market benchmarks, which reached a negative gap of 15 percent during 2021 (Randewich, 2021).

In a new essay, we suggest a modification to the SPAC that would enable its transformation from an investment vehicle that disrupts capital markets to one that may enhance their integrity … Read more

Sullivan & Cromwell Discusses Dashed Efforts to Make New York a Hub for Non-U.S. Derivative Litigation

In the last week of December, the Commercial Division of the New York Supreme Court dismissed two shareholder derivative actions brought against directors and officers of large European companies in decisions with critical implications for non-U.S. companies’ exposure to fiduciary litigation in the U.S.  Those actions—against Bayer and UBS—are part of a flurry of derivative suits against major non-U.S. firms filed in New York state court over the past two years in an attempt to circumvent the requirements of these companies’ respective home forums.  These two dismissals may spell the beginning of the end of those efforts.  Sullivan & Cromwell … Read more

Informed Options Trading Before FDA Approves Drugs May Be Growing Problem

The Food and Drug Administration (FDA) appoints drug experts to drug advisory committees (ACs) that make approval or rejection recommendations for about half of all new drugs (usually the unique ones, such as Covid vaccines). The experts receive nonpublic technical reports from drug firms and FDA staff a month or so before ACs meet. Our recent study is the first to examine potentially informed options trading around the report creation dates (not publicly known), as well as the AC meeting dates (publicly known).

The study is important because there could be relatively large amounts of informed trading months before the … Read more

Wachtell Lipton Discusses Compensation Season 2022

U.S. companies continue to demonstrate resilience following another year in which the pandemic imposed itself on world events. Although 2021 did not deliver a full reopening, corporate activity thrived in spite of ongoing uncertainty around “return to work,” building on momentum and lessons learned from 2020. As the impact of the pandemic subsides, company culture, talent retention and business objectives will shape the long-term workplace landscape. We identify below some of the key factors that may shape the 2022 compensation season.

Steady Rise of ESG. ESG-related goals are increasingly prevalent in annual incentive programs, with a meaningful year-over-year increase … Read more

Mandatory Corporate Climate Disclosures: Now, but How?

Climate change is one of today’s most salient policy challenges. Under the Paris Agreement, 195 governments agreed to limit temperature increases to well below 2, preferably 1.5, degrees centigrade relative to pre-industrial levels. Since the magnitude of global warming is roughly proportional to the amount of carbon in the atmosphere, the agreement in effect specified a “carbon budget.” To stay within that budget, emission reductions equivalent to what was forced upon us by the worst pandemic in 100 years need to occur every two years throughout the 2020s and beyond. Clearly, just “doing less” is not going to cut it … Read more

Cleary Gottlieb Discusses Delaware Chancery Decision on SPAC Merger Challenge

In one of the first opinions addressing fiduciary duty claims in the context of a transaction involving a special purpose acquisition company (“SPAC”), the Delaware Court of Chancery determined that the SPAC shareholders’ right to redeem can be undermined by insufficient disclosures regarding the transaction and allowed class-action claims to continue against a SPAC’s controlling shareholder and directors.[1]  This decision is important because it addresses some of the unique features of SPACs designed to mitigate inherent conflicts of interest in the SPAC structure, particularly the redemption feature.  While this opinion leaves open that the redemption feature of SPACs may … Read more

How Does Better Access to Public Firm Disclosures Affect IPO Firm Financing?

Financial markets affect the economy in a fundamental way by facilitating the creation of capital. The market for initial public offerings (IPO) – also known as the “primary market” – is especially important because it allows fast-growing and innovative companies to raise the capital needed to pursue business opportunities, develop new technologies, and create jobs – all of which contribute to economic growth. A significant challenge for those companies is that the capital they raise is on average substantially less than what they are worth, a phenomenon known as underpricing. Studies show that underpricing reflects an information problem: Primary market … Read more

How Rating Agencies’ Market Power Affects Credit Rating Standards

Global credit rating agencies (CRAs) like S&P and Moody’s are important gatekeepers for the debt market. The demand for their ratings has increased at an unprecedented rate in the past two decades due to an extraordinary growth in cross-border debt financing. While the global CRAs’ market dominance has been the subject of considerable attention and regulatory debate, we know little about how their overall market power affects rating standards and quality. One reason is that prior studies generally focus on the U.S. market, where S&P and Moody’s already command a more than 90 percent  share. In a forthcoming paper, … Read more

Davis Polk Discusses New UK Foreign-Investment Review Regime

On January 4, the UK’s new National Security and Investment filing regime became fully operational. A wide range of deals will be scrutinized for national security concerns requiring further investigation. The UK government expects to review up to 1,800 cases annually – a dramatic contrast with the handful of deals reviewed on public interest grounds in the last 20 years.

To ensure a smooth pathway to closing a notifiable deal, it will be critically important for the parties to develop clear engagement strategies with the newly established Investment Security Unit (ISU) within the Department for Business, Energy & Industrial Strategy … Read more

Does SEC Scrutiny Improve Mutual Fund Disclosures?

Millions of investors rely on the disclosures of U.S. registered mutual funds in making their investment decisions, but some of the most influential industry opinion leaders and legal scholars have criticized the quality of those disclosures. Like public companies, mutual funds are subject to both internal and external oversight. In contrast to public companies, though, the funds have an acute agency conflict between their management companies and investors, while the internal governance for mutual funds, especially the board of directors, is often ineffective. With weak internal oversight, the role of external oversight becomes particularly important. The most important external oversight … Read more

Does the First Sale Doctrine Apply to NFTs?

An NFT is a non-fungible token that represents a particular copy of digital work.[1] It is a digital certificate of ownership that is secured on the blockchain, effectively creating a traceable record of every time the NFT changes hands.[2] Since digital files can be easily duplicated, NFTs create value for digital artists who otherwise would have difficulty profiting on their work.[3]

Further, when artists sell an NFT of their work, a typical sales agreement would include a mechanism that allows each artist to receive royalties not only on the original sale but also on secondary resales.[4]Read more

The Management and Oversight of Human Rights Due Diligence

Last year was the 10th anniversary of the United Nations Guiding Principles on Business and Human Rights (UNGPs) The UNGPs are a leading  framework for understanding the duties of states to protect those within their jurisdiction from corporations’ negative human rights impacts, the responsibility of corporations to respect human rights, and the role of states and businesses in providing remedies to the victims of human rights abuses.

At the heart of the UNGPs is the concept of human rights due diligence (HRDD). This is the process whereby corporations  assess the actual and potential human rights impacts of … Read more

ISS Discusses Increase in Fund Flows for 2021

Back to normal doesn’t mean what it used to. Following a year like no other, demand came roaring out the gate in 2021. While the pace of new demand has slowed somewhat in recent months amidst concern of new COVID variants, net new flows into long-term mutual funds and ETFs reached unprecedented territory. The $1.1 trillion gathered over the first 11 months of the year has surpassed all other years on record for the fund industry.

Passive funds led inflows in the year-to-date period at $826.9 billion, but active funds have strongly contributed to demand with net deposits of

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Corporate Disclosure: Facts or Opinions?

When it comes to financial disclosure, headline numbers are not all that matters. Equally important are what company executives talk about – and even how they talk about it. A large and growing body of literature in finance and accounting establishes the usefulness of narrative disclosure for predicting a company’s future performance and returns. Many of these papers attempt to extract predictions from text using lexicon or machine learning approaches and, in general, interpret their results as capturing “sentiment.”

While it is clear that this sentiment, however measured, is useful, it is not clear why. One classic paper[1] interprets … Read more

Skadden Discusses Waiver of Appraisal Rights Upheld by Split Delaware Supreme Court

In Manti Holdings, LLC v. Authentix Acquisition Co., Inc., the Delaware Supreme Court affirmed the Court of Chancery’s decision to enforce a waiver of appraisal rights included in a stockholders agreement executed by “sophisticated parties” who owned 100% of the company.1

This 4-1 decision reinforces Delaware’s longstanding public policy favoring private ordering, but has resulted in speculation (including from the strong dissent in the case) about what rights under the Delaware General Corporation Law (DGCL) are truly non-waivable. Delaware corporations, investors and practitioners should pay close attention to Manti’s guidance on contractual waiver of statutory rights.


In connection with … Read more

How Company Responses to Presidential Statements or Policies Affect Share Price

In a recent piece, I argue  that corporate leaders should not shy away from making a public statement if they believe it is the right thing to do and consistent with the corporation’s values.[1]

The opportunities to speak are legion – and controversial. In response to increasing COVID cases, for example, Apple is requiring customers – in addition to employees – to wear masks when visiting stores.  J.P. Morgan is barring unvaccinated employees from entering its New York office.  The NFL is requiring booster shots for staff who work closely with players.

Politicians and even some academics lament activist … Read more

Paul Weiss Discusses LIBOR Transition and SOFR Alternative

As previously reported, the LIBOR settings for one-week and two-month USD LIBOR tenors will cease being representative after December 31, 2021.[1] This cessation is expect to have less of an impact because these tenors are not as widely used as others.[2] All other settings—including one-month, three-month, and six-month USD LIBORs—are scheduled to cease being representative after June 30, 2023. In the U.S., transition efforts continue. We provide an overview of those recent developments and guidance, all of which emphasize that market participants should be evaluating the appropriate alternative to LIBOR for the products they offer. The Secured Overnight

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Do Activists Increase Long-Term Shareholder Value? New Evidence that Includes Non-Hedge Fund Activists

Shareholder activists are often accused of having short investment horizons and thus pushing companies to increase their stock prices at the expense of long-term shareholder value (“short-termism”). These accusations have prompted extensive research on interventions by hedge funds. In a survey of thirty years of such research, Denes et al. (2017) nevertheless conclude that the issue is still not settled.

In a recent study, we use a very different sample of activists and targeted firms from prior research to shed new light on this issue. Drawing on several sources of information, we develop a 20-year sample of 4,312 campaigns … Read more

Skadden Discusses Recent Delaware Chancery “Caremark” Decisions

In 1996, the Delaware Court of Chancery issued its seminal decision in In re Caremark International Inc. Derivative Litigation,1 establishing the conditions for director oversight liability under Delaware law. Adopted a decade later by the Delaware Supreme Court in Stone v. Ritter,2 the Caremark test imposes liability under two “prongs”: where “(a) directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”3

In the 25 years since Caremark … Read more

Why Exit via Acquisition Is Essential to Entrepreneurial Investment

Antitrust regulators around the world, including in the UK, have recently proposed changes to merger review policies and enforcement strategies that have implications for how acquisitions of start-ups are investigated and evaluated.  These changes will likely lead to heightened scrutiny—and increased costs and longer reviews—for many acquisitions, including horizontal and vertical mergers. In evaluating the merits of such changes, it is critical to take into account the important role that exit via acquisition plays in providing incentives for venture capital (VC) investment and entrepreneurship, and more broadly in driving dynamic innovation—one of the stated goals of the UK’s Competition and … Read more

ISS Discusses Shareholder Class Action Settlements in 2021

As the world will soon reflect on two full years of living through the COVID pandemic, the pace of shareholder-related class action settlements continue to bring significant recoveries back to harmed investors.

In fact, according to ISS Securities Class Action Services, 2021 U.S. class action settlements will outpace both 2019 and 2020 in terms of dollar amounts and quantity of settlements. (Note: 2021 numbers are preliminary – final calculations will be published in January 2022.)

Year Settlement Amount Quantity of Settlements
2021 $3.53 Billion 116
2020 $3.26 Billion 99
2019 $3.17 Billion 101

Note: U.S. Federal and State class actions

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How Optimistic Earnings Forecasts Are Kept in Check

Consensus earnings estimates, prominently quoted at major media outlets such as CNBC, Bloomberg, and the Wall Street Journal, play an important role in capital markets by providing investors with a proxy for earnings expectations.  The common belief is that they are formed by simply taking an average of all analyst forecasts. However, to what extent is this true?  Unsophisticated investors know little about the process, while sophisticated investors typically know only what consensus vendors such as Institutional Brokers’ Estimate System (I/B/E/S), whose estimates CNBC uses to identify earnings misses, state in their marketing materials. Specifically, I/B/E/S claims it “removes’ stale … Read more

Davis Polk Discusses U.S. Strategy on Countering Corruption Report

On June 3, 2021, President Biden issued the Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest (the Anti-Corruption Memo).  The Anti-Corruption Memo directed senior figures from the administration’s national security team to oversee an interagency review to take stock of existing U.S. government anti-corruption efforts and to identify and seek to rectify perceived gaps in the fight against corruption.

On December 6, 2021, the Biden administration released the United States Strategy on Countering Corruption (the Strategy) as the first major step pursuant to the Anti-Corruption Memo.  The Strategy outlines the administration’s plans to … Read more

Delaware’s Fiduciary Imagination: Going-Privates and Lord Eldon’s Reprise

What is the source of the duties that a fiduciary owes, and what are those fiduciary duties designed to do? In a recent article, Delaware’s Fiduciary Imagination: Lord Eldon’s Reprise, I argue that Delaware law is deeply conflicted about the answers to these questions, conflict that is having a deleterious effect on the quality of Delaware law.

The article argues that Delaware corporate law deploys the concept of the fiduciary and fiduciary duties to reflect two separate and wholly distinct legal ideas. The ideas have separate sources in early English and U.S. common law and equity, have structurally distinct … Read more

Agreement Reached on International Carbon Credit Trading Rules at COP26

The 2021 United Nations Climate Change Conference, commonly referred to as “COP26”, was held in Glasgow, Scotland last month.  Among other agreements coming out of COP26, government ministers representing nearly 200 countries reached a consensus regarding rules implementing Article 6 of the 2015 Paris Agreement, which provides a framework for the creation of voluntary international carbon credit trading markets.  This agreement follows six years of negotiations over the specific characteristics of such markets, and parties to the agreement have expressed the hope that this framework will lead to the establishment and growth of an international carbon credit trading market.


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China Experiments with Cross-Border Payments of Central Bank Digital Currencies

According to the Financial Stability Board (FSB), there is a consensus among major economies, such as the G20, to enhance cross-border payments.[1] Providing faster, cheaper, and more transparent and inclusive cross-border payment services would be beneficial for citizens, businesses, and national economies. As the Bank for International Settlements (BIS) noted, the Covid-19 pandemic made global policymakers rethink the significance of optimizing global payment and settlement systems, leading some countries to further explore the possibility of developing cross-border central bank digital currencies (CBDCs).[2] In response, China has sped up its own CBDC experiment – the digital yuan or digital … Read more

Heightened Eligibility Thresholds for Shareholder Proposals: Modernization or Voter Suppression?

In September 2020, the Securities and Exchange Commission amended Rule 14a-8 of the Securities Exchange Act to increase the eligibility requirements for a shareholder to submit proposals.[1] Rule 14a-8, also called the shareholder proposal rule, governs when a company must include a shareholder proposal in its proxy statement.[2] Passed by a 3-2 vote, the amendments have led to contentious debates about their potential impact on corporate governance.

Recent Amendments

Among other things,[3] the September 2020 amendments make the following significant changes to the shareholder proposal process:

First, the SEC increases the ownership threshold for initial inclusion of … Read more

SEC Considers Amendments to Rule 10b5-1

It was a very busy day at the U.S. Securities and Exchange Commission yesterday, with the commission weighing in on several proposed rule changes. For starters, the commission considered proposed amendments to Rule 10b5-1 and new disclosure requirements designed to prevent insider trading. Several SEC commissioners expressed their views on the measures. Commission Chairman Gary Gensler’s statement in support is here. The statements of commissioners Caroline A. Crenshaw, Allison Herren Lee, Hester M. Peirce and Elad L. Roisman, also in support, are here, here, here, and here, respectively.… Read more

SEC Considers Proposed Money Market Fund Reforms

On December 15, the U.S. Securities and Exchange Commission considered amendments to rules that govern money market funds. Commission Chairman Gary Gensler’s statement in support is available here. The statements of commissioners Caroline A. Crenshaw and Allison Herren Lee, also in support, are here and here, respectively. The statements of commissioners Hester M. Peirce and Elad L. Roisman opposing the amendments are here and here, respectively.… Read more

SEC Considers Proposals to Enhance Buybacks Disclosure

On December 15, the U.S. Securities and Exchange Commission considered proposals to enhance disclosure about stock buybacks. Commission Chairman Gary Gensler’s statement supporting the proposals is available here. The statements of commissioners Caroline A. Crenshaw and Allison Herren Lee in support are here and here, respectively. The statements of commissioners Hester M. Peirce and Elad L. Roisman in opposition are here and here, respectively.… Read more

SEC Considers Proposed Rules About Security-Based Swaps

On December 15, the U.S. Securities and Exchange Commission considered three proposed rules about the security-based swaps market. Commission Chairman Gary Gensler’s statement in support of the rules is available here. The statements of commissioners Caroline A. Crenshaw and Allison Herren Lee, also in support, are here and here, respectively. The statements in opposition of commissioners Hester M. Peirce and Elad L. Roisman are here and here, respectively.… Read more

Compensation Disclosure: A Study Based on Semantic Similarity

How companies determine executive compensation plays a critical role in corporate governance by helping recruit, motivate, and retain key employees. Not surprisingly, it has attracted broad attention from academics, investors, regulators, and the general public. In a recent study, we introduce a toolset for extracting relevant information from narrative disclosures and seek to provide novel insights into the compensation-setting process and facilitate further research on firms’ compensation decisions.

Research on executive compensation has largely focused on quantitative measures such as total pay level, cash bonus, and equity incentives. Given the wealth of other information that firms disclose about executive compensation, … Read more

Skadden Discusses SEC’s Final Amendments Under Holding Foreign Companies Accountable Act

On December 2, 2021, the U.S. Securities and Exchange Commission (SEC) adopted final amendments implementing the disclosure and submission requirements of the Holding Foreign Companies Accountable Act (HFCA Act). In addition, the adopting release establishes the SEC’s procedures for (i) determining whether a registrant is a “Commission-Identified Issuer” under the HFCA Act and (ii) prohibiting the trading of a Commission-Identified Issuer’s securities.

The final amendments will go into effect 30 days after publication in the Federal Register. The earliest that the SEC could identify a Commission-Identified Issuer would be after companies file their annual reports for 2021 (i.e., spring 2022 … Read more

How Sarbanes-Oxley Changed Firms’ Responses to Announcements of Earnings Restatements

Among the many goals of the Sarbanes-Oxley legislation was to increase CEOs’ accountability for the veracity of financial statements by requiring that they personally certify financial disclosures. Although that provision has not led to  successful prosecutions of offending executives, our research finds that the act has had a related impact, although by way of an unexpected mechanism.

In our recent paper, Shine a Light: How Firm Responses to Announcing Earnings Restatements Changed After Sarbanes-Oxley, we find that firms forced to restate earnings are much more likely to replace their CEOs than they were before Sarbanes-Oxley was enacted. This is … Read more

Wachtell Lipton Discusses ISS Final Voting Policies for the 2022 Proxy Season

Institutional Shareholder Services (ISS) recently released its final U.S. voting policies, which largely track previously proposed policies and become effective for shareholder meetings held on or after February 1, 2022.  Glass Lewis released its final U.S. voting policies for the 2022 proxy season, including specific guidelines on environmental, social and governance matters (ESG), on November 15, 2021, as described here.

ISS’s updated policies focus on climate, board diversity and uneven voting rights in multi-class share structures.  The final voting policies also reflect revisions that reach racial equity or civil rights audits, common and preferred stock authorization and equity-based incentive plans.  … Read more

The SPACtacular Rise of the Special Purpose Acquisition Company: A Retail Investor’s Worst Nightmare

The special purpose acquisition company, or SPAC, is a company with no commercial or operating history that has listed on a stock exchange with the sole objective of raising financing to identify and acquire another company.   SPACs developed after the SEC curtailed penny-stock blank-check companies and have recently achieved cult-like status.  In 2020, SPACs accounted for most of the money raised through IPOs on U.S. exchanges.  SPACs are also big business in the M&A world, completing nearly $80 billion worth of acquisitions in 2020 alone, and it is not surprising that non-U.S. exchanges are falling over themselves to take a … Read more

SEC Chair Gensler Speaks on the Risks of SPACs

Thank you for the kind introduction, Ty [Gellasch]. It’s great to be with the Healthy Markets Association.

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 staff.

I’d like to start by discussing an overarching principle I consider when thinking about public policy.

This principle has been around since at least antiquity. Aristotle captured it with his famous maxim: Treat like cases alike.[1]

This was as true two thousand years ago as it is in two thousand twenty-one.

Finance is constantly evolving

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The Impact of Retail Investors on Stock Liquidity and Crash Risk

The influence of retail investors on the stock market is controversial among experts. Some studies conclude that retail investors are uninformed, overconfident investors who assess risk poorly and thus destabilize the financial markets (e.g., Grinblatt and Keloharju, 2009; Barber and Odean, 2013). However, more recent studies suggest that retail investors are informed investors (e.g., Boehmer et al., 2020), provide liquidity, and therefore reduce the risk of stock-price crashes and stabilize the financial market (e.g., Barrot at al., 2016). In particular, in times of financial crises, retail investors might play an important role (e.g., Mitchell and Pulvino, 2012).

In a recent … Read more

Offshore Activities and Corporate Tax Avoidance

Taxation of multinational companies (MNCs) has received increasing attention from politicians, the media, regulators, and academics. While the popular press provides considerable anecdotal evidence that large MNCs pay lower taxes than their domestic counterparts, academic research provides mixed evidence on how multinationality affects taxation. Although foreign operations provide additional cross-border tax avoidance opportunities such as income shifting to low-tax rate jurisdictions, the existing empirical studies find that MNCs do not have significantly lower effective tax rates than purely domestic firms have. As more U.S. firms become multinational and engage in offshore activities of serving foreign markets and moving production overseas, … Read more

Sullivan & Cromwell Discusses UK Watchdog’s Order to Unwind Facebook Acquisition

On November 30, 2021, the UK’s competition watchdog, the Competition and Markets Authority (CMA), found that the completed acquisition by Facebook, Inc. (now Meta Platforms, Inc.) of GIPHY, Inc. resulted in a substantial lessening of competition (SLC) in social media and display advertising, harming social media users and businesses in the UK.

The CMA found that the only effective remedy is a full divestiture of GIPHY to a purchaser approved by the CMA.

The decision highlights that:

  • The CMA’s jurisdiction is far-reaching: The CMA asserted jurisdiction over the transaction even though GIPHY does not generate

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Mandatory vs. Voluntary ESG Disclosure, Efficiency, and Real Effects

In recent years, several countries have imposed disclosure requirements on public firms for environmental, social, and governance (ESG) performance. These mandates have also been accompanied by the European Union’s wide-reaching Non-Financial Reporting Directive, effective in 2018 (Directive 2014/95/EU). Similar legislative attempts to impose mandatory ESG disclosure have been made in the U.S. For example, in June 2021, the U.S. House passed the Corporate Governance Improvement and Investor Protection Act (HR 1187), which includes ESG-metrics disclosure requirements for public companies and allows enforcement of these requirements by the SEC. At the same time, a sizable portion of public firms in the … Read more

SEC Staff Discusses Key Considerations on LIBOR Transition

[1]This statement is being issued to remind investment professionals of their obligations when recommending LIBOR-linked securities and to remind companies and issuers of asset-backed securities of their disclosure obligations related to the LIBOR transition.[2]  This statement follows previous staff statements addressing various aspects of the forthcoming LIBOR transition.[3]

In light of the now-certain transition away from LIBOR as a reference rate for a number of different types of investments, including securities, investment professionals should be mindful of their obligations when recommending LIBOR-linked securities (defined for purposes of this statement as any security that uses LIBOR as a

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Does Sustainable Investing Matter to the Market? 

The value of an investment is no longer just about financial returns. A growing number of investors and other corporate stakeholders are calling for their money to go toward stocks or funds that are both profitable over the long term and reflective of their social values.[1]

In a new paper, “Sustainable Investing: An incentive to do “good” and attract the “right” investors?” we show that companies have strong incentives to do “good” by serving a beneficial purpose and to attract the “right” financially sophisticated and dedicated investors. However, companies’ good practices need to be visible to the … Read more

SEC’s Accounting Chief on Financial Reporting and the Priorities of His Office

The events of the past year bring to mind the old saying that “change is the only constant in life.”[1] Our capital markets continue to evolve and adapt in response to changes in the economic environment, investors’ needs for new types of information, and challenges related to the ongoing effects of the pandemic. Amidst these changes, the U.S. financial reporting system remains strong, largely due to the cumulative efforts of thousands of stakeholders who have exhibited resilience and adaptability, while remaining focused on the need for high quality financial reporting for the benefit of investors.

In this statement, we

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Does More Effective Director Monitoring Make Management Guidance More Credible?

One of management’s many important roles is to provide information to market participants. However, this information may be self-serving rather than beneficial to the market, especially in the case of voluntary disclosure. To curb this possibility, boards of directors are responsible for monitoring management to provide confidence in the credibility of these disclosures. To date, however, there has been no clear evidence of a link between director monitoring and the credibility of voluntary disclosure.

Recent studies do suggest directors can influence aspects of firm disclosures. In particular, Karamanou and Vafeas (2005) and Ke, Li, and Zhang (2020) document that director … Read more

ISS Discusses the Challenges of Litigating Class Actions in the UK

Although the United States inherited its common law legal system from the United Kingdom, the U.S. securities class actions jurisprudence is well advanced of the development of this area of law in the United Kingdom. With the first major collective action just occurring in 2013 (RBS Rights Issue Litigation), it is easy to understand why the case law surrounding this small but significant area of law has not had as much time to develop as it has in the United States.

The U.K. securities litigation is hitting its stride and the Courts have recently provided some valuable guidance as to … Read more

A Ranking Season Would Help Combat Discrimination by Commercial Banks

Last October, the U.S. Department of Justice (DOJ), the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) launched what they are referring to as an aggressive effort to combat deliberate financial discrimination against Black and Hispanic families by banks. Taking things one step further, earlier this month, the NYS Department of Financial Services announced that it plans to start examining banking institutions’ record of helping to meet the credit needs of minority- and women-owned businesses, and their participation in assistance programs for small and mid-size businesses, relying on the department’s Community Reinvestment Act … Read more

SEC Chair Gensler Speaks Before Investor Advisory Committee

Thank you. It’s good to be back with the Investor Advisory Committee again. As is customary, I will note that my views are my own, and I’m not speaking on behalf of my fellow Commissioners or the staff.

I’d like to thank the members for volunteering their time to provide us with advice. In addition to the important work you’re doing, I understand you’ll be announcing today a new Subcommittee on Disclosure. That’s a great addition to the fold.

Since the SEC’s founding in the Great Depression, we’ve been requiring disclosure of important information from companies.

The basic bargain is

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Jack Weinstein: Last of the Mohicans?

This is a speech that Professor Coffee is scheduled to deliver today as part of a webinar program that will pay tribute to Judge Jack Weinstein and will be presented jointly by Columbia Law School and the Institute of Judicial Administration at New York University School of Law.

We all know that Jack Weinstein is often described as the Father of Mass Tort Class Actions. That title has been bestowed on him by virtually everyone who has studied this field. But the larger, sadder question is whether his descendants in this field have died out? Is the field moribund? … Read more

Credentials Matter, but Only for Men: Evidence from the S&P 500

Gender diversity in the boardroom and the C-suite is one of the most contentious topics in corporate governance. Proponents of greater diversity argue that the lack of women directors and top executives is a missed opportunity and that increasing their numbers will improve corporate governance, and ultimately, increase shareholder value. Efforts toward that goal have included State Street’s “Fearless Girl” campaign, California’s two board-diversity statutes, and the recently approved NASDAQ rule. Many opponents of these measures stress that they don’t oppose diversity per se, but argue that there is a shortage of qualified women. As a … Read more

Cleary Gottlieb Discusses Federal Banking Agencies’ Crypto Initiative

On November 23, 2021, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint statement on an inter-agency initiative to address bank and bank holding company participation in crypto-asset-related businesses.  The Agencies’ label for the initiative (“crypto sprint”) is undoubtedly more of a relative term, as both banks and non-bank fintechs have clamored for guidance for some time, and the Agencies’ publication last week amounts to a plan to issue more guidance in the future.  Nevertheless, the statement provides a useful overview of the … Read more

Ninth Circuit Gives Plaintiffs Some “Slack” on Tracing Shares

On September 20, 2021, the Ninth Circuit took aim at a foundational requirement in securities litigation that has long bedeviled plaintiff’s attorneys. In a 2-1 decision in Pirani v. Slack Technologies, the court imposed a strict liability standard under Section 11 of the Securities Act of 1933 for shares sold as part of a direct listing. This includes shares normally subject to an exemption from registration requirements, the baseline for Section 11 litigation. While this is a case of first impression, given the unique circumstances of Slack’s IPO, the ruling may still have major implications for the standards of … Read more

ISS Discusses Landmark Ruling in China’s First Shareholder Class Action

The Intermediate People’s Court of Guangzhou delivered a groundbreaking victory to investors in China’s first-ever shareholder class action.

The China Securities Investor Service Centre (CSISC), a government-affiliated body, represented investors as it brought the action against Kangmei Pharmaceutical Co. (In China, class actions can only be initiated by government bodies – different from the U.S., where any investor of record can file a complaint.)

On November 12, 2021, the court declared the Puning-based drug manufacturing company to pay 2.46 billion yuan (USD $385.5 million) to investors as a reimbursement of its losses. The defendants included the company’s former Chairman, Ma

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Strategic Leadership in Corporate Social Responsibility

Why do corporations, in particular public corporations, adopt corporate social responsibility (CSR) policies? The CSR adage of “doing well by doing good” suggests that a firm can achieve higher financial returns by balancing the goals of different stakeholders. There are various ways to do that, including by increasing customer awareness, extending the planning horizon, creating a more resilient supply chain, or better addressing employee concerns.

This balancing act, however, depends on how other industry participants respond. For example, a firm may invest in making its supply chain more resilient, but that investment may prove of limited value if its suppliers … Read more

Debevoise & Plimpton Discusses Proposed Cybersecurity Legislation

On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law, authorizing $1.2 trillion for infrastructure spending, including approximately $2 billion for various federal cybersecurity projects. This adds to a large number of cybersecurity bills that are currently pending before Congress. In this Debevoise Data Blog post, we outline the key themes and takeaways of these pending bills, and what companies can expect in terms of new cybersecurity obligations in 2022.

The bills, which largely focus on critical infrastructure, appear to be coalescing around three key concepts:

  1. Expanding the Role of the Cybersecurity and Infrastructure Security

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Plus Factors in Price-Fixing Litigation

Antitrust plaintiffs typically rely on circumstantial evidence when pursuing price-fixing claims, because price-fixing conspirators usually conceal their collusion through code names, secret meetings, cover stories, and falsified documents. Antitrust law uses a two-step process for proving price-fixing agreements through circumstantial evidence. First, the plaintiff shows that the defendants engaged in similar conduct, referred to as “conscious parallelism.” Second, the plaintiff presents plus factors, which are evidence that suggests the defendants’ parallel conduct is the product of collusion, not independent decisions by the defendant firms. Following the Supreme Court’s mandate in Continental Ore Co. v. Union Carbide & Carbon Corp. that … Read more

Milbank Discusses SEC Guidance on Shareholder Proposals and the Way to Regulate Climate Change

As a result of the SEC’s most recent Staff Legal Bulletin[1] (“SLB”), shareholder proposals that focus on a “significant social policy” will not be excludable simply because the policy issue is not, in fact, “significant” to the company receiving the proposal. The SEC has decided it will no longer “focus on the nexus between a policy issue and the company.”  Previously, shareholder proposals that did not raise a “policy issue of significance for the company” were excludable under the “ordinary course of business” exception to Rule 14a-8.[2] The new Staff Legal Bulletin is a departure from past … Read more

How Holdouts Put Restructuring at Risk

Corporate creditors, perhaps like Americans generally, like to think of themselves as rugged individuals who also work within a communal system.  The fundamental tension is clearest at the point of default: Too much individuality, and a small minority of creditors can block a useful deal that would get the debtor-firm back on track.  But too much collective process, and the majority can bulldoze the minority, forcing it to take outsized losses when the majority cuts a side deal with the firm and its managers.

The restructuring system – comprised of chapter 11 of the Bankruptcy Code, parts of the securities … Read more

Paul Weiss Discusses Federal Jury Verdict Finding Cryptocurrency Products Not Securities

On November 2, 2021, a federal jury in Audet v. Fraser found that four cryptocurrency-related products were not securities under the Securities Exchange Act of 1934 and the Connecticut Uniform Securities Act. This case is significant because it appears to be the first time a jury has reached a verdict on whether cryptocurrency products are securities under the test articulated by the Supreme Court in SEC v. W.J. Howey Co., 328 U.S. 293 (1946). This case thus is instructive in the developing area of law as to whether digital assets and other crypto-related products may be considered to be … Read more

Debt and Taxes: Why Loans Are Really Leases

Debt has been a ubiquitous form of finance for millennia, and one might reasonably assume that we have a good handle on exactly what it is by now. It turns out that may not be the case.

A loan is commonly understood as the lender’s transfer of funds to the borrower on condition that the funds be repaid, with interest due in the interim. That is, the transaction is framed as a swap of loan proceeds on one hand for promises to pay interest and the amount borrowed back on the other. Call this the “standard view.” Under it, the … Read more

Gibson Dunn Discusses SEC Rules Mandating Use of Universal Proxy Card

On November 17, 2021, the Securities and Exchange Commission (SEC) approved amendments to the federal proxy rules to mandate the use of a universal proxy card in public solicitations involving director election contests. After the rules become effective on August 31, 2022, proxy cards distributed by both public companies and activist shareholders in a contested director election will have to include both sides’ director nominees, such that shareholders casting their vote can “mix and match” nominees from the company’s and dissident’s slates of nominees. We believe that the new rules are likely to embolden activists and increase the incidence of … Read more

SEC Announces Enforcement Results for FY 2021

The Securities and Exchange Commission today [November 18] announced that it filed 434 new enforcement actions in fiscal year 2021, representing a 7 percent increase over the prior year. Seventy percent of these new or “stand-alone” actions involved at least one individual defendant or respondent. The new actions spanned the entire securities waterfront, including against emerging threats in the crypto and SPAC spaces. For example, the SEC charged a company for operating an unregistered online digital asset exchange, charged a crypto lending platform and top executives alleging a $2 billion fraud, and brought an action against a special purpose

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SEC Commissioner Crenshaw on Universal Proxy Rules

Congratulations to the rulemaking team from the Division of Corporation Finance, as well as the staff within the Division of Economic and Risk Analysis and the Office of the General Counsel. This rulemaking has been several years in the making,[1] and I am glad that we are here today to finalize it.

The reality of modern board of director elections is that few shareholders attend a corporation’s annual meeting in-person to vote.[2] The ramifications of this are meaningful. Proxy voters in contested Board of Directors elections are usually unable to choose a mix of dissident and management nominees.

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SEC Commissioner Peirce Dissents on Universal Proxy Rules

I support universal proxy, but not today’s version of universal proxy.

Shareholders voting by proxy should be able to split their vote among company and dissident nominees.  Allowing shareholders a straightforward way of choosing a mixed slate through a universal proxy card can facilitate sensible changes to board composition.  Universal proxy makes sense for both operating companies and investment companies.  This particular universal proxy rule, however, may facilitate changes to the company that advance special interests rather than enhancing corporate value by serving as a tool for frivolous, as well as serious, activists.  I might have been able to support

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SEC Commissioner Roisman on Universal Proxy Rules

Thank you to the staff who worked on this rulemaking.

I support adopting this rule.  I see no compelling reason to prevent shareholders from mixing and matching their votes between a management and dissident slate, given that shareholders who attend meetings are already able to vote in this way.

I would have preferred, however, that today’s rule include certain additional changes and believe we should continue to consider those going forward.  First, I believe we should have given greater consideration to having this rule apply to funds.  I have heard no clear argument for why they should be treated differently

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Rewiring Corporate Law for an Interconnected World

The traditional view of corporate law can be summarized as follows. Shareholders have a single well-defined objective, namely “to maximize the net present value of the firm’s earnings per dollar invested” (Hansmann, 283). Managing companies in the interest of shareholders that aim at maximizing the net present value of their firm leads to a higher level of social welfare than any realistically available alternative. Within that framework, the goal of corporate law is straightforward: aligning managers’ preferences to those of shareholders.

In a recent paper of ours, we show that this view is premised on two assumptions that … Read more

ISS Discusses Intangible Assets and Company Valuation

Intangible assets continue to represent a significant portion of the overall Balance Sheet globally. Over 40% of capital in the US today is in the form of intangible assets, as assessed by our ISS EVA (Economic Value Added) methodology. The growth in intangibles has made valuing and evaluating companies more difficult, as disclosure and treatment of intangible assets varies globally. In our most resent ISS EVA & ISS ESG white paper we explore the relationship between intangibles and valuation as well as intangibles and ESG.

EVA stands for economic value added. EVA equals the return on capital, which is net

Read more

Regulating via Social Media: Deterrence Effects of the SEC’s Use of Twitter

Social media is widely used to create, disseminate, and consume information. Today, around seven in 10 U.S. adults use social media.[1] Additionally, more than half of Americans at least occasionally obtain news through social media.[2] In financial markets, investors use social media to express their opinions, and companies use it to disseminate information. Financial regulatory agencies are also increasingly adopting social media to connect with financial market participants. The SEC, for example, frequently tweets about its actions and activities.[3] Yet, we know very little about whether the SEC’s use of social media influences the behavior of entities … Read more

SEC Commissioner Speaks on ESG Risks and Company Accounting Controls

Thank you for the kind introduction Kevin [Gould]. It’s a pleasure to be here today at the annual PepsiCo-PwC CPE conference, which I understand is a tradition going back 18 years now. I appreciate the opportunity to speak, and I look forward to answering your questions today.

It’s not often—even in this job—that I find myself speaking before such a large group of controllers, accountants and other finance professionals of public companies. And I welcome it because it means we can get a bit more technical and talk about financial reporting issues. I suspect many of you will not be

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Competing Approaches to Director Liability in the Zone of Insolvency

When should directors be held liable for their company’s distressed financial condition? In a recent article, we show that the answer varies widely across legal regimes. We focus on the zone of insolvency, a phase in the company’s life when its financial condition is unstable and deteriorating, but it has yet to enter a formal bankruptcy proceeding (and theoretically may never enter such a proceeding).

There are two main approaches to dealing with directors’ actions when their company is in this zone. Under the American and Canadian approach, directors are generally held to the same corporate law standards that … Read more

Sullivan & Cromwell Discusses FinCEN Update of Ransomware Advisory

On November 8, 2021, the United States Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) issued an updated version of its Advisory on Ransomware and the Use of the Financial System to Facilitate Ransom Payments, originally issued in the fall of 2020.  Coming as part of a strengthened and more unified federal government focus on the ransomware threat, the Updated Advisory provides additional guidance to regulated institutions on how to detect potential ransomware payments and augments FinCEN’s call for institutions to report suspected ransomware transactions promptly.  FinCEN released the Updated Advisory contemporaneously with a joint enforcement action against a … Read more

ESG Investing: Why Here? Why Now?

ESG investing is taking the world of finance by storm.  Few concepts have come to dominate an academic discipline as quickly as Environmental, Social, and Governance (ESG) has come to dominate the field of corporate law.  While certain forms of ESG investing and governance have been around since the 19th century and achieved some prominence during the anti-apartheid movement, [1] the term “ESG” first appeared in 2004, when the former UN secretary general challenged various financial institutions “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services … Read more

Debevoise & Plimpton Discusses Federal Regulators’ Focus on AI and Consumer Protection in Finance

As financial institutions increasingly deploy artificial intelligence (“AI”), including machine learning and automated decision-making technologies, across their business lines, U.S. federal regulators have started to scrutinize the consumer protection implications of these technologies. Most recently, the Department of Justice (“DOJ”), in partnership with the Consumer Financial Protection Bureau (“CFPB”) and the Office of the Comptroller of the Currency (“OCC”), announced a new interagency “Combatting Redlining Initiative,” with a particular focus by the CFPB on “digital redlining” resulting from biased underwriting algorithms. The DOJ, OCC and CFPB initiative follows closely on the heels of another recent announcement by the White House … Read more

How Investment Banks’ Disagreement over Valuation Contributes to the Winner’s Curse

The well-developed theory of the winner’s curse can potentially explain the poor performance of mergers and acquisitions (Roll, 1986). A key reason for the curse is the uncertainty concerning a deal’s value (e.g., Capen, Clapp, and Campbell, 1971; Bazerman and Samuelson, 1983; Varaiya, 1988).  The greater the disagreement over the target’s value, the more likely that a winning bid will fail to account for the uncertainty and lead to overpayment. The empirical relevance of the winner’s curse is central to takeover efficiency, because it teaches that the bidder who overpays the most, instead of the bidder who can create the … Read more

SEC Chair Talks Private Equity and Hedge Funds

Thank you. As is customary, I will note that I am not speaking on behalf of the Commission or SEC staff.

Today, I’d like to talk about private funds, and the importance of certain of these funds — in particular, private equity and hedge funds — to our capital markets.

Why do these funds matter?

First, they matter because they’re large, and they’re growing in size, complexity, and number. Altogether, U.S. private funds have gross assets under management of $17 trillion with net assets of $11.5 trillion.[1] The sheer size and transaction activities of these funds represent a critical portion … Read more

Modernizing ESG and Climate Risk Disclosure

On November 3, timed to coincide with the United Nation’s COP26 climate summit in Glasgow, the IFRS Foundation announced prototype global reporting standards for corporate climate and sustainability disclosures, and the formation of the International Sustainability Standards Board (ISSB) to further develop them.  It also announced that it would consolidate under the ISSB two leading sources of climate disclosure guidance, the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation. (Earlier in 2021 the VRF had already brought together two other highly influential standard-setters — the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council).

These … Read more

Sullivan & Cromwell Discusses Stablecoins Report of President’s Working Group on Financial Markets

The President’s Working Group on Financial Markets (the “PWG”),[1] the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (the “OCC”) published the Report on Stablecoins on November 1, 2021.[2] The Report (1) provides a high-level background description of stablecoins, (2) outlines potential risks and regulatory implications, building on prior publications by other regulators and international regulatory bodies, and (3) sets forth recommendations for legislation (or, pending congressional action, interim measures by regulators) to ensure that “payment stablecoins”[3] and payment stablecoin arrangements are subject to a consistent and comprehensive federal prudential framework. … Read more

Shocking Business Bankruptcy Law

In a recent essay, Shocking Business Bankruptcy Law, I discuss how crisis is used strategically to push legal boundaries in large chapter 11 cases in ways that are not readily reversed. I focus primarily on two phenomena. The first is bankruptcy à la carte. Chapter 11 is akin to a fixed price meal; it offers extraordinary perks as part of a broader package meant to promote objectives with diffuse beneficiaries. In bankruptcy à la carte, parties such as lenders and distressed company acquirers extract the perks provided in the Bankruptcy Code without having to endure the oversight, … Read more

SEC Enforcement Chief Speaks on Regulation Outside the U.S.

Good morning, everyone and thank you for inviting me to deliver the Scott Friestad Memorial Keynote address. I didn’t have the privilege of knowing Scott, but in my few months as Director, I’ve frequently heard his name, and I’ve noticed that it is always uttered with respect and affection. Staff considered him a leader, a model Enforcement attorney, a mentor, and a friend. I’m honored to deliver this address that bears his name.

It’s also a privilege to address so many of our foreign counterparts. As our economies and securities markets become increasingly interconnected, it’s important that we continue to

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When Should You Abstain? A Call for a Global Rule of Insider Trading

The core concepts of securities regulation tend to be similar across jurisdictions. However, there are differences that may seem small and insignificant at first glance but in fact generate the potential for arbitrage by the kind of sophisticated actors that engage in cross-border mergers and acquisitions.

In a recent paper, we shed light on significant differences in the rules governing the definition of what is material information with regard to unfolding events.

Both the U.S. and European jurisdictions treat information regarding “material” events as important to investors and apply insider trading prohibitions when material information remains nonpublic. Hence, “materiality” … Read more

Wachtell Lipton Discusses SEC Staff’s Move to Limit Exclusion of “Social Policy” Shareholder Proposals

The SEC Staff has issued revised guidance rescinding prior Staff Legal Bulletins addressing the exclusion of Rule 14a-8 shareholder proposals based on the social significance to a company, “micromanagement” or  “economic relevance.”  The changes will likely facilitate a larger number of shareholder proposals, including ESG proposals, coming to a shareholder vote.

Ordinary Business Exception: The new guidance revises the SEC’s application of the “ordinary business” exclusion, which considered whether a proposal was of social policy significance or sought to micromanage a company.  While the Staff has previously focused on the significance of a social policy issue to a particular issuer, … Read more

The Dark Side of Information Dissemination

For decades, there has been an important debate over how much securities regulators should focus on protecting small investors. The regulators themselves have generally aimed to create a level playing field among investors, and historically, new technology has been an integral part of accomplishing this goal. Yet many posit that providing less sophisticated investors with better access to pertinent information can also impose significant costs on other market participants, regulators, and firms. Little, however, is known empirically about whether such costs exist or when they are greatest.

In a recent study, we investigate whether broadening the dissemination of corporate disclosures … Read more

How Generalist and Specialist CEOs Compare in the Eyes of Independent Directors

The benefits and drawbacks of generalist CEOs – those with the talent and skill to manage companies in various industries – have been fiercely debated in contemporary research. Some research touts generalist CEOs’ varied professional experiences and ability to launch a wide range of strategic initiatives. Other research warns of their tendency to switch jobs easily, which may mean that their motivations do not align with those of shareholders and prompt them to give short-term investments priority over above longer-term, but more beneficial, projects.

Our research contributes to the debate by exploring how independent directors view generalist and specialist CEOs. … Read more

SEC Chair Gensler Speaks at Securities Enforcement Forum

Thank you for having me here today. 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.

In 1934, in his first speech as the SEC’s first Chair, Joseph Kennedy told the National Press Club, “The Commission will make war without quarter on any who sell securities by fraud or misrepresentation.”[1]

Though much has changed since then — technology, financial products, and business models are always evolving — Kennedy’s words still ring true today.

Enforcement is one of the fundamental pillars in achieving the

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The Supreme Court and the Fraud on the Market Class Action

The class action is indispensable to private enforcement of SEC Rule 10b-5, which prohibits fraudulent practices in the secondary securities market.  Though Rule 10b-5 is a criminal provision, courts have long inferred a private civil right of action, allowing defrauded buyers or sellers of securities to sue for damages. Many Rule 10b-5 plaintiffs, however, have “negative-value” claims: Their financial loss is not large enough to justify individual litigation. Without class litigation under Federal Rule 23, these claims would not be pursued and, to that extent, the anti-fraud policy of Section 10(b) would not be vindicated.

The U.S. Supreme Court under … Read more

SEC Chair Gensler Speaks on Market Structure

Thank you. It’s good to be here at the annual meeting of the Securities Industry and Financial Markets Association — what we all know as SIFMA. John [Rogers], I look forward to your questions.

As is customary, I will note that I am not speaking on behalf of the Commission or SEC staff.

The SEC has a three-part mission: protecting investors, facilitating capital formation, and maintaining that which is in the middle: fair, orderly, and efficient markets.

We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent

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Are Climate-Change Risks Reflected in Stock Prices?

Climate-change risks can result from physical forces like wildfires, floods, or droughts or from changes in policy, the so-called transition risks created by government actions or the adoption of new technologies. A key question for academics, policy makers, firms, and investors is whether either type is being priced into securities markets.

In a new paper, Dissecting Climate Risks: Are they Reflected in Stock Prices?, we provide an answer to that question. We analyze climate news and provide separate proxies for market-wide physical risks and transition risks by performing textual analysis of Reuters climate-change news over 2000-2018.

We find that … Read more

Davis Polk Discusses Financial Action Task Force’s New Guidance for Virtual Assets

The Financial Action Task Force (FATF), the inter-governmental body that recommends international standards for anti-money laundering (AML) and countering the financing of terrorism (CFT), released an updated version of its guidance on the application of FATF’s recommendations to virtual assets and virtual asset service providers (VASPs) on October 28, 2021 (the Guidance). The Guidance builds on FATF’s efforts to apply its AML/CFT framework to the virtual assets industry. United States Treasury Secretary Janet Yellen praised the Guidance, stating, “[t]he United States welcomes the significant work by the FATF to . . . provide clear standards and guidance for the … Read more

How Technological Similarities Between Firms Affect the Market for Managers

Last June, Benedetto Vigna became the new CEO of Ferrari NV, joining the company from semiconductor manufacturer STMicroelectronics NV. The chairman of Ferrari noted Vigna’s “deep understanding of the technologies driving much of the change in our industry,” and the subsequent press release stressed Vigna’s experience “at the heart of the semiconductor industry that is rapidly transforming the automotive sector.” The emphasis on the new CEO’s technological background was emblematic of an important yet underexplored development: the growing impact of technological expertise on the executive labor market. In a new paper, we study that development, examining whether the degree to … Read more

SEC Commissioner Speaks on the Emerging Challenge of Cybersecurity

Good afternoon.  Thank you for the kind introduction and the opportunity to speak to the Los Angeles County Bar Association today.  Before I begin, let me issue the standard disclaimer that the views I share are my own and do not represent those of the Securities and Exchange Commission (the “SEC”) or my fellow Commissioners.

Today I would like to speak with you about cybersecurity, a topic that is becoming increasingly important for companies and regulators as more of our registrants’ operations have moved online.  The threats, strategies, and motives of cybercriminals can take many forms.  To name just a

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Corporate Governance Reform and the Sustainability Imperative

In recent years, interest in alternatives to shareholder-centric corporate governance has increased significantly. It has been driven by a growing sustainability imperative – widespread recognition that business as usual, despite the short-term returns generated, could undermine social and economic stability and even threaten our long-term survival, if we fail to grapple with associated costs. We remain poorly positioned to assess options for reform, however, because prevailing theories of corporate governance limit the debate in ways that obscure many of the most consequential possibilities.

According to those views, our options amount to board versus shareholder power, and shareholder versus stakeholder purpose. … Read more

Davis Polk Discusses the FSOC Climate Report: 10 Key Takeaways for the Banking Sector

The FSOC Climate Report views “climate-related financial risk as an emerging threat to the financial stability of the United States.” Here are our 10 key takeaways on a critical step in what will be a long and complex journey.

10 Key Takeaways

  1. U.S. financial regulators are in catch up mode
  • In a press call on the Climate Report,1 an unnamed “senior administration official” stated, “Are we behind? Of course we are. This is the starting gun going off for the U.S. regulatory system.”2
  • The Climate Report contains 35 recommendations for FSOC’s member agencies. It is a framework

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Does Uncertainty About Economic Policy Prompt Boards to Change?

Economic policy uncertainty (EPU) measures the ambiguity that government officials introduce into fiscal, regulatory, or monetary policy (Baker, Bloom, and Davis, 2016).[1] EPU is intended to be a comprehensive measure of uncertainty, capturing ambiguity about a firm’s operating environment rather than serving simply as an early indicator of a recession or a weak economy. EPU spikes around close presidential elections, wars, the September 11 attacks, the collapse of Lehman Brothers, and the COVID-19 pandemic.

In our forthcoming paper in The Financial Review, we consider how boards of directors alter their structures to handle exogenous changes in uncertainty. EPU … Read more

Deputy U.S. Attorney General Speaks on Corporate Crime

Thank you, Ray, for that introduction, and thank you all for having me today. I’m sorry that I am not able to be there in person but appreciate the ability to join you virtually.

I have three priorities for my time with you. First, I want to describe three new actions that the department is taking today to strengthen the way we respond to corporate crime. Second, I want to look forward and tell you about some areas we will be studying over the next months, with an eye to making additional changes to help further invigorate the department’s efforts … Read more

The Board of Directors’ Duty of Oversight and Cybersecurity

Over the last several years, cyberattacks, including from foreign state actors, have affected thousands of companies and government agencies. Past corporate victims include Yahoo!, Home Depot, and LinkedIn. And the real world consequences of a cyberattack became vivid to the Americans public in May 2021, when the operator of the Colonial Pipeline was compromised. As a consequence of the attack, the pipeline, which provides roughly 45 percent of the gasoline and other types of fuel for the East Coast, had to be shut down for six days. The stoppage precipitated a run on gasoline along parts of the East Coast … Read more

ISS Discusses Why the Enron Scandal Still Matters to Investors After 20 Years

In what is still regarded as the largest U.S. corporate fraud in history, the Enron scandal “celebrates” its 20th anniversary this month.

It was October 16, 2001 when Enron announced a $638 million third quarter loss, confirming a handful of whispers on Wall Street from those who were skeptical of Enron’s growth. This same day, the company first disclosed it would require a restatement of its earnings from a four-year period, 1997 to 2000, to correct accounting violations. And just six days later, on October 22nd, Enron acknowledged a U.S. Securities and Exchange Commission inquiry into its accounting practices. Simultaneously, … Read more

Misconduct Synergies from Mergers

Like many sectors in the U.S. economy, the registered investment advisory (RIA) industry has seen a recent increase in consolidation through mergers and acquisitions (M&A). The RIA industry has also experienced widespread and well-documented misconduct among employees.  For example, Egan, Matvos and Seru (2019) report that 7 percent of financial advisors have misconduct records.  Beyond the traditional cost and revenue synergies, what is the potential impact of M&A transactions on employee behavior? Mergers can increase value if they improve monitoring and disciplinary mechanisms that reduce employee wrongdoing at the combined firm.

In a new paper, we use the RIA industry … Read more

Skadden Discusses Crisis in the C-Suite: A 10-Step Plan

It’s an all-too-common occurrence. A senior executive is accused of wrongdoing ― sexual misconduct, bullying, financial fraud, a conflict of interest or other conduct posing a compliance or integrity concern. Suddenly, directors find themselves thrust into the center of a crisis, forced to make critical decisions on a short timeline, often in the glare of a public spotlight.

It’s a time for clearheaded thinking and a game plan. Here’s a 10-point guide for directors for the first few, critical days.

1. Make a quick, preliminary assessment of the seriousness of the allegations and establish a proper investigation structure: The first … Read more

COVID to Test Bankruptcy Infrastructure

The COVID pandemic prompted  global economic problems that many predicted would lead to an unprecedented number of corporate bankruptcies. The predictions were wrong, largely because governments responded with extraordinary measures. Congress, for example, pumped trillions of dollars into the U.S. economy in the form of both grants and loans, and the Federal Reserve kept interest rates historically low. Companies received enough money to continue operating despite their lack of cash flow, yet many were left with unprecedentedly large amounts of debt on their balance sheets.

Perhaps a robust economy will allow the companies to grow out of their debt burden. … Read more

Top Justice Department Official on Stepping Up Corporate Enforcement

I think these events [the Global Investigations Review conference: New York] are an important opportunity for discussion of trends and really this area is one where your work, your advice to clients, changes the way that people behave. And it changes the way that people behave in a way that collectively helps to detect, deter and sanction corporate malfeasance. Ultimately, it benefits the rule of law and allows businesses to thrive. And that is in part through robust compliance and enforcement programmes.

[Conference co-chair F. Joseph Warin] referenced a little bit of returning to government on 20 January as a … Read more

SPACs: The Roles of Reputation and Disclosure When Information Is Limited

Special purposes acquisition corporations (also known as SPACs or blank check companies) have received a lot of attention recently – and for good reason. SPACs accounted for more than half of U.S. IPOs in 2020, raising over $70 billion in total and over $300 million each on average, with their numbers increasing over 300 percent since 2019 (Goldman Sachs, 2020). Further, there were more SPAC IPOs in the first quarter of 2021 than in all of 2020.

SPACs raise capital through an IPO with the same filing and disclosure obligations as any other firm, however, they have no operations and … Read more

Sullivan & Cromwell Discusses White House Roadmap to Address Climate-Related Financial Risk

On October 14, 2021, the White House issued a report entitled “A Roadmap to Build a Climate-resilient Economy.”[1]  The 40-page report was mandated by President Biden’s May 2021 executive order on “Climate-Related Financial Risk” (the “EO”)[2] and presents the Administration’s “roadmap for measuring, disclosing, managing and mitigating climate-related financial risk across the economy,” while “catalyzing public and private investment to seize the opportunity of a net-zero, clean energy future.”[3]  Guided by the five primary principles outlined in the report, the Administration’s government-wide climate-risk strategy involves six main work streams:

  • promoting the resilience of the U.S. financial system

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Comparing Angels and Venture Capitalists as Investors in Entrepreneurial Firms

Angel investors (angels) and venture capital (VC) investors are both important sources of financing for entrepreneurial firms, but some critics, particularly VCs, often believe that angels are less able than VCs to perform due-diligence. However, an alternative view holds that VCs and angels are equally adept at adding value to startups. For example, a recent article by AngelList mentions that the presence of top VCs in a seed funding round of a startup does not affect the probability of its success. It is therefore important to empirically analyze and compare the value added to startups by angels and VCs. However, … Read more

SEC Chair Gensler Speaks on Fintech

Good morning. It’s good to be here at DC Fintech Week. Thank you, Chris [Brummer], and all the organizers for inviting me here today. 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.

Chris, before we get to your questions, I wanted to set the stage a bit about how I think about financial technology, or fintech.

Finance and technology have coexisted in a symbiotic relationship since antiquity. Think about it: Money, accounting, and ledgers, which we take for granted in some way now,

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What Do Stockholders Own? The Rise of the Trading Price Paradigm in Corporate Law

In a spate of recent decisions, the Delaware Supreme Court has embraced a shift in its approach to stockholder appraisal rights, a development that has attracted considerable comment. The greatest impact of these decisions, however, may lie beyond appraisal and still be to come.  The decisions present a new conception of how trading prices relate to the stockholder’s entitlement, one that would alter basic ideas surrounding mergers, stock ownership, and the nature of the corporation as a vehicle for co-ownership. Delaware corporate law appears to be on the verge of a paradigm shift.

At the heart of the shift is … Read more

Debevoise Discusses the Labor Department’s Proposal on ESG and ERISA

On October 14, 2021, the U.S. Department of Labor (the “DOL”) issued proposed regulations that represent the first step in meeting President Biden’s directive to revise or rescind the recent Trump-era rules addressing a fiduciary’s duties under Section 404 of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).[1]

As a refresher, in late 2020 the Trump administration DOL issued final rules that addressed ERISA fiduciary duties with respect to (a) considering environmental, social and corporate governance (“ESG”) factors when selecting investments and investment courses of action and (b) deciding whether to vote proxies and the use … Read more

Raiders, Activists, and the Risk of Mistargeting

For decades, Delaware and federal law governing contests for corporate control have focused on building walls to keep corporate raiders outside the gates, while doing relatively little to stop activist hedge funds. The prevailing academic view has been similar: Scholars frequently support measures that make life more difficult for raiders, while taking a more skeptical stance toward measures that target activists. In both cases, the conventional wisdom rests on an assumption that raiders pose a greater threat than activists to corporations and their stockholders.

In a recent article, Raiders, Activists, and the Risk of Mistargeting, we argue that this … Read more

SEC Commissioners Discuss Report on “Meme Stock” Episode

Today [October18], the staff issued a report on the so called “meme stock” episode that occurred this past January.  We would like to thank the staff not only for their hard work on this report, but also for keeping the Commission fully and timely informed during the period of extreme volatility discussed in the report.  While the report includes an interesting account of the events, it does not appear that many conclusions can be drawn from the data.  This report should have been an anodyne report on the events of earlier this year and, if evident from the data, an … Read more

Management Guidance Withdrawals During the Pandemic

The novel coronavirus (COVID-19) pandemic has drastically affected the global economy and offers a unique setting to investigate firm and market behavior through periods of heightened economic uncertainty. During the pandemic, many U.S. public firms withdrew their quarterly and annual guidance on their firms’ financial outlook. According to Intelligize, 851 companies announced the withdrawals of their management guidance between March 16 and May 31, 2020.[1] In contrast, guidance withdrawals were rare prior to the pandemic. The large increase in the number of withdrawals has attracted wide attention from investors, regulators, and the media (CNBC 2020; Wall Street Journal 2020). … Read more

Skadden Discusses Government Expectations for Companies’ Data-Driven Compliance Programs

As artificial intelligence and other data tools have proliferated, regulators and prosecutors expect companies to utilize sophisticated data analytics as part of their compliance programs. They also expect directors to take an active role, understanding and overseeing these data-driven compliance programs.

Recent lawsuits, enforcement actions and surveys suggest, however, that many companies have not kept up with the rising expectations and may not be utilizing available data to flag potential compliance problems as well as they could – perhaps not even as well as the government is already doing.

A careful reading of enforcement cases, policies and public statements shows … Read more

Stablecoins, National Currencies, CBDCs, and Banks

The Federal Reserve is set to release a much anticipated discussion paper on the prospect of a digital U.S. dollar. According to the Bank for International Settlements (BIS), over 86 percent of central banks are investigating the possibility of a digital currency.[1] Although China began a trial for its digital yuan in four cities in 2020, the Commonwealth of the Bahamas was the first to formally issue a sovereign digital currency, known as the Sand Dollar. In our article, Sovereign Digital Currencies: Parachute Pants or the Continuing Evolution of Money, we explore the budding dynamic between cryptocurrencies, particularly … Read more

SEC Chair Gensler Speaks on Clawbacks of Erroneously Awarded Compensation

I support today’s [October 14] action to re-open comment on the Dodd-Frank Act rule regarding clawbacks of erroneously awarded incentive-based compensation. I believe we have an opportunity to strengthen the transparency and quality of corporate financial statements as well as the accountability of corporate executives to their investors.

In today’s economy, corporate executives often are paid based on how the companies that they lead perform: things like revenue and profits of the overall business. Occasionally, however, the numbers the companies reported as the basis of that compensation aren’t accurate. In these cases, companies may have to go back and revise

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Economic Downturns and the Informativeness of Management Earnings Forecasts

Economic downturns brought about by events such as the financial crisis and COVID-19 pandemic create substantial uncertainty for companies. While some firms endure the downturns unscathed or even thrive, others see their businesses decline drastically and their bankruptcy risk increase. The heightened uncertainty makes it especially difficult for market participants, such as investors and analysts, who rely on personal experience and public information to assess how a particular firm will perform during a downturn. In contrast, managers – as insiders – are better able to assess their firm’s future performance because they receive timely information about the firm’s operations and … Read more

Capitalism, Heal Thyself

A paradigm shift is underway: The corporation – much reviled as a cost-externalizing, short-termist, inward-focused, politically manipulative machine – is undergoing a fundamental change. This is good news. Corporations are beginning to confront the harm they created, allowing capitalism to start healing itself.

The Rise of ESG Investing

There are three powerful factors at work. First, most large investment funds are either incorporating ESG into their investment decisions or tracking stock market indices.  Either way, there is the growing realization that bad companies or bad investments can hurt the entire portfolio. Big investors are realizing that everything is connected, and … Read more

SEC Chair Gensler Speaks About Digital Analytics in Finance

Thank you. I’m happy to appear at SEC Speaks for the first time as Chair of the Securities and Exchange Commission.

This event provides great continuing legal education to lawyers, accountants, and other market professionals. It also gives a platform for dozens of the talented and dedicated SEC staff and directors to share some insights about our work.

I’d like to thank the Practising Law Institute for working with our agency on this program, and my colleagues Gurbir Grewal and Renee Jones for co-chairing this event.

As is customary, I will note I’m not speaking on behalf of the Commission

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Private Equity in the Hospital Industry

Private equity (PE) firms have in recent years been spending more money on purchasing more hospitals than ever before, with such deals accounting for a sizeable chunk of the roughly $340 billion that PE firms have put into the U.S. healthcare industry over the last decade.[1] Hospitals are economically very significant, not only because they are among the 10 largest employers in all U.S. states, but also because they provide important jobs to women and critical healthcare services to local communities.

The role of PE firms in the hospital industry is, however, controversial. Proponents claim that PE firms can … Read more

Wachtell Lipton on Dealing with Activist Hedge Funds and Other Activist Investors

Despite a short dip at the outset of the pandemic, activism has rebounded and now continues at an ever-growing intensity.  As we have previously noted, regardless of industry, size or performance, no company should consider itself immune from activism.  No company is too large, too popular, too new or too successful.  Even companies that are respected industry leaders and have outperformed the market and their peers have been and are being attacked.  And companies that have faced one activist may be approached, in the same year or in successive years, by other activists or re-visited by the prior activist.

Although … Read more

Do Investors Pay Less Attention to Women Fund Managers?

It is well-documented that relatively few women manage investment funds. In 2019, for example, women accounted for 37.5 percent of all lawyers, 49 percent of judges, 34.5 percent of economists, 19 percent of surgeons, and 26 percent of chief executives, according to the U.S. Census Bureau. In contrast, the percentage of funds managed by women is not only low, it has barely changed: It was 10.3 percent in 2016 and 11 percent in 2020.

While there are several explanations for the employment gap between men and women in various industries, financial economists have argued that investors in mutual funds discriminate … Read more

New SEC Enforcement Director Speaks on Promoting Market Integrity

Thank you for that introduction and for having me here today. At the Division of Enforcement, ensuring that broker-dealers and associated individuals follow our laws and regulations is critical to our mission, so it’s only fitting that my first speech as Director is at this event.

While I just referred to it as “our mission” at the Division of Enforcement, what I’d like to talk to you about today is how we all share the responsibility to maintain market integrity and enhance public confidence in our securities markets. But first I must provide the disclaimer that my remarks today express

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The Price of Your Vote: Proxy Choice and Securities Lending

On October 7, 2021, BlackRock announced that, beginning in 2022, institutional clients would have the opportunity to direct the voting of shares held by index funds.  Some commentators heralded this change as “a catalyst for others in [the investment management] industry” and a move that would “expand the voting choice options for investors,”[1] though others were noncommittal or downright skeptical.[2]

Did BlackRock bury the lede?  Consider the following fine print: “BlackRock will determine eligibility criteria under this program based upon . . . financial considerations, including the decision to lend securities.”[3]  In an era of rock-bottom … Read more

Sullivan & Cromwell Discusses SEC Proposal to Enhance Proxy Voting Disclosure by Investment Funds

On September 29, 2021, the SEC issued a proposed rulemaking to enhance the information mutual funds, exchange-traded funds and other registered management investment companies (“funds”) report annually about their proxy votes.  The proposal also would require so-called “institutional investment managers” subject to section 13(f) of the Exchange Act (“managers”), which includes a broad range of investors in U.S. publicly traded equities, including some who are not “managers” in the conventional sense, to report annually regarding their voting of proxies related to executive compensation “say-on-pay” matters.  The proposed rulemaking—the first to be issued under the leadership of SEC Chairman Gary Gensler—touches … Read more

The Lowdown on Related Party Transactions by Directors or Managers in Public Companies

Though no longer surprising, corporate scandals can still involve the unexpected. Take the recent Carlos Ghosn and Nissan saga, for example. Aside from its sensational aspects, what is striking about the scandal was Ghosn’s alleged value-diverting related party transactions (“RPTs”) (see here and here). Though not unusual on their own, RPTs can be noteworthy when they occur between a director or manager (who is not a significant or controlling shareholder) and a company with a controlling shareholder. Ghosn was the chairperson of the board of directors of Nissan, which was controlled by another automobile company, Renault SA, (see hereRead more

Davis Polk Discusses SEC Enforcement Action Against Alternative Data Provider

An enforcement action against an alternative data provider for misrepresenting its practices offers lessons both for trading firms that use alternative data and public companies that sell it.

On September 14, 2021, the Securities and Exchange Commission announced a settlement with App Annie Inc., a privately held company, and its co-founder and former CEO and Chairman for making material misrepresentations about how App Annie obtained alternative data—information about companies or investments that is not contained within financial statements or other traditional data sources—and about its internal controls to prevent the misuse of confidential data.

App Annie provides a free performance … Read more

The Leverage Effect of Bank Disclosures

In a new paper, The Leverage Effect of Bank Disclosures, we challenge the widespread view that disclosure requirements prompt banks to reduce their risk and leverage.  That view has prevailed since at least 2004, when the Basel Committee introduced Pillar 3 (market discipline) into the Basel II Accord, making disclosure requirements a complement to minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) (BIS, 2004).  The committee has emphasized that disclosure leads to lower risk and leverage because “the market will require a higher return from funds invested in, or placed with, a bank that … Read more

SEC Chair Gensler Testifies Before U.S. House Committee on Financial Services

Good afternoon, Chairwoman Waters, Ranking Member McHenry, and members of the Committee. I’m honored to appear before you today for the second time as Chair of the Securities and Exchange Commission. As is customary, I will note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe’s capital markets.[1] This exceeds even our impact on the world’s gross domestic product, where we hold

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The Cost (and Unbenefit) of Conscious Capitalism

We examine how shareholders and other stakeholders were affected by a quasi-exogenous shock to corporate governance that began to emerge state-by-state across the United States in the 1980s. The shock came from so-called “constituency statutes,” which allow, but do not require, directors to take into consideration stakeholders rather than just shareholders when making decisions (Orts 1992-1993). These statutes prompted an important shift in governance. Under the shareholder primacy principle, directors and managers had a fiduciary duty to make the interests of just one type of stakeholder – shareholders – a priority. Under constituency statutes, they now held the “right” to … Read more

Davis Polk Discusses Tighter China Controls Over Crypto Transactions

The PRC appears to be further tightening controls on cryptocurrency activities.  On September 24, 2021, the People’s Bank of China (PBoC), China’s central bank, issued the Notice Regarding Further Prevention and Management of Risks Associated with Cryptocurrency Trading Hype (September 2021 Notice) jointly with nine other Chinese national government bodies[1].

The September 2021 Notice prohibits (i) overseas cryptocurrency exchanges from providing services to residents in mainland China and (ii) individuals in mainland China from working for overseas exchanges as their employees., and bars companies and individuals from providing marketing, payment, settlement services or technical support to … Read more

COVID-19, Corporate Leverage, and Financial Fragility

The COVID-19 pandemic and efforts to combat its spread were an unprecedented shock to corporate cash flows and consequent need for external financing. How did corporate leverage respond? More important, what does the impact on leverage mean for financial stability? In the U.S., firms that were most affected by the pandemic, in terms of drop in demand, are likely facing a debt overhang problem and increased risk of default. We document these recent patterns on corporate leverage and financial fragility in our recent paper, which uses a dataset of about 3,000 U.S. public companies.

Controlling for the effects on … Read more

Kirkland & Ellis Discusses Cross-Border Transfers of Personal Data

In the wake of the landmark judgment in Schrems II in July 2020 (which invalidated the EU-US Privacy Shield with immediate effect) (as reported by us here), the European Commission has recently adopted a number of hotly anticipated (at least in the privacy world!) decisions that re-adjust the framework for transferring personal data from the European Economic Area (the “EEA”) to countries outside the EEA (“third countries”) and the United Kingdom.

These decisions include:

  • an implementing decision which approves a new form of Standard Contractual Clauses (the “New SCCs”) for legitimising transfers of

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Attention to Dividends, Inattention to Earnings?

Why do firms pay dividends? A well-known finance theory proposes that, in frictionless markets, dividends are irrelevant for firm valuation because an investor’s wealth does not change if the firm holds a dollar in the bank or if the firm returns a dollar to an investor through a dividend who then holds it in the bank.[1]  Despite this, roughly 40 percent of public firms pay dividends and, because they are rarely cut, dividends provide investors with a predictable stream of cash.  Research has had limited success in explaining why firms pay dividends (i.e. the benefits), but the costs, such … Read more

Sullivan & Cromwell Discusses OFAC Ransomware Advisory Update

On September 21, 2021, the United States Department of the Treasury’s Office of Foreign Assets Control issued an Updated Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments, which provides additional guidance for companies facing ransomware attacks, or processing ransomware payments, on ways to mitigate the risks of a potential sanctions violation in connection with such payments.  The Updated Advisory incentivizes companies to proactively improve their information security systems and to promptly report ransomware attacks to U.S. government agencies by offering penalty mitigation under OFAC’s enforcement guidelines in the event a sanctions violation is later discovered.  Concurrent with the release … Read more

CSR and Firm Survival: Evidence from the Pandemic and the Climate Crisis

The global challenges of climate change and COVID-19 have created a grim economic outlook, with companies fighting for their very survival. As a result, companies are boosting their brands, and ability to compete, with Corporate Social Responsibility (CSR) programs. The airline industry, for example, responded to the pandemic and pressure to reduce CO2 emissions by playing a crucial role in transporting medical equipment necessary to tackle Covid-19. This step not only contributed to the well-being of society, but also improved the industry’s image and the ability of airlines to survive.

In a new paper titled “CSR and Firm Survival: Read more

Wachtell Lipton Discusses Delaware Supreme Court’s New Demand Futility Test

In what promises to be a landmark decision, the Delaware Supreme Court last week reframed the rules governing derivative litigation.  United Food & Commercial Workers Union v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021).

A Facebook stockholder sued current and former directors to recover costs the company had incurred in connection with a proposed stock reclassification.  The Court of Chancery dismissed the suit, finding that the plaintiff had failed to establish that at least half of the current directors were incapable of independently evaluating whether to pursue the suit.

The Delaware Supreme Court affirmed.  Writing for the … Read more

Kleptocracy Through Weak Governance at State-Owned Corporations

1Malaysia Development Berhad (1MDB), a state-owned company purportedly established for the benefit of the Malaysian people, was a vehicle for former Prime Minister Najib Razak to steal billions of dollars over close to nine years.  Called “kleptocracy at its worst” by then-U.S. Attorney General Jeff Sessions, the scandal raised the question of why Malaysian corporate law, modeled on international standards, failed to safeguard against expropriation of such magnitude.  In my new article, I explore this question, highlighting how corporate governance frameworks can be strengthened to guard against similar debacles.

The Doing Business 2020 index ranks Malaysia as second highest … Read more

SEC Chair Gensler Speaks on Proposal to Enhance Proxy Voting Disclosure

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on September 29, 2021. I want to welcome members of the public who are listening in.

This is my first open meeting as Chair of this remarkable agency. While there will be times when we vote on rulemakings via seriatim, I like open Commission meetings. I think open meetings can bring greater transparency to our work, and the public benefits when we can open up our deliberations to them. I hope it will be the first of many during my tenure.

Today, the Commission will consider

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Copycat Skills and Disclosure Costs

Despite the benefits of greater transparency, public disclosures may reveal proprietary information that ultimately harms the disclosing firm by allowing competitors to view and imitate its strategies, an activity known as “copycatting.” An SEC proposal in July 2020 to increase the reporting threshold for the quarterly 13F holdings of investment companies from $100 million to $3.5 billion was partly aimed at reducing the costs from copycatting. Although prior studies have shown how proprietary costs and competition shape the decisions of disclosing firms (e.g., Leuz and Wysocki, 2016),  copycatting by peers remains relatively unexplored, mainly because such behavior is so difficult … Read more

Arnold & Porter Discusses ESG, Disclosure, and Whistleblowing

On August 25, 2021, The Wall Street Journal reported that the SEC and the United States Attorney’s Office for the Eastern District of New York are investigating greenwashing allegations made by the former head of sustainability of Deutsche Bank AG’s asset-management arm, DWS Group (DWS), including allegations that DWS overstated how much it used sustainable investing criteria to manage its assets. DWS disclosed in its 2020 annual report that it invested more than half of its $900 billion in assets using a system called ESG integration, where companies are graded using ESG criteria. According to The Wall Street Journal, … Read more

Personhood, Procedure, and the Endurance of Corporate Compliance

Despite its significant role in preventing and deterring wrongdoing, corporate compliance’s long-term prospects remain an open question. How strongly does a company’s inclination to redress wrongdoing rest on a credible threat of outside enforcement?

This is one of the questions I tackle in a new book chapter, Personhood, Procedure, and the Endurance of Corporate Compliance. The chapter, which is forthcoming in the Research Handbook on Corporate Purpose and Personhood, begins with a prediction. For a number of reasons, the government may find its constitutional access to corporate information significantly narrowed in the future. I set forth the basis for … Read more

SEC Chair Speaks Before Small Business Capital Formation and Asset Management Advisory Committees

Thank you, Carla [Garrett]. It’s good to be with this Committee again. I’d like to thank the members for their time and willingness to represent the interests of America’s small businesses. As is customary, I’d like to note I’m not speaking on behalf of the Commission or the SEC staff.

I look forward to your readouts from today’s discussion on late-stage, private rounds of financing, as well as the pathways to our public markets.

Last time we gathered, I spoke about my father, Sam Gensler, a small business owner who never had more than a few dozen employees. He didn’t

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Why Singapore Exchange’s Embrace of SPAC Listings Is a Game Changer

On September 2, 2021, Singapore Exchange (SGX) released the “Proposed Listing Framework for Special Purpose Acquisition Companies” that officially permits the public listing of SPACs on its mainboard. The move aims to cement Singapore’s status as Asia’s top financial center, attract lists of regional unicorn companies in the tech industry, and satisfy the appetite of local high net-worth investors for higher-risk investments.[1] On September 17, the Singapore government launched a S$1.5 billion (US$1.1 billion) investment fund backed by Temasek Holdings, the city state’s investment firm, to boost its stock markets by injecting money in high-growth companies and … Read more

Chair Lina Khan Discusses Vision and Priorities for the Federal Trade Commission

Thank you [commissioners and staff] for the grace and patience you’ve displayed the last few months as my team and I have gotten up to speed on the agency’s work and processes. Navigating a leadership transition during a pandemic has
posed a host of challenges, and I am so grateful for the warm welcome and support from across the Commission. The past 18 months have involved significant hardship and loss for many of us, and I want to thank everyone for their hard work and dedication during these difficult times.

It’s been great to meet and speak with many of Read more

Private Communication Between Managers and Financial Analysts: Evidence from Taxi Ride Patterns in New York City

Firm managers spend substantial time meeting privately with analysts and investors (e.g., Thomson Reuters 2009; Soltes 2014; Brown, Call, Clement, and Sharp 2015; Bushee, Gerakos, and Lee 2018). As evidenced by a wealth of anecdotes and surveys, such private communications are now found everywhere, becoming an important source of information to sell-side analysts (Brown et al. 2015). Despite the importance of these off-line, non-public interactions, however, little is known about the timing, nature, and value of private communications, primarily due to the data limitations inherent in their private nature. This study seeks to fill this gap by constructing a unique … Read more

Mandatory Short Selling Disclosure Could Lead to Investor Herding Behavior

Commission-free trading apps like Robinhood and coordinated action by retail investors on Twitter, WallStreetBets, and other social media have created an unprecedented force on Wall Street that specifically targets short sellers. One result has been a massive run-up in the stock prices of GameStop, AMC, and other “meme” stocks in 2021, presenting the SEC with the challenge of promoting the efficiency of capital markets – even as the prices of these meme stocks substantially deviate from firm fundamental value –  while simultaneously protecting retail investors. AMC specifically warned its investors in a June 3, 2021, filing that, “We believe that … Read more

Debevoise Discusses the Proposed Anti-Foreign Sanctions Law in Hong Kong

The possibility of an Anti-Foreign Sanctions Law being implemented in Hong Kong has recently attracted significant attention in the region. The precise scope and ambit of the contemplated law is currently unclear, as is the proposed timing for its implementation. Whilst we await the details, it is nevertheless prudent for businesses in Hong Kong to begin to consider the potential operational and legal implications that might arise.

For these purposes, it is helpful to understand some of the background to the law and its possible provisions. As such, this briefing note summarises:

  • the implementation of the Anti-Foreign Sanctions Law in

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The Real Effects of Conflict Minerals Disclosures

Pursuant to the Dodd-Frank Act, the Securities and Exchange Commission (SEC) adopted the conflict minerals disclosure (CMD) rule, which requires issuers to perform due diligence on “conflict minerals” – natural resources known to fuel conflicts in underdeveloped nations – that are used in the “functionality or production” of their products. The issuers must disclose whether their products contain tantalum, tin, tungsten, or gold (3TG) from the Democratic Republic of Congo (DRC) or any of nine neighboring African nations (together, the covered countries). The CMD rule is designed to further the humanitarian goal of ending the extreme violence perpetrated by armed … Read more

Paul Weiss Discusses FTC Withdrawal of Vertical Merger Guidelines

At its public meeting on September 15, the Federal Trade Commission (FTC) rescinded its Vertical Merger Guidelines. These guidelines were issued jointly by the Department of Justice (DOJ) and FTC in June 2020, and served to “outline the principal analytical techniques, practices, and enforcement policies of the” DOJ and FTC “with respect to a range of transactions often described as vertical mergers and acquisitions.” The FTC also rescinded its related Commentary on Vertical Merger Enforcement issued in December 2020. The FTC did not issue replacement guidelines. Instead, the majority statement said that sometime in the future the FTC “will … Read more

SPACs and Forward-Looking Disclosure: Hype or Information?

In 2021, 359 SPACs have raised $95 billion, surpassing the $74 billion raised by 254 SPACs in 2020. The growth in this market might mean that sophisticated investors are using a regulatory loophole to avoid IPO disclosure regulations in taking firms public and hyping their shares. It could also mean that IPO disclosure regulations are preventing small companies with scant performance history from raising money in public markets. Either way, it’s time to reconsider disclosure regulations related to IPO. With that in mind, we examine the extent of forecasting by SPACs and its relation to transaction outcomes.

SPACs are blank … Read more

SEC Chair Gensler Speaks on Alternative Reference Rates

It’s good to be with the Alternative Reference Rates Committee to discuss the transition from the London Interbank Offered Rate (LIBOR). I’d like to thank the Committee, the New York Fed, and the Federal Reserve Board for putting this together. 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 some of you may know, when the topic of LIBOR comes up, I sometimes find myself thinking about Hans Christian Andersen and Warren Buffett. Others of you might be wondering why I’d mention these

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Once upon a time, a successful startup that reached a certain maturity would “go public” – selling securities to ordinary investors, perhaps listing on a national stock exchange, and taking on the privileges and obligations of a public company under the federal securities regulations.

Times have changed. Successful startups are now able to grow quite large without public capital markets. Not so long ago, a private company valued at more than $1 billion was rare enough to warrant the nickname “unicorn.” Now, over 800 companies qualify.

Legal scholars are worried. A recent wave of academic papers makes the case that, … Read more

Weil Gotshal Discusses Boeing Decision and Board Oversight of Product Safety Risks

The Delaware Court of Chancery’s recent decision denying a motion to dismiss in In re The Boeing Company Derivative Litigation, 2021 WL 4059934 (Del. Ch. Sept. 7, 2021), reminds directors and their counsellors of the importance of board and board committee level oversight and monitoring of “mission critical” product safety risks – in this case airplane safety. Perhaps even more important for litigation purposes, the Boeing decision also reminds directors and their counsellors of the importance of documenting these efforts in a manner that can be produced to stockholders making demands for books and records under Section 220 of … Read more

The Jobs Act Did Not Raise IPO Underpricing

The JOBS Act was signed into law on April 5, 2012, with the objective of improving access to the public capital market for growth companies. Title I of the JOBS Act amended the Securities Act and the Exchange Act and has been widely recognized as the most significant relaxation of securities regulation in decades. Title I of the JOBS Act includes provisions designed to “de-risk” and “de-burden” the IPO process for emerging growth companies (EGCs) — issuers with pre-IPO revenues of less than $1 billion. The de-risking provisions are intended to enhance the ability to conduct a successful registered offering … Read more

Cadwalader Discusses FTC’s About Face on Debt for Hart-Scott-Rodino Purposes

In a recent blog post, the Acting Director of the Federal Trade Commission Bureau of Competition announced the reversal of the Federal Trade Commission’s (“FTC”) decades-long position regarding the treatment of debt repayment when determining whether a premerger notification filing under the Hart-Scott-Rodino (“HSR”) Act is required. Effective September 27, 2021, companies and individuals that do not file HSR based on excluding retired debt from the transaction value may face enforcement action. Perhaps even more concerning, the FTC also cast doubt in general on whether HSR practitioners may rely on past informal guidance from the FTC’s Premerger Notification Office … Read more

Uninformative Performance Signals and Forced CEO Turnover

Evaluating the performance of CEOs is one of the most important tasks of corporate boards of directors. When deciding whether to retain or dismiss CEOs, boards should follow the informativeness principle developed by Holmström (1979) and include all valuable performance signals regarding the quality of the CEOs. Of course, boards should also ignore all uninformative performance signals. For example, CEOs should not be rewarded or punished for, in effect, getting lucky or unlucky.

In a recent working paper, I investigate whether boards violate the informativeness principle in firing CEOs by failing to ignore outcomes that are conditionally uninformative. If … Read more

SEC Chair Gensler Testifies Before Senate Committee on Banking, Housing, and Urban Affairs

Good morning, Chairman Brown, Ranking Member Toomey, and members of the Committee. I’m honored to appear before you today for the first time as Chair of the Securities and Exchange Commission. I’d like to thank you for your support in my confirmation this spring. As is customary, I will note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.

We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe’s capital markets.[1] This

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The Economics of Crypto Funds

Crypto funds are a new financial intermediary that trade in cryptographically protected digital assets, known as coins or tokens. Both the number of crypto funds and investments in crypto funds are soaring. As of the second quarter of 2021, more than 800 crypto funds are active, and their aggregate assets under management exceed $60 billion. The trend is likely to continue, as crypto funds returned an average of 98 percent  (before fees) to their investors in the first quarter of 2021.

Crypto funds differ from more traditionally-managed funds in significant ways. For example, CryptoFundResearch reports that 43 percent of all … Read more

Whistleblowing Should Be Part of President Biden’s Fight Against Corruption

On June 3, 2021 President Joseph Biden issued a “Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest,” (hereinafter “Anti-Corruption Memorandum” or “Memorandum”).  In issuing the Memorandum, President Biden placed fighting corruption at the “core” of his foreign policy, and explained that he wanted his administration to “lead efforts to promote good governance; bring transparency to the United States and global financial systems; prevent and combat corruption at home and abroad; and make it increasingly difficult for corrupt actors to shield their activities.”  The Memorandum set a deadline for obtaining recommendations from … Read more

Fragile Financial Regulation

As COVID-19 rocked financial markets in March 2020, the Treasury market failed to perform its role of maintaining financial stability. Unable to respond to the surge of investors liquidating their Treasury holdings to raise cash, the secondary market ground to a virtual halt. Liquidity disappeared. Trading costs skyrocketed. And the price of Treasuries – a common benchmark for financial assets – crashed with other assets, instead of remaining stable or rising.[1]

In a new article, we argue that this breakdown in the Treasury market undermined the credibility of Treasuries as the safe asset in financial regulation, and the collateral … Read more

Wachtell Lipton Discusses Boeing’s MAX Woes in the Boardroom

In an important decision this week, the Delaware Court of Chancery permitted a Caremark duty-of-oversight claim to proceed against the directors of the Boeing Company.  Stockholder plaintiffs sued Boeing’s board, seeking to recover costs and economic losses associated with the crash of two 737 MAX jetliners.  The plaintiffs’ complaint alleged that the directors failed to monitor aircraft safety before the crashes and then failed to respond to known safety risks after the first crash.  The lawsuit seeks to hold the directors liable for the resulting loss of “billions of dollars in value.”

The court denied the directors’ motion to dismiss.  … Read more

Disclosure Procedure

Each year, U.S. public companies spend millions of people-hours producing the securities disclosures that undergird public capital markets. But relatively little is known about how firms produce such consequential information, including whether they are spending too much, too little, or just enough on disclosure procedures. Failures of these procedures – from the inclusion of outright falsehoods to inartful drafting – can render a firm’s disclosures misleading, potentially causing investor losses. Of course, those failures can also lead to substantial costs for firms themselves in the form of securities litigation or government investigations. All equal, higher-quality procedures would be expected to … Read more

Gibson Dunn Offers 2021 Mid-Year Securities Litigation Update

The torrid pace of new securities class action filings over the last several years slowed a bit in the first half of 2021, a period in which there have been many notable developments in securities law.  This mid-year update briefs you on major developments in federal and state securities law through June 2021:

  • In Goldman Sachs, the Supreme Court found that lower courts should hear evidence regarding the impact of alleged misstatements on the price of securities to rebut any presumption of classwide reliance at the class-certification stage, and that defendants bear the burden of persuasion on this issue.

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Consumer Protection Settlements: Theory and Policy Issues

In a new paper, I compare private and public class action settlements. I find a dearth of theoretical law and economics literature on public class actions, so I use the private class actions literature and a pivotal case study to highlight key issues and suggest areas for future research.

Class Actions Are Different. Class actions are quite different from other lawsuits. Frequently an attorney initiates the action rather than a plaintiff, and there is no formal relationship with members of the class.  There are clear economies of scale in class actions, and the plaintiffs’ attorneys perform a socially useful … Read more

SEC Chair Gensler Speaks Before Investor Advisory Committee

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

I’m glad to participate in my second meeting of the Investor Advisory Committee. I thank the members for your time and willingness to represent the interests of American investors. Investor protection is at the heart of the SEC’s three-part mission.

Today, I’d like to discuss a few areas related to topics you’re discussing today, including the behavioral design of online trading platforms, 10b5-1 plans, and SPACs. I also look forward to

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The Impact of SEC Case Backlog on Investigations

In recent years, the number of enforcement actions by the Securities and Exchange Commission (SEC) has declined significantly, which has led to questions about the SEC’s effectiveness. While several potential explanations exist for this decline, SEC officials have often pointed to being too busy to effectively investigate and prosecute all potential misconduct (Peikin 2019).

In a new study, we examine the impact of busyness on the SEC Division of Enforcement’s formal investigation process. In particular, we focus on four broad lines of inquiry: (1) the effect of open-case backlog on the overall likelihood of SEC investigations; (2) the effect of … Read more

Wachtell Lipton Puts a Spotlight on Boards

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 ongoing coronavirus pandemic and resulting economic and social turbulence, combined with the wide embrace of ESG, stakeholder governance and sustainable long-term investment strategies, are propelling a decisive inflection point in the responsibilities of boards of directors.  The 2016 and … Read more

The Corporate Contract and the Internal Affairs Doctrine

No rule of corporate law may be more foundational than the internal affairs doctrine. The doctrine provides that the internal affairs of a corporation – the “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders”[1] – are governed by the laws of the state in which the corporation is chartered.

Lurking within this widely accepted principle, however, is an even more foundational question: Is the internal affairs doctrine simply a choice of law rule enabling a corporation and its shareholders to choose which state’s law will govern their private business arrangement? … Read more

Arnold & Porter Discusses NY Financial Regulator’s Collection of Diversity, Equity, and Inclusion Data

On July 29, 2021, the Superintendent of the New York State Department of Financial Services (DFS) issued an Industry Letter (Industry Letter) announcing its new initiative to support diversity, equity and inclusion (DEI) efforts by collecting and publishing data on the diversity of corporate boards and management of its Regulated Banking Institutions and Regulated Non-Depository Financial Institutions (collectively, Regulated Institutions). The announcement of this initiative follows the establishment of a new Statewide Office of Financial Inclusion and Empowerment led by Tremaine Wright, and the initiative is similar to others that have been undertaken by federal and European bank regulators. While … Read more

The Strategic Use of Form 13F Restatements by Hedge Funds

On July 10, 2020, the Securities and Exchange Commission (SEC) announced a proposal to increase the reporting threshold for Form 13F from $100 million to $3.5 billion. Form 13F was adopted in 1975 and required managers with more than $100 million under investment to report their equity holdings on a quarterly basis. In the subsequent 45 years, the number of 13F filers increased 17-fold to reach 5,089. Not surprisingly, given the drastic increase in reporting volume, there were no systematic checks for accuracy, and there were no fines for erroneous data. Still, the plan to raise the reporting threshold faced … Read more

Debevoise & Plimpton on the Latest Round of SEC Cybersecurity Enforcement Actions

On August 30, 2021, the SEC filed settled enforcement actions against three groups of broker-dealers and investment advisers for failing to protect confidential customer information in violation of Rule 30(a) of Regulation S-P (the “Safeguards Rule” or “Rule”). One group of the entities was also found to have violated Section 206(4) of the Advisers Act and Rule 206(4)-7, by allegedly providing misleading information in its breach notification to customers. These actions, which were announced just two weeks after the SEC imposed a $1 million civil penalty for an issuer’s allegedly misleading data breach disclosures in connection with a public company’s … Read more

How Can We Tell Whether Compliance Programs Work?

In the United States, major financial scandals in the 1970s, 1980s, and 1990s resulted in federal pressure on corporations to inculcate ethical behavior in their employees. The Foreign Corrupt Practices Act, Federal Sentencing Guidelines, Sarbanes-Oxley Act, the U.S. Organization Sentencing Guidelines, and similar laws either mandated or encouraged the expansion of corporate compliance programs[1] and, ultimately, led to creation of a “compliance industry.” In this new industry – just as in any emerging industry – arose specialized programs (and needs), trade associations and conferences, and a large job market to meet increased demands. One recent analysis estimated that the … Read more

Public Information and Capital Flows: Evidence from a Betting Market

What are the consequences of increasing public information in a market of risk-seeking participants? Academics and policy makers alike are grappling with this question following the influx of speculative capital flows from individual investors in financial markets. As platforms such as Robinhood take root, the influence of gambling behavior is likely to increase and further affect the functioning of markets. The topic is also a key policy issue in light of the Securities and Exchange Commission (SEC) plan to review new policies aimed at increasing transparency to address market developments such as the frenzy of trading in “meme” stocks like … Read more

SEC Chair Speaks Before European Parliament Committee on Economic and Monetary Affairs

Thank you, Chair Tinagli and Members of the Committee. I’m honored to appear before this Committee for the fourth time, and for the first time as Chair of the U.S. Securities and Exchange Commission. 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 the SEC staff.

The last time I appeared before this Committee, in 2012, as Chair of the Commodity Futures Trading Commission, I was recovering from four broken ribs and a punctured lung.[1] On doctor’s orders, I wasn’t allowed to fly, so I

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The Anti-Activist Pill in The Williams Companies Stockholder Litigation: A Response to Professor Gordon

Editor’s Note: A counter-response immediately follows this post.

In a recent post, Professor Jeffrey N. Gordon argued that the Delaware Supreme Court should upend over three decades of precedents and apply Blasius, rather than Unocal, to invalidate a corporate board’s adoption and implementation of a poison pill.[1]  I disagree.  Doing so is neither necessary, nor justified, to uphold the Chancery Court’s determination that a particularly aggressive poison pill, adopted by The Williams Companies in March 2020, was not a reasonable response to potential activist threats under Unocal.[2]  Gordon’s post also misinterprets some of the history … Read more

Corporate Vote Suppression: A Counter-Response to Eric Robinson

I appreciate the engagement by long-term pill observer Eric Robinson with my Corporate Vote Suppression piece. I am also glad that he agrees that the pill in The Williams Companies Shareholder Litigation ought to be struck down, though he narrowly confines his ground for supporting the Delaware Chancery Court’s decision to do so.  His invitation to re-examine Moran v. Household International shows how far the anti-activist pill has strayed from its initial justification (and limitation).  Moran sustained a “flip-over pill” against the threat of a front-loaded two-tier hostile bid and countenanced a 20 percent pill trigger because it represented the … Read more

Leading Law Firms Respond to Investment Company Act Lawsuits Targeting SPAC Industry

Editor’s Note: A response to the statement below immediately follows this post.

Recently a purported shareholder of certain special purpose acquisition companies (SPACs) initiated derivative lawsuits asserting that the SPACs are investment companies under the Investment Company Act of 1940, because proceeds from their initial public offerings are invested in short-term treasuries and qualifying money market funds.

Under the provision of the 1940 Act relied upon in the lawsuits, an investment company is a company that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.… Read more

The Anti-SPAC Attack Claque

A joint letter by 58 law firms is certainly a notable declaration, particularly when pulled together within a mere 10 days after litigation initiated by esteemed scholars. Observers might be tempted to wonder whether the motivation for such a quick and public press release is the signatories’ concern with analyzing a legal issue carefully, or with losing a large book of business and being called to account for legal advice that now stands in question.  The New York Times quotes one attorney as saying, “We really needed something powerful to take away” the “P.R. narrative.”

Upon what, precisely, have all … Read more

Supreme Risk for FINRA and Other SROs

Most efforts to manage systemic risk tend to focus on risks arising from within financial markets, from existing regulators, or from legislative misadventures. Yet self-regulatory organizations (SROs) and the markets that depend on their steady functioning now face an underappreciated risk: that the post-Trump era U.S. Supreme Court will render a market-destabilizing decision in the foreseeable future.  Little thought has been devoted to a  response should the Supreme Court obliterate a financial market utility or void some critical SRO rule, causing capital markets to freeze up from legal uncertainty.

For many years, these types of scenarios would have been entirely … Read more

Debevoise & Plimpton Discusses Expanded Horizons for Class Action Litigation in the UK

Mass claimant litigation is on the rise in the English courts, with multinational companies in particular facing ever-growing exposure. While large class action suits are relatively common in jurisdictions such as the United States and Australia, until recently these actions have not been a prominent feature of the United Kingdom’s legal landscape.

A series of recent decisions have significantly broadened the scope and enhanced the viability of mass claimant actions in England and Wales. On 18 August 2021, the Competition Appeal Tribunal (the “CAT”) handed down its decision in Walter Hugh Merricks CBE v Mastercard Incorporated and Others [2021] CAT … Read more

The SEC, Digital Assets, and Game Theory

Digital assets, cryptoassets, cryptocurrencies, and security-tokens have become ubiquitous. Yet approaches to regulating them differ around the globe. In the U.S., the Securities and Exchange Commission (“SEC” or “Commission”) has become a uniquely active crypto-regulator. In my recent article, I examine the Commission’s approach to digital-asset markets.

The Commission has not provided a clear rule for determining whether a digital asset is a security subject to the federal securities laws or something else, like a commodity not subject to the securities statutes. Instead, the SEC has opted for the more flexible approach of enforcement actions that rely on the … Read more

The Inequities of Equitable Subordination

Sitting as courts of equity, bankruptcy judges have embraced an exceptionalist role whereby they exercise widespread discretion in deciding cases. The doctrine of equitable subordination epitomizes bankruptcy exceptionalism and its potential for market distortion.

The doctrine originated as a remedial measure to give innocent creditors of insolvent debtors priority over creditors that engage in malicious misconduct. The Supreme Court introduced equitable subordination in a bankruptcy case in which a parent company virtually preyed upon its subsidiary, effectively driving it into insolvency. The Court ruled that the subsidiary’s preferred shareholders should have priority over the parent’s intercompany debt claims against the … Read more

Cleary Gottlieb Discusses Final Rules For UK-Listed SPACs

On July 27, 2021, the Financial Conduct Authority (“FCA”) published a policy statement that includes final rules amending the UK Listing Rules, and new associated guidance, applicable to special purpose acquisition companies (“SPACs”).[1] The new rules and guidance came into force on August 10, 2021.

The final requirements are based on the FCA’s earlier consultation launched on April 30, 2021 (the “Consultation”).[2] The Consultation’s proposals focused on the presumption of suspension of trading for a UK-listed SPAC that (under the prior FCA rules) would be triggered when the SPAC announced an intended … Read more

Common Ownership: Solutions in Search of a Problem

Mutual funds and exchange-traded funds are the cornerstone of many Americans’ investment and retirement plans.  (For simplicity, we refer to all these investments as “mutual funds.”)  Collectively, investment companies such as BlackRock, Fidelity, State Street, and Vanguard hold more than $29 trillion on behalf of more than 47 percent of all households in the United States and account for approximately 30 percent of all U.S. corporate equity.  (2020 Investment Company Factbook, 2020 Facts at a Glance)

Yet, according to some antitrust scholars, the large size that makes these mutual funds efficient investment vehicles also makes them unlawful.  Some … Read more

Wachtell Lipton Discusses Myths About Advances in Stakeholder Governance

Two years ago, the Business Roundtable (BRT) issued a “Statement on the Purpose of a Corporation,” signed by the CEOs of 184 major U.S. corporations, that rejected shareholder primacy, declared “a fundamental commitment to all [corporate] stakeholders” and linked corporate purpose to advancing and protecting the interests not just of shareholders, but of all corporate stakeholders.  The BRT’s statement reflected rapidly growing momentum towards a more inclusive corporate governance regime and promised to accelerate stakeholder governance by committing business leaders to the interests of employees, customers, suppliers, communities and the environment.

The BRT statement elevated the topic of stakeholder capitalism … Read more

Don’t Compound the Caremark Mistake by Extending It to ESG Oversight

Since the foundational decision in In re Caremark Intern. Inc. Derivative Litig.,[1] Delaware corporate law has required boards of directors to establish reasonable legal compliance programs. Although Caremark has been applied almost exclusively with respect to law and accounting compliance, the original Caremark decision contemplated applying the oversight duty to the corporation’s “business performance.”[2] Accordingly, Caremark claims plausibly could lie in cases in which the corporation suffered losses, not due to a failure to comply with applicable laws, but rather due to lax risk management.

In fact, several commentators have argued that Caremark liability extends—or, at least, … Read more

Sullivan & Cromwell Discusses SEC Case on Misleading Disclosure of Cybersecurity Incident

On August 16, 2021, the SEC charged Pearson plc with misleading investors and failing to maintain adequate disclosure controls and procedures in connection with a cybersecurity incident. According to the SEC’s order, Pearson learned in March 2019 about an intrusion involving the exfiltration of millions of rows of student data, including names and some birthdates and email addresses, as well as usernames and hashed passwords for school personnel. In July 2019, a periodic filing characterized data privacy incidents as an ongoing risk factor but failed to disclose that such an incident—and one characterized by the Order as “material”—had actually occurred. … Read more

Who’s Looking Out for the Banks?

Two decades ago, Congress repealed the Glass-Steagall Act’s Depression-era separation between commercial banking and other financial activities, paving the way for bank holding companies (BHCs) to expand into investment banking and insurance.  At the time, some critics – most notably, Professor Arthur Wilmarth – warned that financial conglomeration would encourage BHCs to exploit their depository institutions’ “federal safety net.”

Critics were correct to suspect that financial conglomerates might take advantage of their bank subsidiaries by transferring government subsidies to their nonbank affiliates. Banks enjoy many forms of government support. For example, the Federal Deposit Insurance Corporation guarantees bank deposits, providing … Read more

Wachtell Lipton Discusses a New Variation in SEC Insider Trading Enforcement

Earlier last week, the SEC filed a complaint in the Northern District of California alleging insider-trading charges that may signal a more aggressive approach to enforcement under the agency’s new leadership.  In SEC v. Panuwat, the SEC charged a corporate executive who learned about an impending acquisition of his employer and then traded in the securities of an unrelated company in the same industry that he anticipated would materially increase in price when his employer’s acquisition was publicly announced.

The SEC’s complaint alleges that Mathew Panuwat was a business development executive at Medivation, Inc., a mid-cap oncology-focused biopharmaceutical company.  … Read more

Electoral Accountability in the Workplace

Corporate codetermination, which allows workers to elect representatives to a board of directors, is in the news again. Proposals for codetermination were, for example, a prominent part of this past presidential campaign, with senators Sanders and Warren disagreeing over what portion of a board workers could choose. Multiple bills in the Senate would implement codetermination and have sparked accusations that, if enacted, they would harm American economic growth.

To test these and other claims, economists and others have looked to real-world examples of codetermination, mainly in Europe, but their empirical studies have provided little information that’s relevant to the United … Read more

Wachtell Lipton Discusses Latest SEC Enforcement Action over Cyber Breach

In yet another important signal of the SEC’s increasing focus on how public companies respond to, and issue disclosures concerning, significant cyber breaches, the Commission announced yesterday that it had entered into a settled administrative order with Pearson plc, finding violations of the negligence-based antifraud provisions of the Securities Act and imposing a $1 million civil penalty.  Pearson neither admitted nor denied the Commission’s findings.

The Order recites that a substantial volume of personal data concerning students and school administrators was stolen by a “sophisticated threat actor” from Pearson’s academic performance assessment services that were provided to 13,000 school districts … Read more

Corporate Vote Suppression: The Anti-Activist Pill in The Williams Companies Stockholder Litigation

The Delaware Supreme Court has before it a case that could dramatically reshape corporate governance in the United States.  The case, The Williams Companies Stockholder Litigation, addresses the legitimacy of an “anti-activist pill” whose particularly aggressive features would severely limit both an activist’s economic incentives and its capacity to organize other shareholders.  The implications reach well beyond the hedge-fund wolf packs purportedly roaming the corporate landscape. The validation of such an anti-activist pill would throttle the incipient ESG activist movement that recently illustrated its potential in successful challenges at Exxon-Mobil. It would also require the Delaware courts to come … Read more

Davis Polk Discusses FinCEN, CFTC Penalties on Cryptocurrency Derivatives Exchange

The CFTC and FinCEN recently announced a settlement with BitMEX for $100 million to resolve an enforcement action related to the exchange’s failure to register as a futures commission merchant and failure to establish a BSA/AML compliance program.

The Order

On August 10, 2021, the Financial Crimes Enforcement Network (FinCEN) and the Commodity Futures Trading Commission (CFTC) announced that the agencies had assessed a $100 million civil monetary penalty (CMP) against BitMEX, one of the world’s largest cryptocurrency derivatives exchanges.[1] BitMEX is a peer-to-peer cryptocurrency trading platform that offers its users the ability to trade cryptocurrency derivatives, including swaps, … Read more

The Upside of Finance Committees and Why Firms Create Them

Boards of directors at U.S. firms are increasingly using finance committees featuring financial experts to oversee complex finance-related matters. Since 2003, most U.S. public firms have been required by NYSE and NASDAQ to have audit, compensation, and governance committees. Finance committees are the most common voluntary board committees in the U.S., and many influential firms (e.g., GE, Verizon, GM, Coca Cola, etc.) use or once used finance committees to handle complex financial issues. GE established a Finance & Capital Allocation Committee in December 2017, but Robert C. Pozen argues that GE should have adopted a finance committee much earlier and … Read more

Paul Weiss Discusses SEC Focus on Crypto Enforcement

At the Aspen Security Forum on August 2, 2021, SEC Chair Gary Gensler reaffirmed the SEC’s heightened focus on cryptocurrency. Following these comments, the SEC announced two enforcement resolutions that provide further guidance on the SEC’s approach to crypto enforcement. First, on August 6, the SEC announced a $13 million resolution against a lender and its two founders for offering unregistered securities using decentralized finance (DeFi)[1] technology.[2] And second, on August 9, the SEC announced a $10 million settlement with an online digital asset exchange for offering unregistered securities.[3]

The key takeaways are as follows:

  • The SEC

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Institutional Investors in China: Corporate Governance and Policy Channeling in the Market Within the State

The extraordinary rise of China’s economy has made understanding Chinese corporate governance an issue of global importance. A rich literature has developed analyzing the Chinese Communist Party’s (CCP’s) role as China’s largest controlling shareholder and the impact that this has on Chinese corporate governance. However, the CCP’s role as the architect – and direct and indirect controller – of institutional investors in China has been largely overlooked in the legal literature.

This lack of focus on institutional investors in Chinese corporate governance may have made sense two decades ago. At that time, in listed Chinese companies, institutional investors’ shareholdings were … Read more

The Triumph of a Local Focus in Troubled Times

The emphasis on the contribution of local knowledge to economic growth is a key tenet of classical economic theory. The Hayekian worldview, for example, sees the dispersion of local pockets of knowledge across the economy as the primary reason why centralized planning fails to produce optimal results. In the realm of corporate finance, these considerations emphasize the importance of firms’ reliance on local CEOs with access to social networks where information flows in a subtle and nuanced way that highly depends on specific individuals rather than formal institutions. Focusing on the local, however, comes at a cost, as a rich … Read more

Comparative Corporate Governance

With the increasing internationalization of law and legal scholarship, comparative corporate governance has seen a burgeoning volume of research from a practical, theoretical, and empirical perspective. Practically speaking, both internationally and within individual countries, most corporate governance research deals with the interaction between board members, officers, and shareholders, primarily in large, publicly traded corporations. Much of the literature is preoccupied with reducing conflicts of interest between shareholders and management and consequently minimizing agency cost, vindicating the narrow finance perspective. Given the predominance of controlling shareholders around the globe, the literature increasingly focuses on conflicts between controlling and minority shareholders. In … Read more

Moving Beyond Mutual Funds

As has become widely known in the past few years, the mutual-fund industry is more concentrated than ever, especially because of the growing use of index funds.  Whether this is a problem and how to respond have been the topics of considerable debate.  Commentators have laid out several possible reforms, including antitrust responses, regulations that limit the number of companies in an industry that an index fund may invest in, and the wholesale removal of some mutual funds’ power to vote.  But many of these responses would disadvantage index funds, which would be unfortunate because index funds have greatly benefited … Read more

ISS on Maximizing Good Results in Global Sustainable Finance Industry

The global sustainable finance industry has been described as an ‘industry in transition’, according to the recently-released Global Sustainable Investment Review 2020. This is reflective not only of the growth of the industry, but also the steps taken by many regional markets in implementing industry best practice standards. The Review marks the 5th iteration of a biyearly study published by the Global Sustainable Investment Alliance (GSIA), a group of the world’s leading sustainable finance industry bodies, that reports on the size, growth and dynamics of the world’s responsible investment market.

The report found that sustainable investments account for

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Transnational Migration of Laws and Norms in Corporate Governance

In a recent working paper, I explore the intersection of contemporary corporate governance and transnational law. Transnational law is, of course, far from a settled concept. For early theorists, it involved conduct or events that crossed national boundaries. More recent scholarship, however, has focused not on what is being regulated, but rather on how laws and norms are transmitted between supranational and local levels.

Corporate governance fits naturally within this modern conception of transnational law. Today’s corporate governance is highly fragmented and includes a complex array of public and private actors. It also embodies legal and non-legal elements, which operate … Read more

Wachtell Lipton Criticizes Putting Politics in Bank Merger Antitrust Policy

Congressional critics of the agencies reviewing bank mergers have in recent months claimed that those agencies “rubber stamp” mergers and that merger review standards relating to antitrust are too lax.  We believe those critics are misinformed.

Bank mergers are among the most regulated in the economy.  The Federal Reserve Board (the “Fed”) has extraordinary, virtually carte-blanche power in approving or denying bank holding company mergers (as do the OCC and FDIC with respect to bank mergers), reviewable only by a federal appeals court and under a highly deferential standard of review.  Their determinations, especially with respect to … Read more

Democrats’ Gift-Wrapped Cloak of Secrecy for Wall Street

On July 29, 2021, the House Financial Services Committee voted to advance H.R. 4618, The Short Sale Transparency and Market Fairness Act, a well-intentioned bill with a misguided provision that was likely the product of hurried drafting.  The legislation would require investors managing over $100 million in assets to provide ongoing portfolio disclosure on Form 13-F on a monthly rather than quarterly interval and extend disclosure to short positions and derivatives.

There is much to praise in H.R. 4618.  Current periodic disclosure rules require the reporting of long positions alone, which is partial at best and outright misleading at … Read more

Debevoise & Plimpton Discusses the State of the LIBOR Transition

On March 5, 2021, LIBOR’s administrator, ICE Benchmarks Administration (the “IBA”), and LIBOR’s regulator, the U.K. Financial Conduct Authority (the “FCA”), announced that LIBOR will no longer be provided (i) for all sterling, euro, Swiss franc and Japanese yen settings, and the one-week and two-month U.S. dollar settings after December 31, 2021 and (ii) for the remaining U.S. dollar settings after June 30, 2023. On March 8, 2021, the Alternative Reference Rates Committee (“ARRC”) confirmed that the IBA and FCA announcements constitute a “Benchmark Transition Event” with respect to all U.S. dollar settings under the ARRC recommended fallback language for … Read more

The Restructuring Landscape in Emerging Markets One Year into the Pandemic

Like advanced economies, emerging economies were buffeted by the global economic slowdown stemming from the COVID-19 pandemic and the associated lockdowns of national economies. In 2020, emerging economies (and developing countries) contracted by 2.1 percent (their steepest decline in many years), but the decline was not as severe as in advanced economies (-4.6 percent), according to the latest data from the International Monetary Fund (IMF), released in July 2021 as part of its World Economic Outlook Update.

Emerging economies and developing countries taken as a whole are expected to experience a major rebound this year, with anticipated growth reaching … Read more

Cleary Gottlieb Discusses Recent Decisions Highlighting Legal Privilege Protections

Two recent decisions on the scope of legal privilege in the United States and Europe have once again demonstrated the importance of understanding fully the scope of legal privilege in the jurisdictions relevant to companies’ operations.

In the United States, a ruling from a Federal Court in San Francisco denied legal privilege to Elizabeth Holmes – founder of the beleaguered and now-dissolved medical device start-up Theranos Inc. (“Theranos”) – over 13 communications between Ms Holmes and the law firm Boies Schiller Flexner (“BSF”) on the basis that the privilege belonged to the company, Theranos, and not to Ms Holmes personally.… Read more

The Rule of Law and the Purpose of the Corporation

The three primary determinants of economic growth – physical capital growth, human capital growth, and technological innovation – rely on citizens’ confidence that private property rights are secure. Essential to that confidence is the rule of law.

Rule of law is an important catalyst for financial development. It allows for an effective judiciary, which is critical for the enforcement of legal contracts. Shareholders rely on the contractually created limited liability feature of equity to undertake risky, but value-enhancing, investments.  That feature is essentially a contract between shareholders and debtholders (and other stakeholders) providing that, when a company’s fortunes sour, shareholders … Read more

SEC Commissioner Peirce on Nasdaq Board Diversity Proposal

I write in opposition to the approval of the Board Diversity Proposal (“Board Diversity Proposal” or “Proposal”) submitted for approval by the Nasdaq Stock Market LLC (“the Exchange”).[1] The Proposal attempts to expand opportunity, a goal I share,[2] but it does so in a way that improperly leverages authority that Congress has entrusted to it under the Exchange Act. Because the Exchange cannot show that its Proposal is consistent with the Exchange Act, and because the Proposal is in fact outside the scope of the Act and contrary to fundamental Constitutional principles, I cannot support its approval.[3]

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Private Equity, State Pension Plans, and the SEC

The Securities and Exchange Commission under Chair Gary Gensler has been exploring transparency issues and other problems in the private equity industry and considering whether additional policy interventions are needed. One motivating factor is that public pension plans are the largest investors in this $5 trillion industry.

Context is important here. This is not the first time that more aggressive policy interventions have been considered to address perceived problems in private equity. As discussed in my 2020 paper, Public Investors, Private Funds, and State Law, a wave of state legislatures passed, or seriously considered passing, laws to mandate better … Read more

Debevoise & Plimpton Discusses European Commission’s Views on Sustainable Finance Disclosures Regulation

The European Commission (the “Commission”) recently issued long-awaited answers to questions raised by the European Supervisory Authorities earlier this year on the Regulation on Sustainability-related Disclosures in the Financial Sector (“SFDR”). This Update covers answers to questions that relate to some key areas of legal uncertainty under SFDR. While the explanations are welcome, a number of answers do not provide the clarity expected.

SFDR applies to non-EU AIFMs. In line with market understanding, the Commission confirmed that, under its interpretation of SFDR, “financial market participants” that are in the scope of SFDR include non-EU alternative investment fund managers (“AIFMs”) … Read more

How Much Do Various Advisers Affect the Success of M&A?

Companies that engage in M&A regularly employ a variety of financial, legal, and other advisers to enhance the chances of success for a deal. Though research has extensively examined the impact of financial advisers, and particularly investment bankers, on a deal’s outcome, the influence of strategy advisers such as management consulting firms (and legal advisers) has rarely been studied. Overall, based on a global questionnaire of over 100 M&A professionals, we find that strategy consultants contribute significantly to the perceived M&A success of firms.


Between December 19, 2019 and February 28, 2020, companies worldwide were surveyed regarding their M&A … Read more

Sullivan & Cromwell Discusses SPACs in the UK

On July 27, 2021 the FCA published a policy statement setting out its planned amendments to the Listing Rules to remove the presumption of suspension that applies to special purpose acquisition companies (SPACs) when a potential acquisition target is identified (the ‘de-SPAC’ transaction), subject to certain investor protection features. These changes are geared towards making the London Stock Exchange a more attractive listing venue for SPACs and follow the publication of the UK Government’s review of the UK listing regime, as discussed in our client memo of March 3, 2021, and the subsequent consultation by the Financial Conduct Authority (FCA) … Read more

Short-Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher-Order Beliefs

Discussions on the role of higher-order beliefs (investor beliefs about the beliefs of other investors) in financial markets can be traced back to Keynes’ (1936) comparison of the stock market to a beauty contest. Investors “are concerned,” he famously said, “not with what an investment is really worth to a man who buys it for keeps, but with what the market will value it at [. . .] three months or a year hence.” Interest in higher-order beliefs models continues today. An anecdotal example of the role of higher-order beliefs is the downgrade of Citigroup by analyst Meredith Whitney in … Read more

SEC Chair Gensler Discusses Crypto Regulation

Some might wonder: What does the SEC have to do with crypto?

Further, why did an organization like the Aspen Security Forum ask me to speak about crypto’s intersection with national security?

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 the SEC staff.

Let me start at the beginning.

It was Halloween night 2008, in the middle of the financial crisis, when Satoshi Nakamoto published an eight-page paper[1] on a cypherpunk mailing list that’d been run by cryptographers since 1992.[2]

Nakamoto — we … Read more

National Blockchain Laws Are a Threat to Capital Markets Integration

Since its creation in 2008, the blockchain has seemed incompatible with legal constraint. Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, hailed the blockchain’s “unstructured simplicity.” Even now, apostles of distributed ledger technology (DLT) strongly resist the idea that it needs regulation, arguing that it was designed precisely to avoid centralized control.

This did not, however, stop courts and legislators around the world from becoming increasingly concerned about DLT. They are no longer focusing only on the dangers cryptocurrencies might pose to the public, such as its potential use in money-laundering, the financing of terrorism, or tax … Read more

Wachtell Lipton Discusses Mandatory Climate Change Disclosure Rules – A Preview From the SEC Chair?

As noted in our previous memos, the SEC is considering and has sought input from investors on potential new disclosure requirements related to climate change and other sustainability issues.  Yesterday, SEC Chairman Gary Gensler made remarks that add some clarity as to what can be expected:  a combination of qualitative and quantitative climate-risk disclosures that are consistent, comparable and decision-useful to investors. Examples of potential qualitative disclosures include how the company’s leadership manages climate-related risks and opportunities, how such matters impact corporate strategy and, potentially, the use of scenario analyses.  Quantitative disclosures may include disclosure of Scope 1, 2 … Read more

Corporate Social Responsibility by Joint Agreement

Voluntary industry-wide agreements have recently emerged as a way to promote corporate social responsibility (CSR). Competitors in industries as diverse as chocolate production, fashion design, and truck manufacturing aspire together to pay fair wages or transition to less polluting products. A growing management literature endorses the idea. Henderson (2020), for instance, calls for “industry-wide cooperation” to stop environmental degradation and economic inequality.

Joint decision-making allegedly would help reduce first-mover disadvantages that can dissuade companies from acting responsibly if it puts them at a competitive disadvantage. Firms coordinating their business decisions, however, raises antitrust concerns. To believers in the effectiveness … Read more

McMillan Discusses Key Considerations in Implementing Shareholder Votes on Climate

As the momentum of shareholder engagement on climate-related matters continues to grow across the globe, including in Canada, these issues remain a key focus area for public companies. One of the tools that has gained prominence is the so-called “Say on Climate” vote, where shareholders vote on their company’s climate policies.

The initiative, launched by Christopher Hohn, a British fund manager, in conjunction with his investment firm The Children’s Investment Fund Management (“TCI”), was first implemented by Aena, a Spanish airports group, in 2020. Since then, several other blue-chip firms like Unilever, Glencore, and CNRead more

A Social Enterprise Company in EU Organizational Law?

In my recent article, A Social Enterprise Company in EU Organizational Law?, I discuss the present and future regulation of social enterprises in Europe. For the moment, social enterprises – like other “social economy” organizations – have been harnessed to act as surrogates for governments in coordinating the administration, financing, and implementation of domestic social and welfare policy.[1] To a greater or lesser extent, therefore, social enterprises are regulated domestically by individual member states of the EU (“Member States”), “with little private leeway for initiative-taking outside government policy”.[2] This means that social enterprises do not enjoy the … Read more

The Choice Between Various Freeze-Out Procedures and Its Consequences

Over the past two decades, delisting from an exchange has become a popular choice for many public companies. Several studies attribute this trend to a number of factors, including the increased concentration of U.S. markets, which made many small and medium size public firms less viable; tightening of regulatory requirements (SOX, for example); and emergence of capital-raising alternatives for small and medium size private firms (for example, private equity funds). In sum, the net benefit of staying an exchange-listed firm has diminished, and various going private legal procedures have become popular.

The most common delisting method in the U.S. is … Read more

SEC Chair Gensler Speaks on Climate Risk and Disclosure

It’s good to be here with the Principles for Responsible Investment. As is customary, I’d like to note my views are my own, and I’m not speaking on behalf of the Commission or the SEC’s staff.

Before we get to the main event — on climate and finance — I’d like to discuss something a lot of us are watching these days: the Olympics.

In the Olympics, there are rules by which we measure an athlete’s performance.

In gymnastics, for example, the scoring system is both quantitative and qualitative. Athletes are evaluated based on the numeric difficulty of the skills … Read more

Do Firms in Developing Countries Use Dividend Policy to Build Trust with Investors?

How do companies based in countries with weak government institutions earn the trust of minority investors and raise capital? Where the rule of law and government enforcement cannot control corruption, insiders seem free to expropriate their company’s resources, making it essential for them to somehow assure  potential outside investors that they can be trusted. Establishing trust is especially important for growing firms that have profitable investment opportunities and are most in need of external capital.

One promising approach to building trust might be to pay a dividend – there is credibility in cash. However, paying a fixed dividend consistently, as … Read more

Arnold & Porter Discusses Criminal Antitrust Risks in Mergers & Acquisitions

On July 9, President Biden issued an Executive Order that announced a policy of increased antitrust enforcement across many industries. The DOJ Antitrust Division and the Federal Trade Commission quickly followed with an announcement that they would jointly launch a review of merger guidelines with an eye towards a more aggressive enforcement approach.

These announcements serve as an important reminder that the risks resulting from more vigorous merger review are not limited to getting the deal through. Companies and their investors should also consider the risks posed by criminal antitrust investigations that can follow merger review. One need look no … Read more

Corporate Governance, the Depth of Altruism, and the Polyphony of Voice

This post responds to the paper, Exit vs. Voice, by Eleonora Broccardo, Oliver Hart, and Luigi Zingales (BHZ),[1] a deep engagement with the choice between alternative means by which an “altruistic” investor can influence corporate behavior.  An “altruistic” investor is one who derives some utility from conferring a social benefit with the goal of inducing firms to change their behavior in a socially responsible way.  The two possible mechanisms are “exit” (divestment) and “voice” (shareholder voting).

BHZ follow prior work by Hart and Zingales that argues that investors can reasonably believe that firms can provide public goods at a … Read more

ISS Discusses the Largest U.S. Securities Class-Action Settlements by State

Since its inception, ISS Securities Class Action Services LLC (“ISS SCAS”) has tracked more than 13,000 shareholder class actions across the world, including 12,000+ cases within the United States. In this report, ISS SCAS closely examines the largest securities class action settlements by U.S. state, as well as the District of Columbia.

In the first edition of this report, published in 2018, ISS SCAS identified 48 cases as the largest securities class action settlements, by total settlement amount and by state. In this updated version, ISS SCAS provides a refresh of the data, including recently settled cases that now meet … Read more

Reforming the Macroprudential Regulatory Architecture in the United States

When the COVID-19 pandemic shuttered major economies in March 2020, it also wreaked havoc on financial markets. In the first few weeks of March, investment-grade corporate bonds lost roughly a fifth of their value, on par with the declines in equity and high-yield debt. (Haddad et al., 2020; Falato, Goldstein & Hortaçsu (forthcoming)). Contrary to the usual flight to quality, in mid-March, U.S. Treasury yields began rising and only stabilized after the Federal Reserve initiated a massive purchase program. (Vissing-Jorgensen, 2020). The distress in the Treasury market accentuated distress in other markets and liquidity challenges for firms. Nonbanks that service … Read more

Debevoise & Plimpton Discusses New Privacy Legislation in the U.S.: The Patchwork Problem Grows

Colorado has just adopted a brand-new data privacy law and Nevada has just significantly amended its law. These changes add rights for consumers, and compliance obligations for businesses, that take the U.S. further in the direction of European-style privacy law. Colorado and Nevada join California and Virginia in adding to the growing patchwork of disparate state laws — making it that much harder for any business seeking to have a single privacy program that is compliant everywhere.

Privacy bills also recently were considered in New York, Florida, and Washington, but did not pass; these bills or others like them are … Read more

Why We Need to Verify and Unmask the Identity of Cryptocurrency Users  

Cryptocurrencies are by now widely known as electronically generated and stored currencies that enable users to trade tokens. The tokens are exchanged anonymously through a decentralized payment system: the blockchain. To further anonymity, the parties to cryptocurrency transactions are identified by a unique string of random numbers rather than by a name or other personal information.

There is however a dark side to this anonymity. It makes it easier for criminals and terrorists to launder money and otherwise transact illegal business. For example, anonymous tokens provide terrorists with access to cash that is essential to organizing attacks without dependency on … Read more

ISS Discusses Increase in Class Action Settlements for First Half of 2021

As the U.S. and countries around the globe attempt to control the Coronavirus pandemic, investors continue to experience meaningful recoveries from securities-related class action settlements.

In the first half of 2021 (January 1 – June 30), U.S. class action settlements totaled $2.32 billion, an increase of 11.5% over the same period in 2020. More impressively, a total of 59 cases settled during the first six months of 2021, an increase of 34.1% over the same period in 2020. The average value of settlements, however, dropped by 16.9% ($39.3 million in 2021 vs $47.3 million in 2020).

The total settlement dollars … Read more

Does Proxy Advice Allow Funds to Cast Informed Votes?

Our examination of the votes cast by 155 mutual funds on over 6 million corporate election items during 2004-2017 led us to a surprising conclusion: We found that Institutional Shareholder Services’ (ISS) proxy advice did not lead funds to vote as if they were informed – more often than not it pushed them in the opposite direction.

The purpose of proxy advice is to allow funds to cast their votes as if they were informed, without having to actually become informed. Given the centrality of proxy advice in today’s corporate elections, the viability of shareholder democracy hinges on the advice’s … Read more

SEC Chair Gensler Speaks Before ABA Derivatives and Futures Law Committee

Thank you for the kind introduction. It’s good to be back with the American Bar Association’s Derivatives and Futures Law Committee.

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

When I first appeared before this committee more than a decade ago, Washington was still developing the regulatory response to the 2008 financial crisis.

That crisis had many chapters, but a form of security-based swaps — credit default swaps, particularly those used in the mortgage market — played a lead role throughout the story.

International banks were using

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Capital Discrimination

In 2014, Diane Straka, along with three male associates, formed a corporation for the purpose of providing accounting services.  Each of the founders was an officer, director, and 25 percent shareholder of the new entity.  A problem soon emerged: One of the corporation’s employees taunted Straka with sexist jokes and cartoons in the office, and her fellow shareholders refused to rein him in.  Additionally, Straka’s work was undermined by some of her co-owners, who condescended to her and countermanded her decisions.  Eventually, Straka left the firm and brought a lawsuit in New York State court alleging shareholder oppression.  Oppression is … Read more

SEC Commissioner Peirce Speaks on ESG Disclosure

This summer was the summer of the cicadas. The dull hum of their song permeated the solitude of an evening stroll, along with the disconcerting crunch as pedestrian attempts to avoid squashing the creatures inevitably failed. Every seventeen years the beady-eyed cicadas emerge from underground—a natural wonder, perhaps therefore to be forgiven for their uncouth habits and off-putting appearance.[1] As eighteenth century farmer and self-taught naturalist Benjamin Banneker, having observed three appearances of cicadas, wrote:

[I]f their lives are Short they are merry, they begin to Sing or make a noise from the first they come out of Earth … Read more

How Does Removing the Tax Benefits of Debt Affect Firms?

Almost all countries have historically allowed businesses to write off interest expenses against taxable income. Critics argue that the tax-favored status of debt has created a corporate debt pile-up, thereby exacerbating economic downturns. This argument, which gained more attention after the 2008 global financial crisis, implicitly assumes that the tax incentives have led to a large increase in the use of debt. However, despite extensive efforts by researchers, it is an open question whether the tax incentives are indeed a primary determinant of corporate debt policy. This is mainly because isolating the impact of interest deductions from other tax effects … Read more

Wachtell Lipton Discusses the Purpose of the Corporation

In recent years, the concept of “corporate purpose” has been invoked as a shorthand to address a corporation’s commitment to include stakeholder governance—and with it commitments to sustainability, diversity, inclusion, social responsibility and other ESG issues—as part of a corporate strategy that achieves sustainable long-term growth and creates long-term value for the benefit of all stakeholders.

Recognizing the importance of corporate purpose in helping guide efforts to build back better following the pandemic, a distinguished group of academics at Oxford University formed the “Enactment of Purpose Initiative.”  The Initiative seeks to encourage the elemental constituencies of a corporation—directors, management, asset … Read more

How Quarterly Financial Reports Affect Employee Job Search

Quarterly financial reports are an important way for companies to communicate with the capital market, and they clearly affect firms’ access to debt and equity capital. However, the most scarce and sought after resource for many modern, cash-rich companies is not financing but people: human capital. For example, 27 percent of U.S. employees voluntarily changed jobs in 2019, costing firms an estimated $475 billion. For perspective, the total interest expense reported by public companies was $467 billion, indicating that the cost of voluntary employee turnover is comparable to firms’ external cost of debt. Total turnover-related costs are even larger when … Read more

Paul Weiss Discusses New York Legislation to Expand Antitrust Law

During its last legislative session, the New York Senate passed the Twenty-First Century Anti-Trust Act, which, if enacted, would have amended the Donnelly Act, New York’s antitrust statute. While the bill did not come to a vote in the Assembly before the session ended, one of the bill’s sponsors has indicated that it may be re-introduced in the next session. This is the second time in recent years that a bill was introduced to amend the Donnelly Act, and this iteration is more expansive than the prior proposal, which we discussed in a prior memorandum. If this or … Read more