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Securities Regulation

SEC Chair Gensler Speaks to Investor Advisory Committee

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Thank you. It is great to speak to the Investor Advisory Committee (IAC). As is customary, I’d like to note that my views are my own and that I am not speaking on behalf of the Securities and Exchange Commission or SEC staff.

Today, the Committee will cover a wide range of investor issues through four panels and three recommendations. Of these seven topics, the Commission recently has issued proposals on five of them. Your input helps us, both through this meeting and through any materials—including reports, recommendations, and transcripts from today’s conversation—that you may submit to the respective comment

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ISS Discusses Evolving Clawback Policies

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The Securities and Exchange Commission is poised to revise its rules on so-called clawbacks: the process of recovering incentive compensation from current and former executives when a company is forced to make a material restatement of its accounts. With a target of releasing its revisions in October, the SEC has twice reopened public comment periods on proposals that it first advanced in 2015 to implement part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The regulator also added 10 new policy questions along with a memorandum that addressed two matters: the voluntary adoption of clawback policies by companies … Read more

How Common is Insider Trading? Evidence from the Options Market

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The U.S. Securities and Exchange Commission (SEC) brought 51, 30, and 33 insider trading cases in 2018, 2019, and 2020, respectively. Whether those numbers mean that insider trading is relatively uncommon or that the cases regulators and prosecutors have pursued are just the tip of the iceberg is difficult to determine and poses a challenge for studying insider trading.

We address this challenge in a new paper on how option investors responded to a significant increase in the likelihood and severity of prosecution after hedge-fund manager Raj Rajaratnam’s arrest in October 2009. His case marked the start of a major … Read more

SEC Chair Gensler on Proposed Rules for U.S. Treasuries Clearing

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Today [September 14], the Commission will consider whether to propose standards for covered clearing agencies (also known as clearinghouses) regarding the clearance of certain trades involving U.S. Treasury securities. I am pleased to support these rules because, if adopted, they would help to make a vital part of our capital markets more efficient, competitive, and resilient.

The $24 trillion Treasury market—the deepest, most liquid market in the world—is the base upon which so much of our capital markets are built. Treasury markets are integral to how the Federal Reserve administers monetary policy. They are how we, as a government and

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The Attack on Nasdaq’s Board Diversity Rule

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The recent pushback by conservative legal groups against equality and diversity on corporate boards has accelerated to new levels in the past few months. The latest example is a challenge to Nasdaq’s board diversity rule, which was approved in August 2021.

Beginning in 2025, the rule will require companies to disclose the level of gender and ethnic diversity on their boards of directors and to explain any lack thereof. On August 29, the U.S. Court of Appeals for the Fifth Circuit heard arguments in a case seeking to vacate the SEC’s order approving the rule.

The petitioners, the Alliance for … Read more

ISS Discusses Proposed $810 Million Settlement in Twitter Shareholder Class Action

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What a long, strange trip it’s been for Twitter shareholders since the company’s November 7, 2013 Initial Public Offering on the New York Stock Exchange.

Aside from the current litigation dominating today’s headlines between Twitter and Elon Musk – which includes a handful of shareholder class actions – investors from early 2015, have potential eligibility in a previously announced settlement, depending upon the timing of their purchases.

Recently, a final fairness hearing was scheduled for November 17, 2022, where Judge Jon S. Tiger in the Northern District of California is expected to officially approve the $809.5 million settlement. If, as

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SEC Enforcement Chief Speaks on the Need to Police Crypto

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This morning,[1] I’d like to return to a theme I’ve touched on repeatedly in speeches throughout my first year on the job, and that is the urgent need to restore trust in our institutions, government, and the legal and regulatory processes. I’ve previously discussed the importance of corporate responsibility, the critical role of gatekeepers, the necessity for proactive compliance and cooperation, and the pervasive – yet unpersuasive – mantra of “regulation by enforcement,” in connection with the trust-building process.

But this morning, I’d like to approach this theme somewhat differently, by sharing some thoughts on how we apply this … Read more

SEC Chair Gensler Speaks on Crypto and the Securities Laws

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Joseph Kennedy, the first Chairman of the SEC, had a saying: “No honest business need fear the SEC.”[1]

In the depths of the Great Depression, Congress and President Franklin Delano Roosevelt (known for a slightly more famous quotation about “fear”) enacted the first federal securities laws.

The Securities Act of 1933 was about companies raising money from the public. Investors could decide which risks to take; companies that issued securities to the public were required to provide full, fair, and truthful disclosures to the public. FDR called this law the “Truth in Securities Act.”

Congress knew, however, that their

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SEC Accounting Chief Warns Chinese Companies About Risks of Changing Auditors

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One of the recent central themes of the Office of the Chief Accountant[1] has been that high-quality audits are foundational to the trust that underlies capital markets.[2] High-quality audits protect investors, instill shareholder confidence in the quality of the financial information, and enable public companies to raise capital efficiently.[3] The investor protection afforded by high-quality audits is as important to U.S. investors in foreign companies that participate in the U.S. capital markets as it is for investors in domestic companies. In fact, it could be argued that the additional information barriers that may exist when investing in … Read more

Climate Change, West Virginia v. EPA, and the SEC’s Distinctive Statutory Mandate

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In March 2022, the Securities and Exchange Commission (SEC) proposed a rule that would require publicly traded companies to provide investors with various climate-related disclosures (the Proposal).[1]The rule has generated extensive debate and the SEC has received more than 4,000 substantive comment letters and more than 10,000 form letters to date. Commenters have raised a variety of concerns about the Proposal, including the extent to which the SEC has the authority to mandate climate-related disclosure. Since the Supreme Court’s June 2022 ruling in West Virginia v. EPA, some commentators have also asserted that the Proposal runs afoul … Read more

Skadden Discusses SEC’s Pay Versus Performance Disclosure Rules

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On August 25, 2022, the U.S. Securities and Exchange Commission (SEC) adopted final rules requiring public companies to disclose the relationship between the executive compensation actually paid to the company’s named executive officers (NEOs) and the company’s financial performance. The final rules implement the “pay versus performance” disclosure requirements mandated by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010. The SEC issued proposed pay-versus-performance rules in 2015 and reopened the comment period on the proposed rules in January 2022. There are a number of important differences between the proposed rules (summarized here) … Read more

ISS Discusses Five Non-U.S. Class Actions Investors Should Pay Attention To

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As institutional investors know, a vast majority of shareholder related class actions take place in the United States. This is accurate in terms of both newly filed cases and settlements.

However, non-North American shareholder litigation is significantly important to investors looking to recoup lost assets, while at the same time keeping companies accountable for violations of local securities laws. In fact, the largest non-North American settlement of all-time was resolved earlier in 2022… a €1.4 billion settlement with Steinhoff International.

Here is a look at five current non-North American cases investors should keep their eye on:

The A2 Milk

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How Mutual Funds Change Benchmarks to Manipulate Performance

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Investors allocate capital to mutual funds based on past performance and the perception of whether a fund can “beat the market.” In fact, mutual fund companies explicitly promote their funds based on these factors, knowing that investors will respond. The Securities and Exchange Commission (SEC) requires mutual funds to disclose at least one “appropriate” broad-based market index to which they compare their past performance. The stated rationale for this requirement is to help investors evaluate “how much value the management of the fund added by showing whether the fund outperformed or underperformed the market.”[1] As with all SEC rules … Read more

SEC Adopts Amendments to Its Whistleblower Rules

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On August 26, the Securities and Exchange Commission adopted two amendments to  the rules governing its whistleblower program. The first amendment expands the circumstances where the SEC can pay whistleblowers for their information and assistance in legal actions not brought by the commission. The second affirms the SEC’s authority to consider the amount of a payment for the limited purpose of increasing but not reducing it. Commission Chairman Gary Gensler’s statement supporting the amendments is available here. Commissioners Hester Peirce and Mark Uyeda opposed the amendments, and their statements are available here and here.… Read more

Insider Traders Have Found Their Way to Cryptocurrency Markets

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On July 21, 2022, the U.S. Securities and Exchange Commission (SEC) commenced the first ever lawsuit charging insider trading in cryptocurrency markets. A former employee of Coinbase – a major cryptocurrency exchange – together with his brother and a friend, were arrested and charged with wire fraud in connection with a scheme to commit insider trading.[1] The three men allegedly used confidential information about coins that were to be listed on the Coinbase exchange prior to the official listing announcement. If found guilty, they could face prison sentences of up to 20 years.

In a new study, we show … Read more

SEC Chair Gensler on Final Rule About Pay Versus Performance

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Today [August 25], the Commission voted to adopt a rule requiring certain public companies to disclose information regarding their executives’ compensation and how such compensation relates to the company’s financial performance. I was pleased to support this rule—so-called “pay versus performance”—because it will strengthen the transparency and quality of executive compensation disclosure to investors.

In 2010, Congress under the Dodd-Frank Act directed the Commission to provide clear disclosure to investors on the relationship between companies’ executive compensation actually paid and financial performance. We proposed a rule in 2015 to implement this provision and reopened the proposal in January of this

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Baker McKenzie Discusses the Evolving Securities Legal Framework of ESG Issues

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In 2021 and 2022, as the market continued to focus increasingly on environmental, social, and governance (“ESG”) issues, government financial regulators across many independent agencies strongly indicated that increased enforcement relating to ESG is on the horizon, while private plaintiffs filed novel securities class actions based on ESG issues.

Given the rapid development of legal ESG issues in the financial services industry, market participants must remain cognizant of the potential legal risks relating to ESG, and take adequate precautions to protect themselves against both government investigations and private civil litigation. This article analyzes the emerging framework of ESG regulation and … Read more

Wachtell Lipton Discusses Regulating Cryptoassets With Existing Tools

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For all the press lamenting the “crypto winter” and urging long-term legislative overhaul, there has not been sufficient attention to how existing regulatory tools can be employed to address some of the key risks and vulnerabilities in the current crypto landscape.  Industry leaders and regulatory authorities should engage with open minds and a willingness to discuss practical actions to mitigate current risks in the system while comprehensive legislation may yet be years away.  In particular, we recommend that U.S. financial regulators consider the following measures — most of which would not require new federal legislation — to promote innovation and … Read more

The Interplay Between Private Meetings with Investors and Subsequent Earnings Announcements

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Since the passage of Regulation Fair Disclosure, managers have increasingly met privately with investors. During these meetings, investors gather useful information by seeking managers’ feedback, pursuing a deeper understanding of publicly available information, and inquiring about company strategy. That information can help them better interpret subsequent disclosures. In a new study, we investigate whether investor activity around earnings announcements is consistent with the leveraging of a mosaic of soft information obtained from private meetings and subsequently forecasted earnings announcements.

We compare firms that issue stand-alone management guidance in conjunction with private investor meetings with a sample of firms that issue … Read more

Davis Polk Discusses What’s Missing from Bipartisan Bills to Regulate Crypto

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In the last few weeks, two bills with the potential to bring needed regulatory certainty to the U.S. digital asset industry were introduced in the Senate with solid bipartisan backing.

In June, Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) unveiled the Lummis-Gillibrand Responsible Financial Innovation Act, and in August, Senators Debbie Stabenow (D-MI) and John Boozman (R-AR) announced they would introduce the Digital Commodities Consumer Protection Act of 2022, with support from Senators John Thune (R-SD) and Cory Booker (D-NJ).

Each bill would bring much needed clarity to the regulatory landscape in part by strengthening the role … Read more