Tag: capital markets

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Securities Regulation

SEC Chair Comments on Commission’s 2026 Regulatory Agenda

The 2026 Regulatory Agenda reflects the robust rulemaking we are pursuing under my chairmanship. Now that we are just over one year into my tenure, we have made significant progress in returning the agency to its core mission of protecting investors; facilitating capital formation; and maintaining fair, orderly, and efficient markets – a charge that will guide the Commission as we continue to enact this important agenda.

This Commission recognizes the importance of advancing our regulatory framework to reflect the realities of today’s operating environment – embracing innovation and new technology. To deliver on President Trump’s goal to ensure that the United States is the crypto capital of the world, we are embracing innovation to bring more products onshore, creating clear rules of the road for capital raising with crypto assets, and providing clarity as to how market participants can custody and facilitate trading of tokenized securities onchain. All while ensuring strong investor protection guardrails are in place and continuing to pursue bad actors who violate the law.

I have also consistently highlighted the importance of reversing the decline of public companies and revitalizing our public markets to Make IPOs Great Again. This agenda includes a number of proposals critical to realizing that mission by transforming our disclosure regime. Every IPO is an invitation to workers and savers to participate in the prosperity of the next generation of American enterprise. When fewer companies go public, fewer investors receive that invitation. Guided by materiality, the proposed reforms aim to reduce compliance burdens and further facilitate capital formation in our public markets, while maintaining critical investor protections.

Lastly, as it relates to the private markets, this agenda reflects our key priority to ensure a regulatory framework that is transparent, accessible, and remains safeguarded. Exposure to the full dynamism of our markets – both public and private – should not be reserved for wealthy insiders. Our agenda includes a proposal to better facilitate retail investor participation in private markets while preserving their protection with appropriate safeguards.

Having just celebrated the 250th year of our Republic, we have a mandate to preserve the promise of our capital markets for the next quarter millennium, and we intend to fulfill it. Anchored to the mission that Congress set for the agency, we will ensure that the next chapter of financial leadership is written in the U.S., and that our capital markets continue to lead the world – in their depth, their dynamism, and their unrivaled ability to transform ingenuity into prosperity.

This statement was issued on July 7, 2026, by Paul S. Atkins, chair of the U.S. Securities and Exchange Commission, in Washington, D.C.

Categories
Securities Regulation

SEC Commissioner Peirce Speaks at U.S. Chamber of Commerce Capital Markets Summit

Thank you, Jim [Febeo]. I am delighted to be part of the Summit. My views are my own as a Commissioner and not necessarily those of the Commission or my fellow Commissioners. My days of giving that disclaimer are rushing to an end. After nearly thirty years in DC, I am leaving the city and moving to the beach. When I think back on my time here, many memories were born within several blocks of where I am standing now. I spent one summer during college as a research assistant for scholars at the Smithsonian’s Castle, a wonderful building on the mall. Some years later, I sat nervously on a bench in Lafayette Park as I prepared for an interview with Judge Roger Andewelt on the Court of Federal Claims. Early in my clerkship, Judge Andewelt took me and my fellow clerk to the top of the Hotel Washington at 15th and Pennsylvania for a breathtaking view of the city and my first (and I hope last) raw oysters. Following the Judge’s wise counsel and ceaseless cheerleading, I found my way into a law firm several blocks west of where we are today. I also have many memories from this building in which I have enjoyed hours of conferences on fascinating financial regulatory issues. I mean that sincerely. I love this stuff.

I love it because it matters. Financial markets underpin our vibrant economy. And capital markets are particularly important because they are so good at directing money to its highest and best use. Capital markets facilitate the sharing of risks and rewards. They organically match enterprise and capital to achieve socially useful ends. Someone who has a good idea but does not have rich family or friends can get funding to commercialize her idea. A company that wants to build a new factory can get money from strangers to build it. The capital markets embrace and support the risk-taking innovations that propel human progress. Failure happens routinely in these capital markets; innovation is a risky business. But capital markets absorb these failures and redirect capital to new endeavors. Contrary to some misrepresentations of these markets, they are not bastions of isolated individualism; they bring people together to build things. The more people who participate in these markets, the better they work. Each person brings a necessary input to the market: ideas, capital, speculative appetite. Together, market participants build companies, which, in turn, make products and provide services that people need. The capital markets invite people to cooperate for the improvement of society.

The United States has the best capital markets in the world. People come here from all over the world to raise money and to invest. Our markets have helped build the globe’s companies and economies. Other countries look longingly to the U.S. capital markets and hope to emulate them. Representatives of foreign governments, whose economies are in thrall to bank finance, routinely ask us what they can do to replicate our dynamic capital markets. Banks serve an important role here in the United States too, but bank finance inherently lacks the dynamism of capital markets and the flexibility necessary to fund innovation.[1]

Why is the United States blessed with such powerful capital markets? As a regulator, perhaps I should credit government as the reason our markets are so strong. But one of the reasons our capital markets work so well is that government generally does not meddle with them. It does not attempt to override the decisions of market participants to direct capital to politically favored places. It is a referee, not a player, on the capital markets field. Certainly, the government has an important role: having sensible rules and enforcing them judiciously gives people the confidence to participate in the markets. Investors, companies that use their capital, and intermediaries feel comfortable in U.S. markets because they can trust both that our laws will be enforced as written and that the enforcement will be fair and impartial. The reliable consistency of the governing law and the confidence in fair and impartial enforcement form the foundation of mutual trust essential to transacting. However, as important as the regulatory framework is in cultivating trust, the nature of this country and its people deserve the primary credit for the success of our capital markets.

Less than a month from now we will celebrate the 250th anniversary of the signing of the Declaration of Independence, which so powerfully proclaimed the “self-evident” truths “that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”[2] We do not always abide by these truths, but we hold one another accountable when we fail and eventually correct course. Indeed, next week on Juneteenth we will commemorate the hard-fought end to the most pernicious infidelity to the Declaration’s truths. In declaring independence, the nation repudiated the bonds of consanguinity in favor of bonds forged through a common commitment to principles of freedom. These principles continue to be the unifying thread of this nation, which is composed wonderfully of people with roots reaching every corner of the world. We are, as the Declaration reflected, a nation of risk-taking liberty lovers who are well-suited for the rough-and-tumble of the capital markets.

The Declaration of Independence not only celebrated every person’s right to life, liberty, and the pursuit of happiness, but recognized government’s appropriate, but limited, role in “secur[ing] these rights.”[3] To perform this role effectively, governments must “deriv[e] their just powers from the consent of the governed.”[4] A government committed to securing the life, liberty, and pursuit of happiness of its people cannot usurp its people’s freedom to achieve these objectives. A successful government is made up of people who recognize that the exercise of government power, by its very nature, constrains human freedom. Consequently, these governing officials exercise power only when the people to whom they are accountable direct them to do so out of a belief that the exercise of government power will help on balance to secure that freedom. A government mandate that you cannot do something or must do something overrides personal choice, so a government committed to protecting personal liberty should use such mandates sparingly. These foundational precepts may seem lofty, but they are essential strictures on the government’s daily work.

The SEC, as part of the government, must limit itself to the exercise of powers given to it by the people. The SEC celebrated its 92nd birthday on Saturday; on June 6, 1934, the Securities Exchange Act, which created the SEC, became law. This law and other statutes give the agency its powers. We do not have the consent of the American people to exercise powers not conferred upon us by those statutes. I may have written the law differently if I were holding the pen, but my job is to follow statutory directives as given by Congress. We cannot freelance outside of these directives, and, of course, the ultimate constraint on SEC action is the Constitution; even if the statutes tell us to do something, we cannot do it if it contravenes the Constitution.

Applying these principles day-to-day can be challenging. Complicating the task is that the markets are vast and complex, many of the statutes are old and drafted during times when the markets operated with fewer participants and less complicated technology. The endless creativity of market participants raises continuing interpretive challenges when dealing with the SEC’s numerous and often technical regulations, especially when other regulators’ jurisdictions overlap with ours. Moreover, our statutes wisely require eschewing merit-based regulation, which means that capital markets will include products, services, and practices that some members of the Commission and the staff personally disfavor.

Several recent actions reflect the Commission’s efforts to regulate the capital markets within the boundaries that the Constitution and Congress drew for it. Last month, the Commission ended its policy of requiring people who settle with the Commission not to deny—or allow anyone else to deny—the allegations against them.[5] A regulatory policy that prevents people from speaking against government action and requires them to actively dissuade others from speaking necessarily raises First Amendment concerns. The Commission also recently proposed to rescind its climate disclosure rules.[6] In my view, those rules required disclosures not authorized under our statutes. More generally, the Commission is reviewing its disclosure requirements under Regulation S-K to ensure that they are tied to materiality and the purposes underlying our statutory disclosure mandate. In April, the SEC and the CFTC proposed to revise Form PF, a form that has morphed over the years into a much lengthier, more burdensome, and more wide-ranging reporting requirement for private funds than envisioned by the underlying Dodd-Frank mandate.[7]Also in April, the Commission issued a concept release about the troubled Consolidated Audit Trail (“CAT”), which is a massive market surveillance monitoring operation.[8] The release asks questions related to the CAT’s implications for civil liberties and privacy.[9] A more general effort to return to its statutorily mandated regulatory territory is the Commission’s work on crypto during the past year-and-a-half; the Commission has sought to tie our crypto regulatory and enforcement activities to the statutes we administer.[10]

The Commission has more work to do. I am concerned, for example, about the constitutionality of the pay-to-play rule for investment advisers.[11] Our pay-to-play rule is not a direct restriction of political speech inasmuch as it does not outright prohibit political donations, but it nonetheless functions as a restriction. Prohibiting advisers who make political donations from providing advisory services to governmental customers creates significant financial disincentives from making those donations and from running for office.[12] Given that the rule effectively regulates political speech—speech at the core of the First Amendment—we ought to ask ourselves whether the rule is really the least restrictive means to achieving the desired objective: preventing public corruption. Moreover, we ought to ask whether that objective is one Congress charged the SEC with achieving.

I also am concerned that the Commission through aggressive statutory interpretations is pushing hard against the limits of its authority. Reasonable restraint in reading our statutes and rules is the best course. If we rush up to the edge of every law and regulation, we might tumble over into unauthorized territory. We tried that with an aggressive interpretation of the term “dealer” and met with judicial disagreement.[13] We similarly aggressively read our own Rule 15c2-11, which was written with equity securities in mind, to include fixed-income securities, much to the dismay of just about everyone including me.[14] In March, the Commission proposed amendments to rectify that overreading.[15]

The Commission likewise should bridle its overly expansive reading of the Foreign Corrupt Practices Act’s requirements that companies devise and maintain a system of “internal accounting controls.”[16]The Commission has misapplied this provision in its enforcement program by failing to limit it to the accounting context and instead using it as a lever to discipline companies that lack what the Commission perceives to be adequate internal controls unrelated to accounting.[17] his aggressive reading already has drawn judicial criticism,[18] and I hope the Commission turns about in response.

Also of note is the Commission’s use of its authority under Section 206(4) of the Advisers Act. Enacted in 1960, Section 206(4) added two sentences to the Act.[19] The first sentence prohibits investment advisers from “engag[ing] in any act, practice, or course of business” of a certain character—those that are “fraudulent, deceptive, or manipulative.”[20] The second sentence directs the Commission to “define, and prescribe means reasonably designed to prevent” the conduct prohibited by the first sentence.[21] This seemingly simple text raises a difficult interpretative question. Because fraud, deceit, and manipulation all are state-of-mind terms that require knowing or intentional misconduct,[22]the best reading of the first sentence is that it prohibits knowing or intentional misconduct, not merely negligent misconduct. But does the second sentence’s authorization for the Commission to define what constitutes “fraudulent, deceptive, or manipulative” empower it to adopt a rule that defines merely negligent conduct as fraudulent, deceptive, or manipulative? This question percolated when the Commission adopted Rule 206(4)-8 and took the position that negligent conduct was sufficient to violate the rule’s prohibition on fraudulent, deceptive, or manipulative acts, practices, or courses of business. During my tenure, I have supported enforcement actions that relied on negligent violations of Rule 206(4)-8, but after careful consideration, I have come to agree with the concurrence Chairman Atkins published at the time of adoption.[23] It seems unlikely that when Congress authorized the Commission to define types of acts, practices, and courses of businesses that are fraudulent, it authorized the Commission to write out of existence an essential attribute of fraud—knowing or intentional conduct. For this reason, while the Commission may adopt negligence-based, or even strict liability, rules designed to prevent fraudulent conduct—meaning knowing and intentional conduct—the Commission should not read the statute as granting it the power to redefine fraud itself.

I cannot leave the topic of reading—and reading into—statutes without discussing disgorgement, an issue that has landed the Commission in the Supreme Court several times in the past decade. Disgorgement is perhaps the most consequential expansion of the ancillary equitable relief sought by Commission. The remedy began to take shape in the 1960s when, in SEC v. Texas Gulf Sulphur, the Commission asked the court to order certain defendants who had purchased securities while in possession of material, non-public information to make restitution to some sellers and to return profits from certain transactions to the company.[24] By 1972, the Commission labelled the remedy “disgorgement” and explained that: “The S.E.C.’s primary function is to protect the public from fraudulent and other unlawful practices and not to obtain damages for injured individuals. Thus, a request that disgorgement be required is predicated on the need to deprive defendants of profits derived from their unlawful conduct and to protect the public by deterring such conduct by others.”[25] Court opinions reflected this emphasis on deterrence.[26]

The Commission’s disgorgement-as-deterrence rationale arguably reached its nadir—or perhaps apex, depending on one’s view—in SEC v. Contorinis.[27] In that case, the district court, responding to a Commission request, ordered the defendant to disgorge all the profits from insider trading, including profits that the defendant himself never received or retained because they accrued to a fund that he managed, not to him personally.[28] The appellate court, while acknowledging that disgorgement “may not exceed the total amount of gain from the illegal action,” rejected the contention that a “wrongdoer need disgorge only the financial benefit that accrues to him personally.”[29] As the dissenting judge noted, this holding was peculiar given that in the parallel criminal action, the same court held that the defendant could not be ordered to forfeit those same profits because “a defendant can be ordered to forfeit only the proceeds that he actually received or controlled.”[30] Not surprisingly, given the expansive use of the remedy, three years later, the Supreme Court observed that “deterrence is not simply an incidental effect of disgorgement” and concluded that the remedy as sought by the Commission “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”[31] Three years later, in Liu, the Supreme Court, clarified that the Commission could seek equitable disgorgement, but cautioned that the remedy must be limited to “a defendant’s net profits from wrongdoing.”[32] Congress entered the fray shortly thereafter by enacting provisions that specifically authorized the Commission to seek and the district courts to order disgorgement.[33] The combination of the Court’s rulings and new legislation did not—to put it mildly—set out a clear path forward.

Indeed, just last Thursday the Court issued its third disgorgement opinion in the last ten years. [34] The Court, without deciding whether the new statutory provision was legal or equitable, reminded the Commission of certain “key limitations” on equitable disgorgement: (1) it “must be limited to the defendant’s net profits (not total revenues) derived from his securities-law violations”[35] and (2) because “equity aims to deliver wrongful gains to wronged victims . . . the SEC must return a defendant’s gains to wronged investors, contrary to its practice of depositing a defendant’s gains with the Treasury.”[36] The Court went on to hold that the SEC does not have to show a pecuniary loss to justify a disgorgement award. [37] The Court’s narrow ruling leaves many questions unresolved; stay tuned for the next installment of the scintillating series SEC Disgorgement at the High Court, which both the majority and concurring opinions foreshadowed. In the meantime, the Commission must accept that equitable disgorgement is a remedy circumscribed by a long history of limiting principles. These principles apply to the Commission, with perhaps even greater force because the Commission is acting to enforce the securities laws rather than to remediate its own harm. Moreover, as reflected in Justice Thomas’ concurrence, if the Commission reads its new statutory authority as freeing disgorgement from its equitable limitations, jury trials may await.[38]

Well-intentioned people can disagree about how to regulate capital markets. We must remember, however, our shared interest in ensuring that our capital markets continue to flourish and grow to serve more investors and companies. Healthy capital markets are essential to generate the economic growth we need to increase the standard of living and decrease the national debt. Properly functioning capital markets are key to increasing the employment and investment prospects of the next generation of Americans. Factions across the political spectrum might have fundamental disagreements about regulating capital markets, but maybe we can find common ground in the boring basics. Updating transfer agent rules, empowering firms to use new technologies to enhance investor disclosures, rethinking recordkeeping rules, reforming investment company proxy processes, and tending to other similar matters may be some unifying projects. We will not agree on every detail, but the joint work of getting to a good place might build good will that can be applied to areas of deeper disagreement.

Thank you for indulging the meandering reminiscences of a soon-to-be former regulator. I am sad to be leaving a place that has allowed me to engage in the important work of regulating the finest capital markets in the world alongside fellow Commissioners and a wonderful staff who are committed to doing that task well. Yet I am delighted to be leaving a seat that should not be occupied by the same person for too many years. Ours is a government grounded in timeless principles, not fleeting personalities. The SEC will benefit from energetic new voices with fresh ideas about how to protect our precious and powerful capital markets. Happy 250th anniversary to the nation I have been so honored to serve.

ENDNOTES

[1] See, e.g., Eur. Comm’n, The Future of European Competitiveness, pt. A, at 64 (Sept. 9, 2024), https://commission.europa.eu/document/download/97e481fd-2dc3-412d-be4c-f152a8232961_en?filename=The%20future%20of%20European%20competitiveness%20_%20A%20competitiveness%20strategy%20for%20Europe.pdf(noting that in Europe “bank loans are still the most important source of external finance for companies” and “banks are typically ill-equipped to finance innovative companies: they lack the expertise to screen and monitor them and have difficulties valuing their (largely intangible) collateral, especially compared to angel financiers, venture capitalists and private equity providers”); id., pt. B, at 286, https://commission.europa.eu/document/download/ec1409c1-d4b4-4882-8bdd-3519f86bbb92_en?filename=The%20future%20of%20European%20competitiveness_%20In-depth%20analysis%20and%20recommendations_0.pdf (“Banks typically operate under a heavy burden of prudential regulation and lack the expertise to screen and monitor innovative companies, especially compared to angel financiers, venture capitalists and private equity providers. Innovative scale-ups tend to have highly volatile cash flows (many do not generate positive cash flows for several years) and, therefore, feature a high likelihood of bankruptcy even if they take modest amounts of debt. Moreover, their collateral is often largely intangible, being formed by patents and the human capital of highly skilled employees. Hence, it is difficult for banks to value it, and rely on it as a hedge against their credit risk. A financial structure that favours innovation should, therefore, not be dependent on bank financing.”).

[2] The Declaration of Independence para. 2 (U.S. 1776).

[3] Id.

[4] Id.

[5] SEC Rescission of Policy Regarding Denials in Settlements of Enforcement Actions, 17 C.F.R. pt. 202 (2026); see SEC Press Release 2026-45, SEC Rescinds Policy Regarding Denials of Settlements in Enforcement Actions (May 18, 2026), https://www.sec.gov/newsroom/press-releases/2026-45-sec-rescinds-policy-regarding-denials-settlements-enforcement-actions. The Commission required settling defendants to agree that they “will not take any action or make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis” and also “will not make or permit to be made any public statement to the effect that Defendant does not admit the allegations of the complaint, or that this Consent contains no admission of the allegations, without also stating that Defendant does not deny the allegations.” Final Judgment as to Defendant Fernando Motta Moraes at 9, SEC v. Moraes, No. 22-Civ.-08343 (S.D.N.Y. Oct. 28, 2022), ECF No. 13 (Consent of Defendant Fernando Motta Moraes, ¶ 11). The Commission employs substantively identical language in the Offers of Settlements leading to settled Orders Instituting Proceedings. See, e.g., Offer of Settlement of FTE Networks, Inc., SEC Admin. Proceeding No. 3-16024 at 3 pt. 6 (filed Sept. 11, 2014), sec.gov/Archives/edgar/data/1122063/000114420414055309/v388919_ex10-1.htm.

[6] SEC Rescission of Climate-Related Disclosure Rules, 17 C.F.R. pt. 210, 229, 230, 232, 239, & 249 (proposed June 3, 2026).

[7] SEC & CFTC Form PF; Reporting Requirements for All Filers, 17 C.F.R pt. 4, 275, & 279 (proposed Apr. 24, 2026).

[8] SEC Concept Release on Consolidated Audit Trail and Other Audit Trails and Data Sources, 17 C.F.R. pt. 240 & 242 (proposed Apr. 20, 2026).

[9] Id. at 68–69 (questions 78–81).

[10] See, e.g., Chairman Paul S. Atkins, The SEC’s Approach to Digital Assets: Inside “Project Crypto” (Nov. 12, 2025), https://www.sec.gov/newsroom/speeches-statements/atkins-111225-secs-approach-digital-assets-inside-project-crypto.

[11] 17 C.F.R. § 275.206(4)-5.

[12] See Commissioner Hester M. Peirce, There’s Got to be a Better Way: Statement of Dissent Regarding Wayzata Investment Partners LLC (Apr. 15, 2024), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-wayzata-041524; Commissioner Hester M. Peirce, Expect the Inquisition: Dissent from Obra Capital Management, LLC (Aug. 19, 2024), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-obra-capital-management-081924; see also Commissioner Hester M. Peirce, Laudable Ends, Poorly Pursued: Statement Regarding Recent Pay-to-Play Settlements (Sept. 15, 2022), https://www.sec.gov/newsroom/speeches-statements/peirce-statement-pay-play-rule-settlements-091522.

[13] See Nat’l Ass’n of Priv. Fund Managers v. SEC, No. 4:24-CV-00250-O, 2024 WL 4858589, at *1 (N.D. Tex. Nov. 21, 2024).

[14] See Commissioner Hester M. Peirce, Statement on Staff No-Action Letter Regarding Amended Rule 15c2-11 in Relation to Fixed Income Securities (Sept. 24, 2021), https://www.sec.gov/newsroom/speeches-statements/peirce-nal-rule-15c2-11-2021-09-24.

[15] SEC Publication or Submission of Quotations Without Specified Information, 17 C.F.R. pt. 240 (proposed Mar. 19, 2026), https://www.sec.gov/files/rules/proposed/2026/34-105004.pdf.

[16] Securities Exchange Act § 13(b)(2)(B) (1934) (codified at 15 U.S.C. § 78m(b)(2)(B))

[17] See Commissioners Hester M. Peirce & Elad L. Roisman, Statement of Commissioners Hester M. Peirce and Elad L. Roisman – Andeavor LLC (Nov. 13, 2020), https://www.sec.gov/newsroom/speeches-statements/peirce-roisman-andeavor-2020-11-13; see also Commissioners Hester M. Peirce & Mark T. Uyeda, The SEC’s Swiss Army Statute: Statement on Charter Communications, Inc. (Nov. 13, 2023), https://www.sec.gov/newsroom/speeches-statements/peirce-uyeda-statement-charter-communications-111423; Commissioners Hester M. Peirce & Mark T. Uyeda, Hey, look, there’s a hoof cleaner! Statement on R.R. Donnelley & Sons Co. (June 18, 2024), https://www.sec.gov/newsroom/speeches-statements/peirce-uyeda-statement-rr-donnelley-061824.

[18] See SEC v. SolarWinds Corp., 741 F. Supp. 3d 37, 104–09 (S.D.N.Y. 2024).

[19] Investment Advisers Act Amendments of 1960, Pub. L. No. 86-750, 74 Stat. 885, 887 (1960).

[20] Id.

[21] Id.

[22] See, e.g., Aaron v. SEC, 446 U.S. 680, 690 (1980) (noting that the terms “manipulative, device, and contrivance . . . quite clearly evinced a congressional intent to proscribe only knowing or intentional misconduct”) (internal quotation marks omitted); id. at 696 (noting that the prohibition on use of “any device, scheme, or artifice to defraud, plainly evinces an intent on the part of Congress to proscribe only knowing or intentional misconduct”) (internal quotation marks omitted).

[23] Commissioner Paul S. Atkins, Concurrence of Commissioner Paul S. Atkins to the Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles (Aug. 3, 2007), https://www.sec.gov/files/rules/final/2007/ia-2628-psaconcurrence.pdf.

[24] SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77, 93 (S.D.N.Y. 1970); see also Thirty-First Annual Report of the Securities and Exchange Commission: For the Fiscal Year Ended June 30, 1965, at 122–23, https://www.sec.gov/about/annual_report/1965.pdf. See generally Stephen C. Unsino, Note, 8 B.C. Indus. & Com. L. Rev. 353 (1967). The appellate court affirmed the district court’s order that certain defendants pay their trading profits to the company. SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307–08 (2d Cir. 1971).

[25] Thirty-Eighth Annual Report of the Securities and Exchange Commission: For the Fiscal Year Ended June 30, 1972, at 70, https://www.sec.gov/about/annual_report/1972.pdf.

[26] See, e.g., SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972) (“Clearly the provision requiring the disgorging of proceeds received in connection with the Manor offering was a proper exercise of the district court’s equity powers. The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable. The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits.”).

[27] SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014).

[28] Id. at 300.

[29] Id. at 305–06.

[30] Id. at 310 (Chin, J., dissenting).

[31] Kokesh v. SEC, 581 U.S. 455, 465 (2017).

[32] Liu v. SEC, 591 U.S. 71, 85 (2020).

[33] William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Pub. L. No. 116-283, 134 Stat. 3388, 4625 (2021) (codified at 15 U.S.C. § 78u(d)(7)).

[34] Sripetch v. SEC, No. 25-466, slip op. (June 4, 2026).

[35] Id. slip op. at 3.

[36] Id. (internal quotation marks omitted).

[37] Id. slip op. at 11.

[38] Id. slip op. at 1 (Thomas, J., concurring).

These remarks were delivered on June 9, 2026, by Hester M. Peirce, commissioner of the U.S. Securities and Exchange Commission, at the U.S. Chamber of Commerce Capital Markets Summit in Washington, D.C.

Categories
Securities Regulation

SEC Chair Speaks at the 2026 Reagan National Economic Forum

Good morning, ladies and gentlemen. And thank you, Fred [Ryan], for your generous introduction. Before I begin, I should like to take a moment to recognize what a profound privilege it is for me to address the Reagan National Economic Forum.

Prior to sharing a few reflections, I must note that the views I express here today are my own as SEC Chairman and do not necessarily reflect those of the SEC as an institution or of my fellow Commissioners.

There is something quite fitting about gathering on a California morning such as this one, because it calls to mind a few of President Reagan’s most enduring words: “Morning in America.” And nowhere are those words more at home than here — in this library, a fixed monument to a free-market legacy. At its opening ceremony in 1991, President Reagan articulated his hope that the library would become “a dynamic intellectual forum where scholars interpret the past and policymakers debate the future.”[1] Today, I believe that we are proving that his hope was well placed.

With that in mind, I do not take lightly the moment in which I stand before you, especially in this milestone year as the United States approaches its 250th anniversary — an occasion that invites not merely nostalgia but a renewed resolve.

A resolve like that of President Reagan’s — to restore the ideals of our forebears: that the government is not meant to control a people, but to set them free to flourish. To prove, again, that America’s best days are never behind her.

It was this vision that won hearts across America in the 1980 election. But vision alone does not renew a nation. What set President Reagan apart was something rarer: an instinctive understanding of a people weary from the Carter years and starved of hope — and an extraordinary ability to rekindle it.

On the tail of his landslide victory, crossing New York City in a motorcade, he noted in a diary entry that “one thing was unusual and very humbling. The streets were lined with people as if for a parade… They cheered and clapped and I wore my arms out waving back to them.” Then he concluded with a somber conviction: “I keep thinking this can’t continue and yet their warmth and affection seems so genuine I get a lump in my throat. I pray constantly that I won’t let them down.”[2]

And today we assemble together because he did not. Because his belief in the “miracle of the marketplace”—and in the American people—pulled our nation up from the ashes of despair and placed it on a firm path toward renewal.

Miracle of the Marketplace

As a young lawyer, I witnessed some small measure of that renewal firsthand. In the summer of 1982, I worked in New York, and by 1984, my career had carried me back there. By that time the deep malaise of the Carter years had finally sunset, and morning in America, as Reagan hailed it, had dawned.

As I navigated the city, I recall a certain palpability to the promise of a new day. A new energy resounded through the streets. A rebounding economy was reviving the hearts and minds of many who had lost faith in — or at least doubted — America’s future.

It was a transformation that President Reagan understood at its root. In his first year as President, he expressed his core beliefs about free enterprise. “Trust the people,” he told a crowd from the World Bank and IMF. “Countries that have achieved the most spectacular, broad-based progress are neither the most tightly controlled, nor the biggest in size, nor the wealthiest in natural resources. No, what unites them all is their willingness to believe in the magic of the marketplace.”[3]

“The magic of the marketplace.” It was not so much a memorable alliteration as it was—and is—an empirical truth. Indeed, President Reagan understood that the greatest weapon to end the Cold War was not a strong military fist alone, but the invisible hand behind it—free markets lifted by a free people.

That philosophy traveled further than any of us had imagined. Thirty-eight years ago today, in fact, President Reagan embarked on Air Force One for his first visit to the Soviet Union. He took to his diary that evening and recorded that when he walked outside the Ambassador’s residence in Moscow, “It was amazing how quickly the street was jammed curb to curb with people—warm, friendly people who couldn’t have been more affectionate.”[4]

A short account, yet one that symbolizes the sweeping reach of President Reagan’s ideology, crossing the Iron Curtain before he ever did.

Years before he set foot on Soviet soil, President Reagan’s free-enterprise philosophy had been steadily permeating a people suffocating under the weight of communism. His economic “offensive strategy” was loosening the grip of its leaders. And the American free-market prosperity that he unleashed kept compounding the economic pressure—until finally the Berlin Wall fell and communism collapsed, all without any troops marching into Moscow.

In the end, the most powerful army that President Reagan deployed was an idea.

The lesson that he left us is not an historical artifact; it is an archetype: Free markets do not just create wealth. They generate gravity, pulling people toward them—across oceans, across ideologies, and as President Reagan proved, even across the Iron Curtain.

So much so, that after the Berlin Wall fell, countries across the former USSR and Eastern Europe began building market economies out of the rubble of central planning. In turn, more wealth has been created since the wall fell than in all prior human history.

In many respects, President Reagan’s belief in free markets inspired — and still underpins — my own. As a young graduate, I watched as the Soviet and communist system of central planning collapsed under the weight of its own contradictions, while President Reagan’s America empowered its citizens to innovate, to invest, and to build wealth within predictable and enforceable legal frameworks.

President Reagan held that our markets affirm the dignity of the human spirit and liberate its potential as no other alternative can. He believed, as do I, that markets, structured properly, can unleash the might of American dynamism as no monarch or government ministry possibly could.

But principles do not preserve themselves. And to maintain their might, markets require rules that are clear enough to guide but restrained enough not to suffocate.

Where the SEC Has Been

Shortly after his re-election victory, President Reagan became the first—and remains the only—sitting president to ring the opening bell at the New York Stock Exchange. He opened his remarks that morning with a characteristic clarity: “I’d like to say a few words about where this country’s been, and where we’ll be going from here.”[5]

Today, to echo President Reagan, I should like to say a few words about where the SEC has been, and where we will be going from here.

Perhaps no comedic line better captures President Reagan’s philosophy than one so beloved that it practically became a catch phrase, which you can probably recite with me: “The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help.”

Over my three tours at the SEC, I have discovered six equally terrifying words: “We should create another disclosure requirement.”

Like President Reagan, I have come to understand the challenge of inheriting a regulatory environment gripped by government control that inhibited investment and punished success. In his inaugural address, President Reagan made clear a doctrine that he held that I also embrace today, that “Government can and must provide opportunity, not smother it; foster productivity, not stifle it.”[6]

For context, Congress has tasked the SEC with three mutually reinforcing aims: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. But seized by a sort of “regulatory adventurism,” past Commissions constructed around those three pillars a thicket of obligations that were unmoored from any of them.

As a result, the SEC’s disclosure regime became conscripted to serve interests beyond those of the Supreme Court’s objective standard of the reasonable investor. And the path to going public grew so costly, so litigious, and so politically fraught that countless entrepreneurs chose to remain private or to list elsewhere. The agency charged with stewarding the world’s greatest capital markets had become, in many ways, an imposing obstacle to them.

Indeed, as our disclosure and general regulatory burden expanded, the number of our public companies has dwindled. From the time that I left the SEC as a staff member in 1994, to when I returned as Chairman just over a year ago, the number of companies listed on the U.S. exchanges had fallen by roughly 40 percent — a decline that represents more than a data point; it is a lost opportunity for workers and savers to share in the prosperity of the next generation of American enterprise.

This regulatory overreach proved equally as damaging to digital asset innovation. The agency that I inherited had become defined — distinguished, even — by a regulatory hostility that pushed digital asset ventures overseas. Its driving philosophy seemed to be that the new technology itself — rather than malign individuals who might exploit it — was sinister and suspect and must be stamped out accordingly. As a result, innovators made the only rational choice. They left.

But — like President Reagan — when presented with this decline, under President Trump’s leadership we have a duty to reverse it. And I am pleased to report that we are equal to the task.

For President Reagan, it was “morning in America.” For us, it is a “new day at the SEC.”

Where the SEC Is Going

President Reagan did not tinker around the edges of a broken system. Rather, he returned it to first principles at its core. And that is precisely the path that this Commission is charting.

First, we are advancing our regulatory posture to bring it into alignment with the world as it is, rather than as it was when many of our rules were first written.

As I alluded to earlier, under the previous administration, innovators found that engaging with the SEC quickly gave way to getting investigated by it. The market rendered its verdict, and an entire generation of digital asset innovation developed outside the United States.

So, over the past year, this SEC has moved purposefully on President Trump’s goal of making America the crypto capital of the world. First, we launched Project Crypto — now a joint effort with the Commodity Futures Trading Commission — to modernize our rules and regulations to facilitate markets’ moving on-chain. Building on this initiative, we recently delivered long-overdue clarity for market participants that distinguishes which digital assets are considered securities, and which are not. Finally, among other measures underway, we are advancing work on a forthcoming innovation exemption for tokenized listed securities and taking steps to clarify how onchain trading systems fit within existing regulations.

Now, the SEC’s advancement of modernized rules is only as purposeful as the clarity with which we apply them.

Indeed, jurisdictional ambiguity can stifle innovation just as surely as ill-devised regulation — and for too long, it has. So after decades of fragmented oversight and overlapping authorities, CFTC Chairman Mike Selig and I have ushered in a new era of harmonization between our two agencies, replacing what I call a regulatory no-man’s land with a field of fertile ground for innovation to take root and flourish — and providing market participants the clear path forward that they have long called for.

Lastly, perhaps nowhere is our forward ambition more evident than in our resolve to transform the SEC rulebook.

As I mentioned previously, over time, many disclosure requirements that began as a framework to illuminate have become instruments to obscure. In losing sight of materiality as its north star and accumulating new rules without excising the extraneous, the agency steadily built a disclosure labyrinth so complex and costly that going and staying public became less and less compelling.

So, we are moving decisively to Make IPOs Great Again. Building upon our recent proposal to afford companies the flexibility of quarterly or semiannual reporting cadences, last week we put forward two rule proposals that would further reduce the burdens of being a public company, by recalibrating disclosure requirements and making it easier for companies to access the public markets quickly and when market conditions are most favorable. And I am pleased to announce that today, we have proposed the rescinding of the prior administration’s ill-advised climate rule — retethering our rulebook to the simple principle that the SEC exists to serve allinvestors, not to advance an agenda of the politicized few with axes to grind or business models to aggrandize.

Now, as substantial as they are, the reforms that I have outlined amount to a beginning, not a summation. Across every dimension of our mandate, the SEC has reclaimed its course — and is moving forward with equal parts rigor and restraint.

Conclusion

Under my leadership, I intend that the Commission work to ensure that the United States is well-positioned to seize on the excitement for economic opportunity that President Trump’s pro-growth policies have inspired — and to build upon the decades of economic strength that the Reagan Revolution ignited.

When he took the oath of office, President Reagan inherited a despondent nation wandering in economic desolation, with no guiding light to lead it out. But over eight years, his administration achieved an unrivaled turnaround, transforming a once barren land into a beacon of prosperity.

Of course, he left America not merely richer, but more itself — more confident in what free people and free markets can accomplish together.

The resulting optimism revived not only the spirit of the American people, but also the economy that they helped to reconstruct — yielding twenty million new jobs and significant declines in unemployment, inflation, and the prime interest rate alike.[7]

Today, we share in that success, but no less in the worldview that kindled it: that by trusting a free people to participate in free markets, we can beget decades of economic prosperity for generations to come.

So, let me close where I began — with the words that President Reagan spoke 35 years ago in this very place.

“For 10 years after we summoned America to a new beginning, we are beginning still… With each sunrise, we are reminded that millions of our citizens have yet to share in the abundance of American prosperity. Can’t we pledge ourselves to a new beginning for them?… May every day be a new beginning and every dawn bring us closer to that shining city upon a hill.”[8]

Indeed, 45 years after President Reagan summoned America to a new beginning, we are beginning still. On the cusp of 250 years of our Republic, and at the dawn of a new Golden Age under President Trump, the question before us is not whether the American people possess the ambition or the ability to lead our nation toward new beginnings. It is whether we, as regulators, possess the will to let them.

In this new day at the SEC, I am confident that we do — and that by preserving the promise of our capital markets for the next quarter millennium, we will heed the call to carry our nation ever closer to that shining city upon a hill.

So, ladies and gentlemen, I am grateful, once again, for the opportunity to participate in this Forum. Thank you very much for your attention. And I look forward to the work ahead of us. Thank you.

ENDNOTES

[1] https://www.youtube.com/watch?v=kcbltLekSM0

[2] https://www.reaganfoundation.org/ronald-reagan/white-house-diaries/diary-entry-03131981

[3] https://www.reaganlibrary.gov/archives/speech/remarks-annual-meeting-boards-governors-world-bank-group-and-international-monetary

[4] https://www.reaganfoundation.org/ronald-reagan/white-house-diaries/collection/president-reagan-s-first-trip-to-the-soviet-union/diary-entry-05291988

[5] https://www.reaganlibrary.gov/archives/speech/remarks-brokers-and-staff-new-york-stock-exchange-new-york-new-york

[6] Reagan inaugural address

[7] https://www.reaganfoundation.org/ronald-reagan/the-presidency/economic-policy

[8] https://www.youtube.com/watch?v=kcbltLekSM0

These remarks were delivered on May 29, 2026, by Paul S. Atkins, chair of the U.S. Securities and Exchange Commission, at the 2026 Reagan National Economic Forum in Simi Valley, California.

Categories
Securities Regulation

SEC Chair Atkins Discusses AI and Capital Markets

Good morning, ladies and gentlemen. Let me begin by thanking our FSOC hosts for convening this roundtable series and for the invitation to take part in it. I should also like to acknowledge our industry partners for joining us. Today’s public-private exchange exemplifies our conviction at the SEC to engage together with you, often and in good faith. And before I share a few reflections, let me also add the customary disclaimer that the views I express here are my own as Chairman and not necessarily those of the SEC as an institution or of the other Commissioners.

Within the time that has been allotted to me, I cannot hope to flush out, much less to resolve, questions as sweeping as the ones before us today, including those of AI’s implications for U.S. capital markets. The complexities of artificial intelligence hardly conform to tidy conclusions. Luckily for you, you have some distinguished panelists to delve into these issues with the rigor that they command.

Still, encouraged by the promise of this technology, I should like to focus on at least a few of our efforts at the Commission to more fully embed it into our culture. The main message that I want to leave with you today is that AI is more than an instrument of efficiency or convenience. It is a force that stands to enable investors to participate in the markets with greater confidence, businesses to allocate capital with sharper precision, and regulators to oversee those financial markets with deeper insight.

If the scale of this new frontier feels unprecedented, it is worth considering how modestly it began—and how long humans have devised instruments to aid the mind, from the abacus onward. Some seventy years ago, in the summer of 1956, a small cohort of mathematicians and scientists assembled on the grounds of Dartmouth College for what some have since dubbed the “Constitutional Convention of AI.” They convened on a premise that “every aspect of learning or any other feature of intelligence can in principle be so precisely described that a machine can be made to simulate it.” [1]

Questions that they posed at midcentury—what can a thinking machine do, and what ought we ask of it?—are not unlike the ones before us today. Nor are they unlike questions with which the SEC has wrestled in the past.

For example, I find it instructive to recall the late SEC Commissioner Roberta Karmel, who stated back in the seventies that “data analyzing technology has progressed to a point of magnitude superior to that available just brief years ago.”[2] Commissioner Karmel added—around the advent of the word processor, mind you—that “although these developments have augmented the complexity and efficiency of the private financial sector, the SEC has not enjoyed all the benefits of this improved technology.”

Her words were at once a warning and an enduring appeal for financial regulators to keep pace with markets that they oversee. So, for our part today, we are not content to retreat from the AI revolution, nor to remain tethered to the tools of a bygone era. Instead, our posture at the SEC is clear: we intend to understand AI; to assess its potential; and, where appropriate, to adopt its solutions.

To those ends, we established the SEC’s AI Task Force in August to facilitate the development and deployment of AI across the Commission. This includes tools to conduct risk assessments for potential examination; to detect potential market misconduct, such as fraud and rule violations; to review disclosures with greater speed and efficiency; to react to public input on new proposals; and to evaluate market-wide risks that bear upon our capital markets.

Of course, we are committed to using AI-enabled tools and systems in ways that augment our work responsibly. Human interaction is still required, indeed imperative, at every stage of our risk assessment program. Due process demands it. An algorithm may identify an anomaly or surface a pattern, but it does not weigh credibility or assess intent, at least not today or for the foreseeable future. Algorithmic detection of possible misconduct should not and cannot supplant the considered judgment of our commissioners and staff, nor can it serve as the sole basis of an SEC enforcement action.

Unfortunately, every technological advance also carries with it the temptation of abuse. Bad actors have begun to exploit AI and the buzz that surrounds it. So, just as we are using AI technology to detect and address fraudulent and manipulative conduct, we will seek to hold those accountable that misuse AI technologies to further those fraudulent and manipulative schemes. We have also brought actions against bad actors for deception that involves false, misleading, or exaggerated claims about the use of AI in their products and services.

In short, while the mechanisms of fraud may change, our obligation does not. The Commission’s mandate to protect investors is technology neutral. And misconduct remains misconduct, regardless of the medium.

Meanwhile, the same steadiness that guides our enforcement program extends to our approach to disclosure. The SEC’s best historical regulatory approach has hewn to principles-based rules—rooted in materiality.  This time-tested approach should inform how a public company today ought to disclose developments concerning AI, just as it guides disclosures about any other development. The standard is a familiar one: whether there is a substantial likelihood that a reasonable shareholder would consider the information important in making an investment decision.

Prescriptive mandates are not the answer to every emerging technology. And disclosure “checklists” are no substitute for materiality-based transparency that offers meaningful disclosure under established principles. If the advent of each new technology becomes a pretext for new line items, then disclosure swiftly loses its discipline. In the absence of a limiting principle, a morass of information can do more to obscure than to illuminate.

Now, insisting on clarity in disclosure should not suggest an aversion to adoption. We actively encourage market participants to engage with our staff around innovative use cases. We seek to ingrain innovation into the SEC’s culture, broadly and deliberately. And we welcome your input on how technological advances can further the agency’s goals to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation.

Which brings me back to where I began—to this room, and to the spirit of it.

Seventy years ago, a small group of scholars at Dartmouth posed questions that they could not yet answer about a technology that they could not yet build. But what they could do was talk with one another. Rigorously, openly, and across disciplines—without the comfort of settled conclusions. And from that exchange, a new frontier was born.

A generation later, Commissioner Karmel reminded us that to oversee evolving markets, regulators must remain engaged with those who comprise them. We must strive to keep up, and to collapse the distance between the regulators and the regulated.

As innovation often begins in dialogue, so oversight strengthens through it. That is why gatherings like this one matter, for the obligation to get this right belongs to all of us. I am grateful that we are discharging it together. And I look forward to discussing how we can extend the boundaries of this technology in service of our financial system.

Thank you, and I wish you all the best for today’s further exploration and discussion of these themes.

ENDNOTES

[1] “The Research Conference Where AI Began,” available at: https://home.dartmouth.edu/about/artificial-intelligence-ai-coined-dartmouth.

[2] Commissioner Roberta Karmel, Remarks to the Treasurer’s Club (October 31, 1979), available at: https://www.sechistorical.org/collection/papers/1970/1979_1031_KarmelProcess.pdf.

These remarks were delivered on March 4, 2026, by Paul S. Atkins, chair of the U.S. Securities and Exchange Commission, at the Financial Stability Oversight Council Artificial Intelligence Innovation Series Roundtable on Strategy and Governance Principles. 

Categories
Finance & Economics

Litigation Finance Plays an Important Role in Capital Markets

Public companies routinely unlock capital by monetizing nontraditional assets. Future receivables are securitized. Intellectual property is pledged as collateral. Long-dated cash flows are sliced, priced, and traded. Even reputational assets increasingly appear – implicitly, if not formally – on corporate balance sheets.

Legal claims sit awkwardly within this landscape. They can represent large, contingent economic value. Yet they are illiquid, risky, and difficult to finance through conventional methods. Accounting rules generally prevent firms from booking claims as assets, traditional lenders hesitate to lend against them, and equity markets often discount litigation risk rather than treat claims as value-creating opportunities.

Litigation finance exists at this intersection of capital formation and legal uncertainty. Litigation finance also allows companies to convert a contingent legal claim into deployable capital, on a non-recourse basis and without diluting equity or saddling the company with traditional debt covenants.

Yet, despite operating as a form of asset-based finance, litigation funding is rarely analyzed as part of the capital markets. Instead, regulatory and academic debates overwhelmingly frame litigation finance as a problem (or solution) of civil justice – asking whether it expands access to courts, distorts settlement incentives, or compromises attorney independence.

In a new article, we argue that this framing is incomplete. Litigation finance is not only a litigation device, it is also a financing mechanism with real consequences for capital access, competitive strategy, and market structure. Viewed that way, debates over litigation finance regulation take on broader – and more consequential – meaning.

When policymakers regulate litigation finance, they are regulating not just the legal business but the capital markets. And they are regulating capital markets in a way that is more likely to harm small and medium-sized enterprises (SMEs) while protecting large companies from competition.

This reframing builds on our earlier work, which argued that litigation finance reshapes behavior not only after disputes arise, but also before they do – by altering contracting incentives, deterring opportunistic breach, and changing how parties bargain when enforceability is uncertain. That account focused on litigation finance’s temporal effects within the legal system. The current article extends the analysis outward: from how litigation finance affects disputes, to how it affects firms’ access to capital and their competitive strategies in the market.

Litigation Finance as Finance, Not Just Litigation

Treating litigation finance solely as a civil-justice phenomenon obscures its economic function. Litigation funding is a way of financing risk – specifically, legal risk – using an underlying asset that traditional capital markets often struggle to price or accept as collateral.

Once understood this way, litigation finance looks less like an anomaly and more like a familiar financial innovation: a mechanism that allows firms to transform an otherwise illiquid, contingent asset into capital that can be deployed across the business. Importantly, because money is fungible, even funding nominally limited to legal fees can free up internal capital for investment, growth, or operational stability.

This perspective also clarifies what is really being regulated when policymakers regulate litigation finance. Restrictions on funding terms, disclosure obligations, or permissible funder conduct do not merely shape litigation behavior. They also shape which firms can access this form of capital – and on what terms.

Litigation Finance as a Nonmarket Strategy

To analyze these effects systematically, the article draws on the business-school concept of nonmarket strategy – how firms use public institutions outside ordinary market transactions, such as courts and regulatory processes, to create economic value.

Under this approach, litigation finance encapsulates at least three corporate strategies:

First, litigation finance as corporate finance. Firms use legal claims as collateral to raise capital, sometimes explicitly as working capital for operations and growth. This is especially salient where traditional debt or equity is unavailable or unattractive.

Second, litigation finance as litigation strategy. Firms often litigate not merely to win individual cases, but to defend intellectual property, discipline contractual partners, or shape competitive dynamics. Litigation finance can determine which firms are able to deploy litigation as a competitive tool, rather than settling early or abandoning claims for lack of resources.

Third, litigation finance regulation itself as strategy. Firms and funders engage in lobbying, trade-association formation, and “best practices” initiatives to shape the regulatory environment governing litigation funding. These efforts are themselves nonmarket strategies aimed at structuring competition within this emerging segment of the capital markets.

Distributional Effects and the Role of Smaller Firms

Reframing litigation finance as finance also brings its distributional consequences into sharper focus. Small and medium-sized enterprises (SMEs) are particularly likely to rely on litigation finance because they often face limited access to traditional credit markets, have fewer tangible assets, and operate with thinner margins for absorbing litigation risk.

For these firms, litigation finance can function as a critical source of capital – enabling them to pursue meritorious claims, defend valuable rights, and remain competitive against better-capitalized rivals.

As a result, regulation that restricts litigation finance may have competitive effects beyond the courthouse. Limiting this form of capital can disproportionately burden smaller firms while leaving larger firms free to finance litigation through retained earnings, broad-recourse debt, or equity investment.

Rethinking Familiar Objections

This broader frame also reshapes familiar critiques of litigation finance. Many regulatory proposals focus narrowly on non-recourse funding tied to case proceeds, while leaving untouched other methods of financing litigation – such as equity investment or general-recourse debt – that may confer even greater control over a firm’s decisions.

If regulators are concerned about influence, control, or foreign involvement in litigation, then focusing exclusively on litigation funding agreements is necessarily an under-inclusive form of regulation. Other financial arrangements may pose equal or greater risks while escaping scrutiny simply because they are more familiar forms of finance.

Similarly, claims that litigation finance encourages frivolous litigation overlook the comparative rigor of funder diligence. Commercial litigation funders typically invest only after extensive evaluation of legal merits and expected value – often applying scrutiny that exceeds that involved when firms fund litigation internally.

Looking Beyond the Courthouse

Debates over litigation-finance regulation have largely focused on its law-related aspects. Our research argues that this focus is too narrow. Litigation finance is also a mechanism for allocating capital, shaping competitive strategy, and determining which firms can credibly assert their legal rights.

Recognizing litigation finance as part of the capital markets does not resolve every policy question. But it does change how those questions should be asked – and what tradeoffs should be taken seriously – when lawmakers and regulators consider the future of litigation funding.

Suneal Bedi is an associate professor at Indiana University’s Kelley School of Business, and William C. Marra is a director at Certum Group and lecturer in law at the University of Pennsylvania Carey Law School. This post is based on their article, Litigation Finance in the Market Square, available here.

Categories
Securities Regulation

Cleary Gottlieb Discusses the State of the Convertible Bond Market

Convertible notes issuances have been surging in the last few years to a market size of approximately $300 billion.  The increased activity has been bolstered by the high-interest rate environment, favorable equity market dynamics and macro uncertainty.  Secular growth trends in AI-linked sectors, such as datacenters, energy and power systems, also have been a key driver of demand, accounting for approximately 20% of global convert issuance in 2025.  Deals have been getting bigger and bigger, with scores of issuances last year in the billion-dollar range.

Convertible notes combine debt and equity, allowing issuers to take advantage of lower interest rates (compared to straight debt) while minimizing dilution (compared to straight equity).  Investors earn a reduced coupon relative to straight debt, but in exchange receive equity upside.

In the 2024 version of this alert memo, we focused on traditional capital markets convertible notes.  In this 2025 update, we expand our focus to capture convertible instrument issuance in the PIPE (private investment in public equity) and pre-IPO markets, where the features may vary significantly.  The evolution in this market reflects the growing presence of private credit and special situations investors drawn in by favorable opportunities for equity-upside economics with credit-downside protections.  We also outline liability management techniques for convertible notes.

I. Capital Markets Convertible Notes

A. Basic Terms

  1. Convertible notes combine features of debt and equity.
    • Like straight debt, a convertible note has a fixed maturity (typically, five to seven years) and regular (typically, semi-annual) interest payments.
    • Like a call option for equity securities, a convertible note allows its holder to convert into shares with a predetermined number of shares deliverable for each note (the “conversion rate”).
    • Investors accept a lower interest coupon in exchange for the equity upside.
  1. The share price at which the note converts is the “conversion price.”
    • The conversion price is equal to the principal amount of a note divided by the conversion rate.
    • The conversion price is higher than the current stock price (typically, a premium of 25% to 30%).
    • The conversion rate is adjusted upon specified corporate events, such as dividends, spin-offs and stock splits.
  1. Convertible notes are usually contingently convertible, meaning investors can convert only at certain times.
    • Generally, investors can convert only in a specified window near maturity (typically, 3-6 months prior) or if certain events occur, including upon:
      • a fundamental change or other transformative transaction;
      • a significant increase in share price (typically, 130% of the conversion price);
      • the notes trading at a discount to their as-converted value; or
      • the issuer choosing to redeem the notes.
    • Issuers often have a “soft call” right to effectively force conversion if the share price exceeds, g., 130% of the conversion price for a certain period of time after a specified date.

B. Structuring Considerations

  1. Convertible notes can be structured with different settlement methods. This choice usually is driven by accounting implications and expected availability of liquidity.  The standard options are:
    • full physical settlement (the issuer delivers only shares on conversion);
    • cash settlement (the issuer delivers value of shares in cash);
    • full flex settlement (also called “instrument X”), where the issuer may choose physical or cash settlement or a combination; or
    • net share settlement (also called “instrument C”), where the issuer must deliver the principal amount in cash and may use shares, cash, or a combination for any further value.
  1. The issuer should work with its accountants to understand the consequences of settlement choices when structuring the convertible note and when electing a settlement method.
  2. Convertible notes are attractive to multiple types of investors, but generally increase short interest in an issuer.
    • Fundamental investors invest in convertible notes for the coupon and the possibility of converting at maturity.
    • Technical investors invest in convertible notes and seek to make money by hedging the embedded option – which entails shorting the issuer’s shares.
    • Special situations and other opportunistic credit investors invest in convertible notes to obtain equity and growth upside while retaining credit downside protections.
    • Private equity investors and sovereign wealth firms invest in convertible notes as a way of acquiring minority or structured equity ownership, and are critically focused on the equity story and valuation.
    • The size of available stock borrow in the issuer’s stock may be an important factor in sizing the overall notes offering, and bankers may suggest concurrent transactions to increase borrow for certain issuers.
  1. Convertible notes can be issued on an SEC-registered basis or privately using Rule 144A.
    • Convertible note investors tend to be large and sophisticated institutions, so many issuances are done privately using Rule 144A.
    • “Well-known seasoned issuers” (“WKSIs”) – generally, public companies with a market cap exceeding $700 million – may use an automatically effective SEC shelf registration statement to offer convertible notes on an SEC-registered basis. There is no delay for SEC review.
    • If a non-WKSI does not have already effective SEC shelf registration statement covering convertible notes, the issuer instead may use Rule 144A to allow for faster execution and avoid SEC review.
    • Rule 144A also affords an exemption from Regulation M. This can be useful to manage dilution risk and offset short selling by technical investors, because it facilitates issuer arrangements to buy back shares at the time of issuance of the notes.
  1. Capital markets convertible notes (e., registered or 144A converts) tend to have standard anti-dilution adjustments designed to preserve the agreed-upon conversion price in the event of corporate changes, such as stock splits, combinations, dividends, rights offerings and tender offers.
    • By contrast, PIPEs and pre-IPO convertible instruments may have more complicated price-adjustment mechanisms, as discussed below.
  1. NYSE and Nasdaq shareholder approval requirements may impose structural constraints.
    • In general, offerings that are “public offerings for cash” (e., widely marketed, and not merely an SEC-registered offering) are not subject to shareholder approval requirements.
    • If an offering otherwise involves an issuance of 20% or more of an issuer’s common stock or voting power (including through securities convertible into common stock), then shareholder approval is needed unless the offering price is at least equal to the “minimum price.”
      • The minimum price is the lower of the (i) official closing price immediately before pricing and (ii) average closing price for the five trading days immediately preceding pricing.
      • In general, for a capital markets convertible note with standard anti-dilution and make-whole features, this test should be satisfied. In cases with ratchets or other atypical features, such as PIPE convertible notes (discussed below), more careful analysis is warranted.
    • Shareholder approval also may be needed for issuances to related parties and in circumstances that result in a change of control. “Change of control” is not defined, but can include a large minority investment with board representation or significant governance rights (which again is more typically a concern in the PIPE context).
    • Non-U.S. issuers generally can follow their home country requirements on governance matters and are not subject to these shareholder approval rules.
    • A limited exception from shareholder approval rules also is available in cases where delaying the transaction to obtain shareholder approval would jeopardize the issuer’s financial viability.
  1. Capital markets convertible notes generally trade in a decentralized manner in over-the-counter transactions, with broker-dealers quoting bid and ask prices.

C.  Considerations

  1. Fundamental changes generally allow investors to put their notes to the issuer at par or convert for a temporary conversion rate increase (called a “make whole”).
    • A fundamental change generally includes a change of control, disposition of “all or substantially all” assets of the issuer, a transaction in which the existing stock is replaced by consideration that consists of less than 90% exchange-traded securities, or a delisting or insolvency of the issuer.
    • Future M&A, spin-offs and asset transfers may have a variety of consequences under a convertible note, including triggering a fundamental change and requiring the successor to become the obligor under the notes, and must be carefully analyzed.
    • The make-whole conversion rate increase generally applies if an issuer exercises its “soft call” right.

2.  Traditional capital markets convertible notes typically have few covenants, but do require attention to compliance.

    • Failure to fulfill a conversion obligation and failure to give notice of a fundamental change generally allow acceleration.
    • Convertible notes typically limit jurisdictions in which a successor entity can be organized.
    • Failure to file SEC reports or delegend Rule 144A notes at the appropriate time typically incur a step-up in interest rates.
    • Convertible notes may require notice of extraordinary dividends and rights offerings well in advance of distribution.

3.  Issuers can offset their obligations under convertible notes by entering into an accompanying over-the-counter derivative transaction known as a “call spread” with banks.

    • In a call spread, the issuer buys a call option on its shares at the conversion price, offsetting the obligation to deliver shares or cash to investors upon conversion.
    • The call option is subject to a cap price. The dealer does not deliver additional value to the issuer if the share price at conversion is above that cap price.
    • For the issuer, this effectively increases the conversion price of the notes to this higher cap price, mitigating the risk of dilution if the convertible notes are converted.
    • Call spreads can be structured using two derivatives – a bond hedge (set at the conversion price) and warrant (a call option sold at the cap price) or as a capped call (a single call option, subject to a cap). Economically, these are similar, though each has its pros and cons, and the choice between them generally depends on complex tax considerations.

II.  PIPE Convertible Notes

A. PIPE Basic Structure[1]

  1. In a private investment in public equity (PIPE) transaction, a public company makes a private placement of securities to a single or limited group of accredited investors.
  2. After the PIPE, the securities are usually registered with the SEC for resale. A PIPE can minimize execution risk and offer quick financing to issuers while providing discounted pricing and favorable terms to investors.
  3. Historically, distressed, small, or mid-sized issuers have used PIPEs when other options for financing are not feasible. However, because PIPEs are a relatively quick and discreet way to raise capital, larger, well-capitalized issuers now also may choose PIPEs, especially when markets are volatile.  PIPE activity spiked, for example, at the outset of the COVID-19 crisis.
  4. An issuer might prefer a PIPE over a traditional offering for several reasons.
    • Because PIPEs are not registered offerings, they avoid the potential delays of SEC review.
    • Another advantage is that issuers may disclose the transaction publicly only after investors commit to purchase the securities.
      • A capital markets convertible note can be marketed confidentially, too, but investors typically will agree to be “wall-crossed” and restrict trading only for short periods of time.
      • In the PIPE context, an investor, particularly a private credit investor with a longer-term or more strategic horizon, might agree to a longer restriction.
      • A longer confidentiality agreement also facilitates the ability of the issuer, where useful, to share material non-public information with the investor that goes beyond the mere fact of the offering, and, so long as the investor remains subject to a confidentiality obligation, to not have to disclose it in connection with consummating the PIPE (g., a potential M&A deal, the disclosure of which would be premature).
    • This discreetness can minimize pressure on the issuer’s stock price and harm to its reputation if the offering is not completed.

B. Common Features

  1. A PIPE might be offered to a broader set of investors than a traditional SEC-registered or Rule 144A convertible note. Private equity funds, strategic investors, sovereign wealth funds, mutual funds and family offices may be interested, among others, particularly if they have long-term investment horizons or have or wish to develop a relationship with the issuer.
  2. Instead of being widely publicly marketed, the offering process generally is more limited and focuses on a smaller group of investors with more flexibility on terms. The deal may be marketed on an agency basis by a smaller advisor or by the issuer directly, in contrast to one or more bulge-bracket banks.
  3. In the PIPE convertible notes space, investors and issuers often negotiate bespoke features such as:
    • Governance rights, such as board or observer seats, and the right to vote the underlying shares on an as-converted basis.
    • Consent rights over items such as changes of control, M&A or other extraordinary transactions; material asset sales, investments, expenditures, borrowings, or issuances; related party transactions; material changes to organizational documents or lines of business; and other material adverse changes.
    • Guarantees or collateral.
    • Financial covenants.
    • Prepayment provisions.
    • Purchase price adjustments beyond standard anti-dilution provisions in capital markets convertible notes – g., ratchets for lower-priced issuances within a certain period.
      • A full ratchet simply matches the lower price, while a weighted average ratchet reflects the relative size of the lower-priced offering.
      • These adjustments may be subject to caps, and can be narrowly based on shares outstanding or more broadly based on potential shares outstanding, taking into account convertible instruments.
    • Equity sweeteners, such as warrants.
    • Paying interest cash or in kind (PIK interest), or a combination of the two.
    • Alternative return calculations – g., based on a specified internal rate of return (IRR) or multiple on invested capital (MOIC).
    • An extended lock-up or standstill for the investor, as well as restrictions on hedging and transfers.
      • In contrast to capital markets convertible notes, PIPE convertible instruments tend to be highly illiquid given their bespoke nature. Of course, the underlying common stock generally will be listed on a stock market and liquid.
    • Registration rights to facilitate SEC-registered resale.
    • Issuing in the form of preferred stock, rather than debt.
  1. In circumstances where shareholder approval is required but not readily obtainable – g., there is an urgent need for financing – issuers sometimes will issue up to just under 20% of their outstanding common stock and, for amounts exceeding that threshold, issue common-equivalent preferred shares, with an undertaking to seek shareholder approval at the next annual meeting until it is obtained.

III. Pre-IPO Convertible Notes

A. Background

  1. As many companies increasingly have deferred an IPO for years, private company financing has grown in complexity.
  2. Traditional preferred stock issued to venture capital investors has become increasingly bespoke and attracted new types of investors to the private markets, such as crossover, hybrid capital and credit investors.
  3. Simple instruments, such as simple agreements for future equity (SAFEs), and traditional borrowing also have become more tailored, with convertible notes now playing a growing role in the pre-IPO ecosystem.
  4. For a company able to bear a debt load and with a credible near- to medium-term path to an IPO, a convertible note can be an attractive lower-cost borrowing option.

B.  Considerations

  1. Like a SAFE, a convertible debt instrument can be used to defer a discussion around valuation – g., if the issuer wants to avoid a “down round” – by pegging the conversion price to the next round or IPO price.
  2. Unlike a SAFE, which often is used for early-stage issuers with highly uncertain prospects, a convertible debt instrument has a specified maturity date and can bear interest, although it may well be in PIK form.
  3. Like a PIPE, the private nature of the company and the investors can allow for greater negotiation of terms and a structure better suited to the needs of both the issuer and investors than a more standardized instrument.
  4. Many of the features negotiated in the PIPE context are similarly up for discussion in the pre-IPO environment.
  5. Some pre-IPO convertible notes survive in whole or in part beyond the IPO, which can make IPO marketing more complicated. IPO investors will need education around a potentially complex liability remaining on the balance sheet, especially if it contains price adjustment or complex return features.

IV. Convertible Note Liability Management

A. Background

  1. Liability management refers to the techniques used to manage outstanding debt – g., to loosen covenants, refinance outstanding obligations (such as when interest rates move or the company’s credit changes significantly), or fund upcoming maturities.
  2. Issuers typically want to consider liability management well ahead of maturity – often, more than a year in advance.
  • This provides flexibility to address equity volatility and select an optimal market window.
  • When contemplating a convertible note issuance, it is important to consider the timing of any future takeout, which may center around redemption or put dates, and the form of a potential takeout transaction.
  1. Liability management techniques also play a critical role in the distressed context, as issuers increasingly opt for non-bankruptcy restructuring of their balance sheets.

B. Liability Management Techniques

  1. Liability management techniques include:
    • Consent solicitations: A fee is paid to holders to amend a covenant or other provision that poses a problem for the issuer (g., to loosen a ratio in a financial covenant).  Because convertible notes tend to have fewer covenants than non-convertible debt, especially high yield debt, this technique is less commonly used.
    • Redemption: If the notes have a call feature and the conditions for exercising it are met, the issuer may choose to redeem, often effectively forcing a conversion of the notes into equity.
    • Privately negotiated repurchases: The issuer purchases notes for cash from a limited number of sophisticated holders.  This technique can be useful if an issuer has available cash and the notes are favorably priced.  Cash repurchases also often are financed by a new offering of convertible notes.
      • The issuer must be careful not to inadvertently commence a “creeping tender” – effectively, purchases that should have been structured under SEC rules as formal tender offer. This can limit the scope of the repurchases.
    • Privately negotiated exchanges: The issuer avoids cash expense and offers to exchange new notes or shares of common stock for the outstanding notes in privately negotiated transactions with a limited number of sophisticated holders.
      • Like privately negotiated repurchases, privately negotiated exchanges must be carefully structured to avoid an inadvertent tender offer.
    • Induced conversions: The issuer temporarily increases the conversion rate on the notes, creating an incentive to convert into the underlying equity while leveraging the conversion mechanics in the note itself.
    • Tender offers: The issuer launches a formal tender offer to all holders in compliance with SEC rules to repurchase or exchange the outstanding notes.
      • Because convertible notes are equity instruments, requirements for formal tender offers in respect of convertible notes of reporting issuers are relatively burdensome, making these offers less common.
  1. These techniques may be combined in certain instances – g., an “exit consent” where exchanging noteholders consent to adversely amend covenants on outstanding notes concurrently with exchanging them, making the existing notes less attractive and therefore disincentivizing holdouts.
  2. They also can be deployed at different times during the lifecycle of the instrument – g., privately negotiated purchases to opportunistically exploit favorable market conditions, followed by a larger exercise closer to maturity.
  3. Liability management is an especially critical tool for distressed issuers, particularly as they seek to use negotiated arrangements to avoid formally filing for bankruptcy. In recent years, increasingly innovative deals have been structured to achieve this result.

V. Treatment of Convertible Notes in Bankruptcy

  1. In the event of a chapter 11 bankruptcy filing by the issuer, all outstanding convertible notes (e., notes that have not been converted into equity as of the date of the chapter 11 filing) will be treated as debt, rather than equity – unless, as discussed below, the notes are “recharacterized” as equity instruments. Otherwise, in accordance with the absolute priority rule, and notwithstanding the conversion feature of the notes, holders of convertible notes will recover ahead of equity.
  2. The treatment of claims of holders of convertible notes relative to other creditors depends on whether the convertible notes are secured or unsecured.
    • If the convertible notes are secured by a lien on collateral, the claims of noteholders will receive priority over all other claims up to the value of the pledged collateral (subject to any senior or parity liens).
    • If the convertible notes are unsecured, the noteholders’ claims will receive recoveries that are pro rata from the issuer’s unencumbered property with claims of all other unsecured claimholders.
  1. With any debt instrument that has equity-like characteristics, including convertible notes, there exists a risk of “recharacterization” by the bankruptcy court. The recharacterization doctrine (which originates in tax law) is based on the principle that form must not be elevated over substance.
    • With respect to “capital markets” converts, absent certain specific and unusual facts, there is no risk of recharacterization as equity. For privately negotiated and bespoke converts, there are factors that need to be considered in the structuring of the notes, with these issues being specific to each deal and focused on whether the instrument truly was intended to be debt and not a disguised equity interest.
    • If a court “recharacterizes” convertible notes as equity interests rather than debt, the absolute priority rule dictates that noteholders will receive no recovery on account of the notes unless and until all creditors have recovered in full.

VI. Outlook

The convertible bond market rides into 2026 on strong momentum from previous years and a positive outlook for further growth.  Heightened convertible notes issuance is expected to continue through 2026, driven by issuers looking to refinance existing convertible debt, particularly in vintages from the COVID era when converts issuance ticked up dramatically.  Issuers looking to refinance “straight” (i.e., non-convertible) debt should continue to consider converts issuance as way of reducing interest expense in an otherwise stubbornly high-for-longer interest rate environment.  Demand remains strong among sophisticated asset managers seeking – and finding – in the convertible bond a canvas for their flexible, evolving investing mandates.

ENDNOTE

[1] Section II.A. is largely extracted from Cleary Gottlieb Alert Memo, Alternative Capital Raising for Public Companies (ed. 2022), adapted from Adam E. Fleisher & Sophie Grais, Alternative Capital Raising for Public Companies, in FINANCIAL PRODUCT FUNDAMENTALS:  LAW, BUSINESS, COMPLIANCE, ch. 23 (Clifford E. Kirsch, ed., 2d ed. 2012 & Supp. 2021) (©2022 by Practising Law Institute, www.pli.edu. Reprinted with permission.  Not for resale or distribution.  Available at www.pli.edu/financialproductfundamentals.)

This post is based on a Cleary Gottlieb Steen & Hamilton LLP memorandum, “The State of the Convertible Bond Market: Traditional Believers and New Converts,” date January 22, 2026, and available here. Richard Cooper, Luke Barefoot, and Jack Massey contributed to the memorandum. 

Categories
Corporate Governance International Developments

Corporate Law Reform Can Move EU Toward an Integrated Market for Innovation

For decades, European policymakers have aspired to create a single capital market capable of financing innovation on a scale comparable to that of the United States. Yet, as reiterated by the recent Letta and Draghi Reports, that ambition remains unfulfilled. Fragmentation persists – not just in capital markets, but in the legal and institutional frameworks that underpin them. The result is a structural disadvantage for European startups and scale-ups: a patchwork of national rules, regulatory rigidity, and complexity that stifle cross-border growth and discourage risk-taking.

Europe’s Legal Fragmentation

Legal fragmentation may seem secondary when compared with cultural or linguistic barriers. But unlike those, it is amenable to reform. In the field of business law, as I explain in a book chapter, the European Union’s patchwork contrasts sharply with the United States’ integrated model. There, corporate law is formally decentralized yet functionally unified through the internal affairs doctrine: The company’s internal affairs are governed exclusively by the law of the state of incorporation, wherever it operates across the U.S.

Delaware’s dominance as the preferred state of incorporation emerged organically, not by political design. Its appeal rests on three pillars: flexibility, predictability, and credible institutional commitment. Specialised courts, responsive legislation, and enabling corporate law rules make Delaware uniquely suited to accommodate the contractual innovations that underpin, inter alia, venture capital financing (Romano 1993).

By contrast, in Europe, partial harmonization and national enforcement perpetuate complexity and legal uncertainty. Even after Centros and its progeny of cases, which facilitated regulatory arbitrage, no “European Delaware” has emerged. Firms remain largely captive to their domestic legal systems, with few incorporating or migrating elsewhere in the Union.

Why Delaware’s Model Matters for Innovation

The contrast becomes stark when we look at venture capital contracting. In recent joint work with Casimiro A. Nigro and Tobias Tröger (2025a; 2025b), we show that many of the standard clauses used in U.S. venture capital deals – such as liquidation preferences, conversion rights, or punitive buy-out provisions for underperforming founders – cannot be easily replicated under German or Italian law.

The obstacle is rarely an explicit statutory prohibition. Rather, it lies in deeply ingrained judicial doctrines and interpretive practices aimed at protecting shareholders from expropriation. Courts often rely on general clauses, reasoning by analogy, or anti-avoidance principles to limit contractual freedom. The result is a legal environment resistant to private ordering – the very feature that makes Delaware law responsive to venture capitalists and entrepreneurs’ needs.

Simply repealing mandatory provisions would not solve the problem. The rigidity we observe reflects deeper legal cultures that distrust flexibility and view deviations from the statutory model as threats to fairness or potentially harmful to weaker parties within the corporation (Enriques & Nigro 2025).

Two Paths Forward: Harmonization and Competition

European policymakers face a choice between two broad, non-mutually exclusive reform strategies. The first is further harmonisation through, for instance, a “28th regime” such as an Innovative European Company Statute. This idea, advanced in the Letta and Draghi Reports and echoed in a 2025 Commission Communication, would create a uniform corporate law framework tailored to startups and scale-ups. Its success, however, would depend on avoiding the hybrid design that characterized the Societas Europaea and would lead to the prevalence of often rigid national doctrinal interpretations.

A genuinely enabling statute would need to be fully European and explicitly constrain judicial interpretation by embedding meta-rules that privilege contractual freedom. It could, for example, require that any limitation on party autonomy be narrowly construed in light of proportionality. Model charters and shareholder agreements – perhaps drafted by private associations such as Invest Europe – could function as recognized safe harbors providing legal certainty while allowing adaptation to evolving market practice.

The second approach is regulatory competition through an EU-wide, legislatively approved internal affairs doctrine. This would prevent host states from imposing their own corporate law rules on companies incorporated elsewhere in the European Union, empowering entrepreneurs to select their preferred jurisdiction – potentially their “European Delaware.” Such mutual recognition could harness market forces to stimulate legal innovation.

Yet both paths face formidable political economy constraints. Harmonization risks lowest-common-denominator outcomes and partial uniformity; regulatory competition challenges entrenched national interests. Government-backed venture capital funds often require domestic incorporation as a condition for investment, and national legal professions have little incentive to loosen jurisdictional ties. Overcoming these obstacles would demand EU-level political discipline and an unusual degree of institutional courage.

A Pragmatic Way Forward

Europe’s problem is not a shortage of good ideas but a shortage of credible commitment to flexibility. Whether through a European statute or an internal affairs doctrine, reform must embed predictability, private ordering, and mutual trust among member states. The temptation to legislate grandly but rigidly should be resisted. Instead, the EU should design frameworks that evolve with practice – precisely the formula of Delaware’s enduring success (no matter how under threat that formula is following recent legislative activism). Only a calibrated blend of harmonization and competition, combined with the political will to accept that some member states will become more attractive venues for incorporation than others, can move Europe closer to a truly integrated market for innovation.

This post comes to us from Luca Enriques, a professor of business law at Bocconi University. It is based on his draft chapter, “EU Corporate Law Reforms to Create an Integrated Market for Innovation,” available here and forthcoming in The EU’s Strategic Autonomy and the Innovation-Finance Nexus, edited by Lorenzo Moretti and Katarzyna Kornosz-Koronowska (European University Institute). A version of this post appeared in the Oxford Business Law Blog, here.

Categories
Securities Regulation

Why the Public’s Perception of the SEC Matters

Democratic institutions depend on public confidence to function effectively. Citizens comply with tax laws when they trust the IRS, cooperate with police when they view law enforcement as legitimate, and engage constructively with regulators they perceive as fair and effective. But does this principle extend to financial markets? When retail investors lose confidence in the SEC, do they pull back from trading? When they view the regulator favorably, do they engage more actively? Despite the SEC’s stated mission of protecting investors and maintaining fair, orderly, and efficient markets, we know surprisingly little about whether public perception of the agency actually matters for investor behavior.

Our research asks a fundamental question: Does the public’s perception of the SEC influence their engagement with U.S. financial markets? The answer, we find, is yes.

Why This Matters

The SEC’s mission depends on public confidence. As a Freedom of Information Act request revealed, the SEC’s Office of Public Affairs monitors social media sentiment, expressing concern that negative posts could “disrupt the SEC’s regulatory agenda and effect the public’s perception of the Commission.”

This monitoring isn’t paranoia – it’s pragmatism. If retail investors lose confidence in the SEC’s effectiveness, they may disengage from markets or become skeptical of the disclosures the SEC works to ensure are accurate. Yet despite the SEC’s clear concern about its public image, we know surprisingly little about whether – and how – public perception actually affects investor behavior.

Measuring the Unmeasurable

The challenge in studying SEC perception is measurement. Unlike consumer confidence or investor sentiment, no established index tracks what the public thinks about its financial regulator. We addressed this by developing a novel measure using over 645,000 tweets that explicitly mentioned the SEC’s official Twitter (now X) account between 2012 and 2021.

The key insight is that when someone tags @SECGov in a tweet, it is clear who they’re talking about. We used sentiment analysis (specifically, the VADER algorithm designed for social media text) to quantify whether each tweet expressed positive, negative, or neutral sentiment toward the SEC. We then aggregated these individual sentiments into a daily measure of public perception.

We document some interesting variation. While it holds neutral views of the SEC about 58 percent of the time, the public maintains positive perceptions 29 percent of the time and negative perceptions 13 percent of the time. Moreover, perception shifts dramatically around major events: enforcement actions, regulatory changes, leadership transitions, and even broader crises like the COVID-19 pandemic.

The Impact on Investor Behavior

Using this measure, we examined over 8.7 million firm-trading days to test whether perception of the SEC influences retail-investor trading. We find that when public perception of the SEC improves, retail trading increases; when it deteriorates, trading declines.

The magnitude is economically meaningful. Compared with periods of neutral perception, retail trading volume is 3.6 percent higher during positive perception periods and 3.4 percent lower during negative periods. For context, retail investors account for roughly 20-30 percent of U.S. equity market volume – a substantial force in market liquidity and price discovery.

The effects are strongest where we’d expect them to be: among small firms and companies with low institutional ownership – precisely where SEC oversight is most important for investor protection. When multiple social media users agree in their perception (showing low disagreement in sentiment), the effects are even more pronounced.

Information Processing and Market Engagement

Perhaps most intriguingly, SEC perception affects not just how much retail investors trade, but how they trade. We examined retail investor behavior around earnings announcements – one of the most important information events in capital markets. Since the SEC regulates and monitors earnings disclosures, investor perception of SEC effectiveness could influence whether they trust and act on this information.

The results support this intuition. During periods of positive SEC perception, retail investors rely more heavily on earnings information in their trading decisions. They’re more likely to buy stocks with positive earnings surprises and sell those with negative surprises. In other words, when the SEC is perceived favorably, retail investors appear to have greater confidence in the credibility of SEC-regulated disclosures.

Implications for the SEC

These findings carry important implications for the SEC and securities regulation broadly:

First, perception management matters. The SEC already monitors its social media presence, but our results suggest this monitoring is justified. Public perception isn’t just about public relations – it has measurable effects on market engagement and the effectiveness of disclosure regulation.

Second, communication strategy is crucial. Major SEC actions – from enforcement cases to rule changes – don’t just affect their immediate targets. They shape broader public perception, which in turn influences how millions of retail investors engage with markets and process information. This creates a feedback loop the SEC must navigate carefully.

Third, the effects are heterogeneous. Because perception effects are strongest for small firms and those with low institutional ownership, shifts in SEC perception may have distributional consequences, potentially affecting capital allocation to smaller companies that depend more on retail investor participation.

Fourth, external events matter. We observe that perception shifts during events like the COVID-19 pandemic, even when those events aren’t directly attributable to SEC actions. This suggests the SEC’s perceived effectiveness is influenced by broader economic and social conditions – a challenge for maintaining stable investor confidence during turbulent times.

Looking Forward

Our research opens several avenues for future inquiry. What specific SEC actions most effectively build or erode public confidence? How does perception vary across different investor demographics? Can the SEC use its communication methods – speeches, educational initiatives, social media – to shape perception in ways that support its mission?

More fundamentally, our findings suggest that in an era of social media and instantaneous information dissemination, regulatory effectiveness depends not just on the substance of regulation but on public perception of that regulation. For an agency whose mission depends on investor confidence, understanding and responding to public perception may be as important as the enforcement actions and rulemaking that generate it.

The SEC’s concern about social media sentiment, revealed through FOIA requests, turns out to be well-founded. Public perception matters – for trading volume, for information processing, and ultimately for the SEC’s ability to maintain fair and efficient markets. In the attention economy, perception isn’t just reality; it’s a force that shapes market outcomes.

This post comes to us from professors Austin Moss at the University of Colorado at Boulder’s Leeds School of Business and Jackie Wegner at the University of Southern California’s Marshall School of Business. It is based on their recent article, “Perception Matters: The Public’s Perception of the SEC and Engagement in Financial Markets,” available here.

Categories
Corporate Governance Securities Regulation

The Proxy Voting Choice Revolution

A corporate governance revolution is underway. The conventional depiction of the U.S. capital markets has focused on the presence of large institutional shareholders and their substantial influence over the economy. But in the past two years, in response to political and public pressure, the largest institutional asset managers have begun to diffuse their power by expanding “proxy voting choice” programs. In a new article, we explore how these programs could affect institutional shareholder voting and the corresponding governance and performance of public companies.

Specifically, we provide the first empirical analysis of a large asset manager’s voting-choice program, providing a detailed account of Vanguard’s use of a “menu” of policy options designed by third-party proxy advisers. To better understand Vanguard’s program across its first two years, we merge information from Vanguard’s proxy disclosure site with ISS voting analytics and Form N-PX disclosures from 2023-2024. In so doing, we provide a detailed account of the policy options provided to investors, their differences, and their relative uptake.

Although our evidence suggests that the current impact of voting choice is minimal, each of the Big Three asset managers has committed to expanding its programs and encouraging investor participation, which has the potential to be transformative in ways that scholars have not yet fully appreciated. For example, our counterfactual analysis of contentious shareholder proposals reveals that the expansion of voting choice could increase the likelihood of proposal failure. More specifically, we show that had Vanguard’s voting choice program applied to all indexed assets in 2024, two dissident proposals would have flipped from passing to failing, due to the popularity of pro-management voting policies in the pilot program.

This result is surprising: The conventional view is that the advent of pass-through voting will make it easier for shareholders to challenge management, particularly on ESG issues. However, given that most investors chose pro-management voting options in the Vanguard pilot and that most ESG proposals fail by wide margins, it is unlikely that the expansion of voting choice will substantially alter the ESG proposal landscape. Instead, the broader adoption of proxy voting choice may increase support for management and make it more difficult for activist investors to prevail in close contests – the exact opposite of what many have predicted.

Our empirical investigation also generates insights about the impact of proxy voting choice on the marketplace. It reveals that voting choice has promise, but also significant peril, for investors and corporate governance, particularly in light of a host of incentive issues facing its three key players – asset managers, investors, and proxy advisers. We highlight these issues as well as the thorny choice-architecture problems that program designers must confront. We focus particular attention on menu design and its many challenges, ranging from setting the default to populating the menu. Given the importance of third-party proxy advisers to the voting choice system, we also discuss ways to improve proxy adviser alignment with investors. One possibility would be to reform proxy adviser compensation, which typically entails a fixed fee that is paid regardless of performance. To encourage third-party providers to invest in curating high quality menus and voting appropriately, asset managers could pay on the basis of investor uptake or other measures of quality. But stronger financial incentives would also entail higher fees paid by asset managers, which could weaken their incentives to develop quality stewardship programs in-house.

Another avenue for reform could come from the Securities and Exchange Commission (SEC). For example, a straightforward way to facilitate alignment between investors and proxy advisers would be to demand ongoing disclosure of votes cast pursuant to voting choice policies, as well as critical information about proxy advisers themselves. Such information would better arm investors, asset managers, and scholars to serve as monitors of these programs over time.

This is a crucial moment for proxy voting choice. The largest asset managers have committed to expanding their programs to their entire portfolios, representing nearly 20 percent of the U.S. equity market. Their programs remain in “pilot” mode, meaning that they are actively studying and soliciting views on how best to tackle the weighty task of diffusing their power. And their choices will no doubt shape the corporate governance ecosystem for years to come.

This post comes to us from Alon Brav at Duke University’s Fuqua School of Business, Tao Li at the University of Florida’s Warrington College of Business Administration, Dorothy S. Lund at Columbia University Law School, and Zikui Pan at the University of Florida’s Warrington College of Business Administration. It is based on their recent article, “The Proxy Voting Choice Revolution,” available here.

Categories
Finance & Economics International Developments

How to Strengthen the International Competitiveness of Capital Markets

Global capital markets are undergoing profound transformation. Over the past decade, there has been a marked decline in Initial Public Offerings (IPOs) in most advanced economies, including those with highly developed capital markets such as the United Kingdom and the United States. Interestingly, during the same period, countries like Indonesia, Malaysia, Thailand, and particularly China have witnessed a significant increase in the number of listed companies, contributing to making Asia home to approximately 55 percent of all listed companies worldwide (OECD, 2025).

Much of the decline in IPO activity in many advanced economies can be attributed to the expansion of private markets. Venture capital, private equity, and private credit have grown exponentially in recent years. These markets offer the flexibility of patient capital without the regulatory burdens imposed by public markets. As a result, many companies now remain private longer – or indefinitely – reducing the role of IPOs as the typical way to raise capital. Institutional investors have also embraced private markets as a core component of their portfolios, reinforcing this trend.

This transformation has created a new type of competition. Exchanges and regulators now compete across borders to attract listings, while domestic public markets compete with private markets. In this new era of capital markets and corporate financing, policymakers face several challenges. First, they need to make sure that public markets remain attractive. Second, they need to ensure that corporate and financial laws can effectively respond to a growing private market in which investors are expected to increasingly participate.

Policy discussions on improving the regulation of capital markets often frame the interests of issuers and investors as conflicting. Nonetheless, reforms do not always lead to such trade-offs. Many regulatory interventions can advance the interests of both. For example, measures that enhance investor confidence can lower the cost of capital and broaden the investor base, indirectly benefiting issuers. Conversely, issuer-oriented reforms that simplify listing requirements, encourage entrepreneurship, or support innovation can often create new investment opportunities and improve long-term returns for investors.

In my new article, I explore how those reforms can be implemented. Using Singapore as a case study, my article examines how countries can enhance the international competitiveness of their public equity markets while navigating the risks and opportunities arising from the growth of private markets.

Singapore faces certain structural constraints, largely due to the small size of its economy, which partly explains what I refer to as the “Singapore Capital Market Puzzle” (SCMP), the persistent challenge of developing Singapore’s equity capital markets. Indeed, despite its stature as a premier financial hub with trillions of dollars’ worth of assets under management, Singapore’s public equity market remains subdued. The number of listed companies has declined steadily over the past decade, IPO activity lags regional peers, and liquidity is far below larger markets. This paradox is not unique to Singapore, though. For instance, other small but globally connected economies with vibrant financial ecosystems, such as Luxembourg, also have a modest domestic equity market. Therefore, the size of the real economy is a factor that partially explains the SCMP and certainly limits Singapore’s ability to develop a vibrant equity capital market.

Despite those constraints, there remains significant potential for the development of Singapore’s equity capital markets. To that end, the Monetary Authority of Singapore and the Singapore Exchange are adopting different strategies to attract listings and make Singapore’s capital markets more appealing to investors. In my article, I argue that while those efforts are a step in the right direction, additional reforms are necessary to enhance the attractiveness of Singapore’s equity markets.

Two key issues are the low liquidity and the relatively low valuations in Singapore’s equity markets. To address these challenges, the law and finance literature has consistently emphasized the importance of investor protection, and particularly the protection of minority shareholders. For instance, some studies have shown that certain reforms can enhance market liquidity and drive higher valuations by adopting class actions (Restrepo, 2023), providing more disclosure and facilitating private enforcement through liability rules (La Porta et al, 2006), and strengthening the protection of minority shareholders (La Porta et al, 2002; Gompers et al, 2003).

By international standards, Singapore’s corporate governance practices are among the world’s best, consistently ranking at the top of the minority shareholder protection indicator in the now-defunct Doing Business Index. However, as in many other jurisdictions around the world, these practices were largely imported from systems dominated by companies with dispersed ownership structures, such as those in the United States and the United Kingdom. In Singapore – as in much of Asia, Latin America, Continental Europe and beyond – controlling shareholders, typically families or the state, dominate listed firms. In such settings, the central conflict is not between managers and shareholders but between controlling shareholders and minority investors. Therefore, reforms aiming to foster investor confidence and enhance market valuation, liquidity and the attractiveness of capital market must prioritize the protection of minority shareholders. My paper suggests several reforms in that direction, including: (i) the empowerment of minority shareholders for the appointment and removal of both independent directors (Bebchuk and Hamdani, 2017) and auditors (Gelter and Gurrea-Martínez, 2020); (ii) the revitalization of the statutory derivative action, rarely used in Singapore; and (iii) the implementation and facilitation of class actions.

The takeover regime, largely inspired by the UK Takeover Code, also warrants reconsideration. For instance, under the non-frustration rule, a cornerstone of the regulatory framework for takeovers in Singapore, the board of directors must not take any action that could frustrate a bona fide takeover bid without shareholder approval. This rule aims to protect minority shareholders and ensure that managers do not entrench themselves at the expense of shareholders. However, in companies dominated by controlling shareholders, which are common in Singapore, the practical effect of the rule is significantly diluted. Since controlling shareholders hold the majority of voting rights, they can easily approve actions that frustrate a takeover.

To address this structural disparity, the non-frustration rule should be revisited. Instead of requiring shareholder approval, my paper suggests that any board action intended to frustrate a takeover should be approved by a majority of the minority (MOM). Moreover, if such MOM approval is required, Singapore could even consider adopting some anti-takeover mechanisms that are not currently allowed, such as poison pills and staggered boards, if these measures were also authorized by minority shareholders. This approach balances managerial autonomy and minority shareholder rights, recognizing that in certain circumstances, minority shareholders may prefer defensive measures to protect the company from certain bidders.

Another key aspect of the regulatory framework for takeovers in Singapore is the mandatory takeover bid rule, which obliges any bidder acquiring a threshold of at least 30 percent of the target company’s voting rights to extend an offer to purchase all remaining shares at an equitable price. This mechanism is intended to ensure that minority shareholders are afforded a fair exit opportunity and that the control premium is distributed equitably among all investors. While conceptually appealing, the mandatory bid rule substantially elevates the cost of acquiring control (Enriques, 2004), thereby deterring hostile takeovers and potentially dampening the market for corporate control.

A voluntary takeover system, as practiced in the United States, where acquirers are not obligated to make offers to all shareholders, can often be more appropriate. In Singapore, where corporate ownership is predominantly concentrated in the hands of controlling shareholders, a voluntary regime may not significantly affect management incentives, as the threat of replacing management without the controller’s consent is generally not credible. However, a voluntary regime may reduce the costs of acquiring a company, thereby facilitating changes of control that can benefit shareholders and contribute to capital market development by allowing new controllers to implement a superior business plan.

Accordingly, the mandatory takeover-bid rule also needs to be reconsidered. A more flexible framework may be to maintain the rule as a default mechanism but allow for exceptions if minority shareholders – through a MOM approval – consent to opt out. This approach would preserve minority protections in markets where minority shareholders often consist of retail or relatively passive institutional investors (as happens in Singapore) while enabling more efficient changes of control if those whom the rule is supposed to protect opt out. In jurisdictions with more active and sophisticated investors, however, an opt-in structure for mandatory takeover bids could be justified.

Singapore’s framework for dual-class shares (DCS) also needs to be revisited, especially if the proposed rules for the protection of minority shareholder are adopted. Currently, DCS are prohibited on the Catalist (listing venue primarily targeting growth firms) and subject to several restrictions on the Mainboard. Critics argue that DCS entrench control and weaken accountability (Bebchuk and Kastiel, 2017). Nonetheless, DCS can enable founders to pursue their “idiosyncratic vision” (Goshen and Hamdani, 2016) and encourage innovative firms to go public. Therefore, a more sensible approach for Singapore may involve allowing DCS structures on the Catalist board (Lin, 2018; Gurrea-Martínez, 2021), the natural home of growing companies with potentially disruptive founders and business models. Similarly, some of the current restrictions on the Mainboard should be relaxed. With the proposed rules strengthening the protection of minority shareholders against tunneling and other opportunistic behaviors by corporate insiders, granting founders greater discretion could make public listings more attractive without undermining investor confidence.

Tax policy also influences corporate financing decisions. In most systems, and Singapore is no exception, debt enjoys preferential treatment through interest deductibility, while equity receives no equivalent benefit. This bias encourages leverage and discourages equity financing. In Belgium, the adoption of an allowance of corporate equity regime, which provides a notional deduction on the incremental equity of firms, has been associated with an increase in equity capitalization and a reduction in debt ratios (Panier et al, 2015). In turn, this tax reform can help promote more developed equity capital markets (OECD, 2024) while potentially achieving other socially desirable goals such as a more stable financial system (Gurrea-Martínez and Remolina, 2019).

Other measures to revitalize Singapore’s equity markets include increasing retail investor participation through: (i) pension reforms encouraging greater domestic equity allocations; and (ii) expanding the definition of accredited investors to include those with knowledge but not the requisite high-level of assets or income.

Finally, advances in technology, particularly blockchain, offer opportunities to embed governance and disclosure into market infrastructure, enabling real-time transparency and compliance (Brummer, 2015; Fox et al, 2021). Additionally, the personal insolvency regime in Singapore, along with certain rules penalizing bona fide insolvent debtors, should be revisited to destigmatize failure and ultimately foster entrepreneurial activity and the development of the venture capital industry (Armour and Cumming, 2008). That, in turn, may lead to more local companies being eligible to go public, given the mutually reinforcing relationship between a vibrant venture capital system and well-developed capital markets (Gilson and Black, 1998).

The article concludes by examining how countries should adapt their regulatory frameworks to a new era of corporate financing characterized by the rise of private markets. It also provides a critical analysis of the “capital market obsession” that seems to be driving many debates over the decline of IPOs and the need to embark on different strategies to revitalize equity capital markets. While such efforts certainly benefit some stakeholders – such as lawyers, bankers, and stock exchanges – similar economic and employment opportunities can be generated through other segments of the financial sector. In fact, Luxembourg and Singapore illustrate this point well: Both countries rank among the world’s wealthiest nations, in part due to the vibrancy of their financial industries. Yet, both jurisdictions have small domestic equity markets.

In the global debate on the decline of IPOs and the rise of private markets, it is important to keep in mind that the strength of a financial system should be assessed by its ability to channel capital into productive investment, support innovation, and foster growth rather than by how these outces are achieved – through markets, bank lending, or some other method (Levine, 2002). A diverse financial system comprising a competitive banking sector, developed public markets, and private markets will be best positioned to serve the real economy. Yet, countries should not be obsessed with the number of IPOs or the size of their equity capital markets. Instead, the priority for regulators and policymakers should be to ensure that the financial sector continues to support the real economy while effectively protecting investors and maintaining the stability of the financial system in a new era of capital markets and corporate financing marked by increasingly blurred boundaries between public and private markets.

This post comes to us from Aurelio Gurrea-Martínez, an associate professor at Singapore Management University. It is based on his recent article, “Strengthening the International Competitiveness of Capital Markets: Global Insights and Local Strategies,” available here.

Categories
Securities Regulation

Wachtell Lipton Discusses Proposed End of Quarterly Reporting and Action on Shareholder Litigation

The U.S. Securities and Exchange Commission last week took steps toward modernizing the periodic reporting system for public companies, and also permitted issuers to include mandatory arbitration provisions in their charters and/or bylaws in connection with IPOs and other securities offerings.

In response to a social media post by President Trump calling for public companies to not be required to report on a quarterly basis, but to report on a six-month basis, an SEC spokesperson said that:  “At President Trump’s request, Chairman Atkins and the SEC is prioritizing this proposal to further eliminate unnecessary regulatory burdens on companies.”  As we reported in December 2018, President Trump had also advocated, and the SEC formally sought public comment on, this matter during his first term, although no reforms were then adopted.

We have long advocated for the rules governing public companies to promote a long-term approach to value creation.  Among many others, the Commission on the Regulation of U.S. Capital Markets in the 21st Century and the Aspen Institute have explicated the logic of that line of thinking, as did Legal & General in their 2015 call for an End to Quarterly Reporting.  As we wrote in 2018, in particular as to quarterly reporting:

For most companies, quarterly reporting consumes substantial time and expense and imposes opportunity costs, as management teams focus on quarterly results.  These quarterly cadences are often deeply disconnected from long-term business cycles, key business drivers, customer dynamics, innovation opportunities and market realities.

While it is unclear if Congressional action would be required to amend Section 13 of the ’34 Act, or if the SEC could amend Rule 13a-13 to permit this increased flexibility in periodic reporting, the SEC’s prioritization of President Trump’s proposal could lead to meaningful reform in this area.

In an unrelated development last week, the SEC published a policy statement announcing that provisions in a company’s charter or bylaws requiring arbitration of investor claims arising under the federal securities laws will not preclude the SEC from declaring the effectiveness of its registration statement.  This policy statement reversed the SEC’s longstanding previous, unwritten position that acceleration requests would not be granted under such circumstances.  The Commission’s previous policy was based on Section 8(a) of the Securities Act, which permits the SEC to refuse to accelerate a registration statement in light of, among other things, the public interest and the protection of investors.  The SEC had viewed mandatory arbitration provisions as contrary to public policy and inconsistent with the so-called anti-waiver provisions of the federal securities laws.  However, in its policy release, the SEC stated that it will now focus on the completeness and adequacy of a registration statement’s disclosures with respect to mandatory arbitration provisions.

In a press release announcing the new policy statement, SEC Chairman Paul S. Atkins commented:  “While many people will express views on whether a company should adopt a mandatory arbitration provision, the Commission’s role in this debate is to provide clarity that such provisions are not inconsistent with the federal securities laws.”  In response, another SEC commissioner criticized the policy change, noting “Mandatory arbitration forces harmed shareholders to sue companies in a private, confidential forum, instead of a court and without the benefit of proceeding in the form of a class action.”  Mandatory arbitration will also need to be evaluated under relevant state corporation law.

These developments regarding quarterly reporting and arbitration provisions are relevant with respect to effective long-term corporate governance, value creation, and capital formation.  It remains to be seen whether these policy measures would reduce the long-term decline in the number of publicly traded companies in U.S. markets, or are optimally targeted to counteract the general (and correct) impression that the regulatory burden of being publicly listed in the U.S. is unattractive and disproportionate.  But they are a welcome start towards an open dialogue around how best to make U.S. capital markets more efficient and attractive.

This post comes to us from Wachtell, Lipton, Rosen & Katz. It is based on the firm’s memorandum, “Proposed End of Quarterly Reporting and Action on Shareholder Litigation,” dated September 19, 2025. 

Categories
Finance & Economics International Developments

How “Chameleon Capital” Has Outpaced the Law

In the modern private capital markets, the traditional distinctions between equity and debt have become increasingly blurred and inadequate to capture the complexity of modern investment instruments. Sophisticated market participants – particularly private credit funds – have begun to craft bespoke financial structures that transcend these legal classifications.[1] In my new working paper, I coin the phenomenon chameleon capital to describe this dynamic category of capital.[2] It comes in three forms:

  1. Blended capital– traditional and modern hybrid instruments (e.g., debt-like PREF instrument);
  2. Braided capital– investments in which equity and debt rights are interwoven (braided) (e.g., debt investment and golden shares, debt investment with warrants, parallel debt and equity investment, debt investment with board representation and restriction rights to force the company to sell its subsidiary); and
  3. Blended + Braided capital – a dynamic combination of blending and braiding (e.g., debt-like PREF and HoldCo PIK financing and ordinary shares).

Each form is used by sophisticated investors with long-term interests and calculated objectives in mind.

Chameleon capital shows the reduced capacity of legal forms to deal with the complex realities of private ordering. I make a distinctive contribution to the broader discourse on the contractual nature of corporate law by anchoring this debate within the specific context of financial instruments. By enabling investors to blend and braid ‘equity’ and ‘debt’, chameleon capital shows that the conventional legal distinction between these two categories holds diminishing practical significance – except in the context of insolvency or bankruptcy proceedings and taxes. For a single investor or associated investors such as private credit and private equity firms, this division is often irrelevant in economic and governance terms. Chameleon capital also challenges foundational principles of corporate law and governance. When debt instruments are structured to produce equity-like returns, debtholders often adopt the incentives and behaviors of equity investors, focusing on wealth maximization and corporate control.

In the U.S. and the UK, the line between equity and debt in the private capital world is legally significant when looking at the question of investor accountability, such as analyzing the controlling stockholder’s or debtholder’s duty or the lack of it.[3] It is also significant to related  issues, such as shadow directorship, equitable subordination, the majority abuse principle, shareholders’ agreements, golden shares, derivative proceedings, and unfair prejudice claim.

This distinction between equity and debt is also legally relevant to the incentives, behavior, and accountability of directors in the context of directors’ duties[4] and to investor protection. It also plays a crucial role in corporate law and governance, as legal frameworks worldwide typically offer different and often isolated protections and accountability mechanisms for shareholders and debtholders. A key legal distinction lies in how equity and debt are treated in insolvency/bankruptcy, which varies significantly across jurisdictions.

What role does corporate law play in distinguishing between debt and equity? The dilemma I highlight in my paper is that especially debt investors – and, to some extent, non-traditional equity investors – have a choice between two options: (i) What are the rules for equity, what are the rules for debt? and (ii) What types of rules do we want?

In my paper, I argue that legal responses to harm should not depend on how an instrument is classified. Law must address the challenges posed by chameleon capital – particularly when actors rely on chameleon capital for opportunistic reasons – regardless of the form of the instrument (i.e., equity or debt). The benchmark for response should be control or interference, akin to the UK concept on shadow directorship[5] or the U.S. doctrine of equitable subordination.[6] There should be instrument-neutral response to opportunistic behavior and accountability for it. Corporate law and corporate governance should provide an adequate response to chameleon capital, independent of the type of the instrument. Additionally, insolvency/bankruptcy law should adapt to evolving corporate finance practices that contract around the distinction between equity and debt. Importantly, corporate law plays an important role in minimizing costs of insolvency/bankruptcy.

Chameleon capital has several implications for U.S. and UK law.

Wealth maximization and interest in corporate control both for sharehodlers and debtholders. Debt investors, like shareholders, may be interested in wealth maximization and corporate control when their debt instruments provide them with equity-like returns that depend on long-term wealth maximization.

Directors’ duties and hybrid capital. Hybrid investors and chameleon capital challenge the idea that a board’s fiduciary duty is to maximize shareholder value. It also raises the bigger question  of whether private and public companies should have different directors’ duties, especially since chameleon capital is more prevalent in private companies.

Controlling stockholder’s duty, controlling debtholders’ duty, and shadow directorship. Unlike in the U.S., there is no formal controlling stockholder’s duty or debtholder’s duty under UK law, and shadow directorship may functionally address this gap.

New definition of the DGCL Section 144 (e) (2) (b) and contractual control. While there is no formal controlling-debtholder duty in the U.S., following the new definition of the DGCL Section 144 (e) (2) (b), there is a question whether a holder of chameleon capital who might have bargained for contractual control via debt qualifies as a controlling stockholder.

Golden shareholder as a controlling stockholder or a shadow director. Golden shareholders may not have a controlling financial stake in the company but wield contractual authority to control it. In the U.S., should such shareholders owe controlling stockholder’s duty under the new DGCL section 144 (e) (2) (b)? In the UK, could they be considered shadow directors, and how do they affect majority or minority shareholder rules?

Functional equivalence and legal boundaries. The link between functionally equivalent rules, such as controlling stockholder or debtholder, shadow directorship, equitable subordination, and the abuse principle, suggests a need to reconsiderthe mandatory scope of corporate law.

Shareholders’ agreements and contracting out of a statute. Should shareholders’ agreements now evolve into debtholders’ agreements amid the rise of chameleon capital? The UK House of Lords’ decision in Russel v Northern Development[7] says that a company cannot contract out of statutory power, but shareholders via shareholders’ agreement can. Russel v Northern Development in the UK seems to be in contradiction with the Delaware Court of Chancery’s decision in Moelis, which was essentially overturned by the DGCL amendments.

Corporate finance influences corporate control. Equity and debt are not only sources of finance, but they should also be viewed as forms of control.[8] Corporate finance and corporate governance are deeply interconnected.

As private markets continue to expand, chameleon capital stands at the frontier of financial innovation, an embodiment of how corporate finance influences corporate control. Chameleon capital represents both momentous global opportunities but also raises a series of new critical challenges for global markets.

ENDNOTES

[1] Narine Lalafaryan, ‘Private Credit: A Renaissance in Corporate Finance’ (2024) 24 Journal of Corporate Law Studies 1, 41-95, https://www.tandfonline.com/doi/full/10.1080/14735970.2024.2351230

[2] Narine Lalafaryan, ‘Chameleon Capital’ (2025) University of Cambridge Faculty of Law Research Paper No 12/2025, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5331909

[3] In light of West Palm Beach Firefighters’ Pension Fund v Moelis & Co., No 2023-0309-JTL (Del. Ch. Feb. 23, 2024) (Moelis II); Tornetta v Musk 310 A.3d 430 (Del. Ch. 2024), In Re Match Group, Inc. Derivative Litigation No. 368, 2022 (Del. Apr.4, 2024); Senate Bill 313 amending the Delaware General Corporation Law (effective from 1 August 2024), in particular the new section 122 (18) and the amended section 122(5), overturning Moelis II, Senate Bill 21 introduced on 17 February 2025, ‘An Act To Amend Title 8 of The Delaware Code Relating To The General Corporation Law’, <https://legis.delaware.gov/BillDetail/141857>.

[4] In light of BTI 2014 LLC v Sequana SA and others [2022] UKSC 25; Wright v Chappell [2024] EWHC 1417 (Ch) (‘BHS’).

[5] The UK Companies Act 2006, section 251.

[6] E.g., In re Dura Medic Holdings, Inc. Consolidated Litigation Cons. C.A. No. 2019-0474-JTL.

[7] Russell v Northern Bank Development Corp Ltd [1992] BCLC 1016.

[8] Oliver Williamson, ‘Corporate Finance and Corporate Governance’ (1988) 43 The Journal of Finance 3, 567-591.

This post comes to us from Narine Lalafaryan, an assistant professor of corporate law at the University of Cambridge and a fellow of the Cambridge Endowment for Research in Finance. It is based on her recent paper, “Chameleon Capital,” available here.

Categories
Securities Regulation

SEC Chair Speaks on Small Business Capital Formation

Good morning. Let me begin by thanking all of you for being here and for your dedicated efforts[*]. As I mentioned at our previous meeting, this Committee serves a critical function. Its members come from every corner of the country and represent a remarkably broad cross-section of investors, innovators, and advisers. I am grateful for your ongoing work to elevate the voices of America’s entrepreneurs. And I am excited to discuss important policy matters related to the Commission’s role in facilitating capital formation.

***

Today, this Committee will continue its discussion of potential enhancements to Regulation A and then engage in a deep dive on finders, who fill an essential void in the entrepreneurial ecosystem by identifying, and in certain circumstances soliciting, potential investors.

We know small businesses seeking to raise less than $5 million in capital can struggle to attract funding from VC firms and institutions.[1] Larger investors are often inclined to step in at later stages of growth, leaving fledgling businesses and their founders with limited avenues to capital. So, after exhausting their own network of family members and friends, businesses in the earliest stage of growth sometimes engage a finder to identify angel investors who target smaller, higher-risk investment opportunities. These finders may provide valuable introductions and facilitate access to much-needed capital. But the regulatory approach to this limited activity, when done outside of a registered broker-dealer, is quite opaque.

Commission staff have issued no-action letters over the years addressing very narrow circumstances under which persons have sought to act as finders without registering as a broker-dealer.[2] Gray areas remain. And a lack of regulatory certainty can deter conscientious participants from helping small businesses to secure financing at a formative stage.

So understandably, many have called on the Commission to provide greater clarity over the years. In 2017, the Treasury Department recommended that the SEC work with the Financial Industry Regulatory Authority (FINRA) and the states to formulate a new regulatory structure.[3] The SEC proposed an exemptive order with a request for comment in October 2020[4] but has since taken no further action. And the legal gray area that lingers can deprive small businesses of essential resources at a time when thirty-three percent of them launch with less than $5,000 in funding—and nearly forty percent fail due to lack of capital.[5]

What’s more, when regulatory uncertainty stands in the way of investment, it’s not just capital that dries up, but jobs and ingenuity. Small businesses employ nearly half of America’s workforce and represent an equal share of our GDP.[6] They create almost two out of every three new jobs.[7] And they exemplify a spirit of dynamism that has made America a place where a single idea sparked in a garage or a storefront can scale into something extraordinary. That’s why discussions like this one matter—and it’s why I am grateful for the chance to listen, to learn, and to work together toward a smarter, more sensible approach that can further catalyze capital formation for entrepreneurs.

***

Now, as we consider how to connect more small businesses with early-stage investors, I have been asked if, given the goal of revitalizing initial public offerings (IPOs), a clearer framework for finders would be counterproductive. Ultimately, companies that would benefit from a finder are seeking early-round seed funding, not the heavy capital infusion that an IPO can provide. Nevertheless, it is important that any recommendations that this Committee makes regarding finders do not risk further cannibalizing the public markets. And I encourage this Committee to keep that objective in mind as it explores regulatory solutions.

At the same time, we must be attuned to the distinct headwinds small businesses face and work to unlock, rather than undermine, capital raising in a manner consistent with the SEC’s mission. Our task, as well as our responsibility, is to ensure that the agency’s regulatory framework keeps pace with their ambition. And as we begin today’s meeting, I’m confident that the insights and recommendations put forth by this Committee can help us do so.

So, I’d like to thank you once again for being here today. I very much welcome your perspectives, including those of our two presenters. And I look forward to a productive discussion ahead. Thank you.

ENDNOTES

[*] The views expressed in these remarks are my own and not necessarily those of the Commission or my fellow Commissioners.

[2] See SEC.gov | Division of Trading and Markets No-Action, Exemptive, and Interpretive Letters; see also Paul Anka, SEC No-Action Letter, 1991 WL 176891 (July 24, 1991). The statements in the staff no-action letters represent the view of the staff of the Division of Trading and Markets. They are not a rule, regulation or statement of the Commission. The Commission has neither approved nor disapproved their content. These no-action letters, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

[5] See Stephanie Ferguson Melhorn, Makinizi Hoover, and Isabella Lucy, Small Business Data Center, May 20, 2024, available athttps://www.uschamber.com/small-business/small-business-data-center.

[6] Id.

[7] See The State of Small Business Now, U.S. Chamber of Commerce, April 10, 2023, available at https://www.uschamber.com/small-business/state-of-small-business-now.

These remarks were delivered on July 22, 2025, by Paul S. Atkins, chair of the U.S. Securities and Exchange Commission, at a meeting of the Small Business Capital Formation Advisory Committee in Washington, D.C.

Categories
Securities Regulation

Mayer Brown Discusses SEC Concept Release on Definition of Foreign Private Issuer

On June 4, 2025, the U.S. Securities and Exchange Commission (the “Commission” or “SEC”) issued a concept release soliciting public comment on the definition of foreign private issuer (“FPI”), particularly on whether the current definition should be amended in an effort to protect U.S. investors while continuing to facilitate capital formation.  The SEC is focused on the significant changes in the global capital markets and characteristics of foreign private issuers since the last SEC review of the FPI regulatory framework in 2008.

BACKGROUND

Traditionally, U.S. policymakers encouraged foreign companies to access the U.S. capital markets by providing certain accommodations for disclosure, reporting and corporate governance.  However, in recent years, particularly under the prior administration, there has been a gradual reduction of regulatory accommodations provided to FPIs.  At the 2024 U.S.-China Symposium hosted by Harvard Law School, SEC Commissioner Uyeda commented on this policy change, highlighting the SEC shift toward treating U.S.-domiciled reporting companies (“domestic issuers”) and FPIs similarly with regard to more recently adopted disclosure requirements.  In his remarks, Commissioner Uyeda proposed two actions to address “the confusion and inconsistency that plagues the SEC’s recent decisions on [FPI] disclosure.”  First, he suggested that the SEC release a white paper or concept release to gather public input on ideas for future rulemaking.  Second, he recommended that the eligibility criteria for FPIs should be reevaluated, possibly restricting it to companies listed on both U.S. and foreign stock exchanges.  He suggested guiding principle ought to be establishing a coherent disclosure philosophy that both remains relevant with the passage of time and transcends political pendulum swings.  The goal of such concept release, according to Commissioner Uyeda, is to ensure that the SEC’s treatment of foreign companies reflect today’s global capital market and does not place domestic issuers at a competitive disadvantage or deprive investors from receiving appropriate disclosure.  It appears many of these thoughts underlie the recent concept release, as discussed below.

In the concept release, the SEC notes that current FPI accommodations and exemptions were established based on its understanding that (i) most FPIs would be subject to meaningful disclosure and other regulatory requirements in their home country jurisdictions and (ii) FPIs’ securities would be traded in foreign markets as well as on U.S.-based exchanges.  However, based on detailed data in the concept release, the characteristics of FPIs have changed dramatically over the last two decades.  In light of these changes, the SEC is seeking public comment on whether current accommodations for FPIs should continue or whether the definition should be amended to better reflect today’s FPI population.

The concept release includes 69 requests for comment, divided into various categories, including several possible approaches to amending the FPI definition.  This Legal Update highlights the broad categories of the comment requests and some of the more interesting questions raised.  The comment period is expected to run until at least mid-September.

CURRENT FPI DEFINITION AND FPI ACCOMMODATIONS

The concept release includes a detailed discussion of the history of the FPI definition and the regulatory framework, with a particular focus on the framework’s purpose—to preserve appropriate investor protections while addressing FPIs’ need for accommodations to reduce burdens on issuers that might arise from duplicative or conflicting domestic and foreign disclosure requirements.  As the release notes, the SEC established the foundation of the current FPI definition in 1983 when it adopted the bifurcated test to determine a foreign issuer’s status depending upon its percentage of U.S. ownership and the location of its business operations.

An FPI, as defined in Rule 405 of the Securities Act of 1933, is an issuer that is domiciled in any foreign country that is not a foreign government, unless more than 50% of its outstanding voting securities are held directly or indirectly of record by U.S. residents and any of the following applies:  (i) a majority of its executive officers or directors are U.S. citizens or residents, (ii) more than 50% of its assets are located in the United States or (iii) its business is administered principally in the United States.

FPIs benefit from a number of specific accommodations.  For example, FPIs are not subject to Section 16 beneficial ownership reporting, the SEC’s proxy rules, Regulation FD, and say-on-pay requirements, and benefit from longer reporting deadlines, no requirement to file quarterly reports or Forms 8-K, and an ability to report their financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), among others.

CHARACTERISTICS OF FPIs

The concept release provides the results of a broad review by the SEC Staff of reporting FPIs between 2003 and 2023, and an analysis of FPI global equity trading volume between 2014 and 2023.  Based on the release, the majority of FPIs that file Annual Reports on Form 20-F, or “20-F FPIs,” have equity securities that are almost exclusively traded in the U.S. capital markets.  The Staff also observed that these  20-F FPIs have relatively small market capitalizations.  The concept release concludes that the 20-F FPIs driving the trends identified by the Staff represent a smaller percentage of the overall population of 20-F FPIs in terms of aggregate global market capitalization than in terms of absolute number.  This should not be surprising considering general capital markets trends over this same period, the overall decline in the number of public companies listed on U.S. securities exchanges, and the many years within that time of poor performance of the initial public offering market and the equity capital markets generally, which negatively affected the population of FPIs.

Overall, the number of FPIs declined from 2003 to reach a low point of 656 issuers in fiscal year 2016, and has since increased steadily to 967 issuers in fiscal year 2023, the latest year included in the Staff’s analysis.  The analysis did not specifically include SPACs and former SPACs; however, the jurisdictions of incorporation of the FPIs included indicates an increase in Cayman-domiciled issuers, suggesting that the increase in SPAC related activity may, at least in part, account for the increase in number of FPIs in recent years.  It would similarly account for some of the increase in the number of small cap FPIs and FPIs with most or all of their trading on a U.S. securities exchange.

The Staff excluded MJDS issuers and FPIs that elect to file on domestic forms from its analysis.  In summary:

  • 967 FPIs filed annual reports on Form 20-F for fiscal year 2023.
  • 146 FPIs filed annual reports on Form 40-F under MJDS for fiscal year 2023.
  • By jurisdiction of incorporation, the composition of FPIs has changed significantly. In fiscal 2003, the most common jurisdictions for both incorporations and headquarters for 20-F FPIs were Canada (non-MJDS issuers) and the United Kingdom.  However, in 2023, the most common jurisdiction of incorporation for 20-F FPIs was the Cayman Islands and the most common location for headquarters was mainland China.  The second most common jurisdiction of incorporation and headquarters for 20-F FPIs in 2023 was Israel.
  • In recent years, there has been a substantial increase in the number of 20-F FPIs’ with jurisdictions of incorporation that differ from the jurisdictions of their headquarters. Much of this divergence, according to the data, is attributable to the increase in China-based issuers who are incorporated in the Cayman Islands or the British Virgin Islands, but headquartered in mainland China, Hong Kong or Macau.
  • An increasing percentage of 20-F FPI’s equity securities trade almost entirely in U.S. capital markets, rather than foreign markets. In fiscal year 2023, a large majority of 20-F FPIs had more than 50% of their equity securities trading in U.S. capital markets.  Even in fiscal 2014, a large fraction (approximately 44%) of 20-F FPIs traded almost exclusively in U.S. capital markets, and this number has continued to increase over time.  As noted above, these tend to be smaller capitalization companies.  Specifically, according to the concept release, the “aggregate global market capitalization of FPIs that trade exclusively in the United States is only a small fraction (9%) of the total aggregate global market capitalization of 20-F FPIs, despite representing a majority of the 20-F FPIs.”

Source: Data derived from the SEC concept release

REQUESTS FOR COMMENT

The SEC requests public comment on several large regulatory questions, such as whether the shift in the characteristics of the FPI population warrants a reassessment of the FPI definition, and whether, under the current framework, U.S. investors in the securities of FPIs are sufficiently protected and receive appropriate information.  The concept release also explores whether the current framework may put domestic U.S. companies at a competitive disadvantage.  It may be difficult to consider these questions in isolation without taking into account views on disclosure requirements for smaller reporting companies and  views regarding whether disclosures should be scaled depending on company size and maturity.

UPDATES TO THE FPI DEFINITION

The concept release includes requests for comment with respect to a variety of potential updates to the FPI definition, including specific requests for input on the following possible approaches to amending the FPI definition:

  • Updating the existing FPI eligibility criteria. The SEC raises the possibility of updating the existing bifurcated test, such as by lowering the existing 50% threshold of U.S. holders in the shareholder test and revising the existing business contacts test by either adding new criteria or revising the existing threshold for assets located in the United States.
  • Adding a foreign trading volume requirement. The SEC requests comment on potentially revising the FPI definition by adding a foreign trading volume test, either as an alternative or in addition to updating the existing eligibility criteria.  For example, an amended definition could require that FPIs assess their foreign and U.S. trading volume on an annual basis to determine continued eligibility for FPI status.  The SEC also requests comment on the appropriate threshold (e.g., 1%, 5%, 10%, etc.) for the foreign trading volume test, and noted that, based on its estimates, the adoption of the lowest 1% threshold would result in over half of current reporting FPIs losing their FPI status.
  • Adding a major foreign exchange listing requirement. The SEC also requests feedback on requiring FPIs to be listed on a major foreign exchange, particularly in connection with a trading volume requirement, as described above.  Potentially, the SEC would maintain a list of foreign exchanges with listing requirements that meet specific criteria in order to be considered a “major foreign exchange.”
  • Incorporating an SEC assessment of foreign regulation applicable to the FPI. The concept release explores the possibility of requiring that each FPI be (i) incorporated or headquartered in a jurisdiction that the SEC has determined to have a robust regulatory and oversight framework for issuers and (ii) subject to such securities regulations and oversight without modification or exemption.
  • Establishing new mutual recognition systems. The SEC also raises the possibility of developing a system of mutual recognition, with respect to Securities Act registration and Securities Exchange Act periodic reporting, for issuers from selected foreign jurisdictions, similar to the MJDS system for Canadian issuers.  The concept release asks a series of questions about how such a system would be developed and administered.
  • Adding an international cooperation arrangement requirement. The SEC requests comment on the possibility of requiring an FPI to certify that it is either incorporated or headquartered in, and subject to the oversight of the signatory authority of, a jurisdiction in which the foreign securities authority has signed the IOSCO Multilateral Memorandum of Understanding Concerning Consultation, Cooperation, and the Exchange of Information or the Enhanced MMoU.

TRANSITION FROM FPI STATUS AND CONSEQUENCES

The SEC also requests comment relating to the potential consequences associated with changes to the FPI definition that cause issuers to lose their FPI status.  In this context, the SEC asks which additional disclosure requirements are likely to be most burdensome as these issuers transition to domestic filer status, whether these issuers are likely to change their listing or exit the U.S. markets, the potential effects on U.S. investors if foreign issuers were to exit the U.S. markets, and related knock-on effects.

CONCLUSION

The concept release comes at an interesting time, given that SEC Chair Atkins has emphasized his intention to focus on promoting capital formation and the number of public companies listed on U.S. securities exchanges has declined in recent years.  There are a number of legislative initiatives underway that aim to promote capital formation by, among other things, extending the benefits provided by the JOBS Act to additional issuers and making these benefits available for a longer period of time.  The concept release, therefore, might provide an opportunity to address changes in the FPI population while still promoting capital formation, though its tone in this regard is quite measured.  Commenters might nonetheless find an opportunity to provide useful perspectives that balance the access to information and investor protection concerns raised by the Staff with more creative approaches than a mere narrowing of the FPI definition or a cumbersome mutual recognition, substituted compliance or similar approach.

This post comes to us from Mayer Brown. It is based on the firm’s memorandum, “SEC Issues Concept Release on Definition of Foreign Private Issuer,” date June 10, 2025.

Categories
Securities Regulation

SEC Chair Speaks at Conference on Financial Market Regulation

In order to keep the compliance folks here at the SEC happy, I must first note that the views I express here today are my own and do not necessarily reflect those of the full Commission or of my fellow Commissioners.

Considering the ongoing changes in financial landscapes, the need for thorough economic analysis of the Commission’s actions becomes increasingly important.  High-quality economic analysis is an essential part of any SEC rulemaking.  It is critical that a rule’s potential benefits and costs be considered in ensuring that it is in the public’s interest. It also helps that it happens to be the law.

From Pedro’s introduction, you can see that this is my third tour of duty at the SEC – having previously served from 1990-1994 on the staff of former Chairmen Richard Breeden and Arthur Levitt, as a Commissioner from 2002-2008, and now as Chairman.

This is a unique moment to come back here to lead the agency, as opportunities abound to facilitate capital formation when the investment environment and the capital markets are undergoing significant change.

During my tenure as Commissioner, I often emphasized the need for rigorous economic analysis.  As Chairman, I aim to ensure that those principles are the bedrock upon which our sound regulatory policies are built.  It is important for us as an agency to ensure that thorough and unbiased economic analysis is not being overshadowed by any driving desire to implement regulatory measures that impose unnecessary burdens on our markets.

Before we act, we first must identify a problem to be solved and propose a resolution that is tailored to solve it – rather than create a solution in search of an unidentified problem.

The SEC, in its regulatory capacity, is tasked to balance investor protection with promoting capital formation and market efficiency.  In years past, the Commission has unfortunately demonstrated a tendency to prioritize regulatory expansion over meticulous economic analysis, potentially jeopardizing this delicate balance.

For example, in some of the Commission’s recent economic analysis, the adopting releases have stated, “Where possible, we have attempted to quantify these economic effects . . . however, we are unable to reliably quantify the potential benefits and costs of the final rul[e].”[1]

Going forward, we must show our work so that the public understands what we are proposing and why.  We must show that we have considered the potential effects of our rules, including the negative ones.

Robust economic analysis of our regulatory initiatives helps us to do just that.  It provides us with a framework to assess the potential unintended consequences of new regulations.

In choosing when and how to regulate our markets we should be cognizant to measure twice and cut once.  Otherwise, we risk damaging our markets and unnecessarily adding costs to issuers and investors.

Like it or not, we operate in a global environment. There are alternatives, and investors can vote with their feet and pocketbooks.  Our job at the SEC is to ensure that we maintain a market that is the best in the world for investors and for issuers.  You cannot have one without the other.

As I have said before, regulation is a bit like golf.[2]  It requires careful, precise strokes, and meticulous analysis of shot selection to achieve the intended result.  For instance, if you choose the wrong club, or swing too hard, you risk overshooting the green.[3]  In the end, your short game of precision is most often the crucial factor to sink the ball in the hole.

As we navigate the complexities of modern financial markets, we must continually refine our methodologies while adapting to new challenges.

I am thankful that you all are here to help us to enrich our understanding of markets and market dynamics.  By incorporating diverse perspectives and a wide range of research, we enhance the robustness of our analyses and ensure that our regulatory measures are well-informed.

We value the research that you do.

It is a new day at the SEC, and I look forward to engaging with you all as we promote policies that foster economic growth and strengthen confidence in our markets.

Before I turn it over to our first panel, I would like to thank everyone who contributed to the success of this event, especially the organizers, Amy Edwards and Vlad Ivanov from the Division of Economic and Risk Analysis, Kathleen Hanley from Lehigh University, and Pedro Matos from the University of Virginia.

Thank you.

ENDNOTES

[1]See The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release No. 34-99678 (Mar. 6, 2024) [89 FR 21668 (Mar. 28, 2024)], available at https://www.federalregister.gov/documents/2024/03/28/2024-05137/the-enhancement-and-standardization-of-climate-related-disclosures-for-investors; Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews, Release No. IA-6383 (Aug. 23, 2023) [88 FR 63206 (Sept. 14, 2023)], available at https://www.govinfo.gov/content/pkg/FR-2023-09-14/pdf/2023-18660.pdf

[2] See Paul Atkins, Remarks before the Securities Traders Association (Oct. 7, 2004), available at https://www.sec.gov/news/speech/spch100704psa.htm

[3] Id.

These remarks were delivered on May 16, 2025, by Paul S. Atkins, chair of the U.S. Securities and Exchange Commission, at the 12th Annual Conference on Financial Market Regulation in Washington, D.C.

Categories
Finance & Economics International Developments Securities Regulation

The Hitchhiker’s Guide to Comparative Financial Regulation

Over recent decades, the massive globalization of finance has led many observers to expect widespread harmonization of nations’ financial regulations. Yet, while there has been a remarkable degree of harmonization in some areas, at least at the regional level, considerable divergence persists.

In a new book, we explore why different jurisdictions converge or diverge in how they regulate finance. We develop an analytical framework to study the role of law in finance and how to approach financial regulation from a comparative perspective. For decades, the comparative approach to financial regulation was at the periphery of scholarship because harmonization was often plainly assumed while divergences were disregarded. However, the current environment characterized by geopolitical tension and increasing nationalism reveals the importance of differences in the regulation of global finance and of legal comparison to make sense of them.

The book does not cover every jurisdiction. Rather, it aims to provide the reader with the methodology to approach financial regulation comparatively. Therefore, we have collected contributions from worldwide experts in financial regulation, including scholars based in Europe, the UK, the United States, and Asia. We asked the contributors to compare different areas of financial regulation in different jurisdictions. Because reasonable people may differ on the functions of financial regulation, we have focused the analysis on one overarching question that we frame in the introductory chapter: What drives convergence and divergence of financial regulation?

At the heart of our approach stand market failures, which are endemic to finance regardless of whether financial intermediation is undertaken by banks or capital markets. We do not mean to overstate the distinction between these two segments of financial markets as we acknowledge that there are many and increasing overlaps – think, for instance, of securitization. However, in our opinion, the distinction between banking and capital markets remains important to analyze financial regulation and to make sense of the complexities stemming from the overlaps. Therefore, we focus our analysis on the key market failures in banking and in capital markets, respectively, (systemic) negative externalities and information asymmetries.

The key finding of the book is the identification of three main frictions preventing full harmonization and two main features prompting convergence. With regard to the frictions, we identify:

  • the private law underpinnings of financial markets;
  • the diverging policy objectives and regulatory goals; and
  • and the varying structure of financial markets.

The main features prompting convergence are:

  • the push by industry associations to reduce transaction costs, particularly in cross-border financial transactions such as derivatives;
  • and policymakers’ concern with risk spillovers and potential race-to-the-bottom from regulatory arbitrage.

Based on these finding, we have categorized the drivers of convergence and divergence in four groups.

  • the underlying national private laws, in particular property and contract law, provide the legal basis for financial contracts and for financial entities to carry out financial transactions. Similar private law institutions increase the likelihood of convergence and vice versa;
  • the different policy goals pursued by different regulators or the use of different legal tools in pursuit of the same goals. One can expect divergence if one jurisdiction wants to favor innovation while another aims to safeguard investors and clients. Yet regulatory harmonization is clearly favored by global coordination on a specific policy goal, such as financial stability in the banking system;
  • the different structure and degree of integration of financial markets that must be accounted for by financial regulators while pursuing their policy objectives. All else being equal, harmonization is less likely if one jurisdiction has a financial market relying heavily on the banking system vis-à-vis one in which capital markets are more developed; and
  • regulators are exposed to a set of other, heterogeneous forces shaping their policymaking. This residual category is broad and relates to aspects not directly related to financial institutions or financial transaction. Policy responses to geopolitical risk represent the chief and most current example.

Departing from this intellectual framework, we have divided the regulatory analysis into two macro areas: Financial Markets (Part II); and Financial Institutions (Part III). Because financial innovation has blurred the distinction between banking and capital markets, we have collected the latest cross-cutting regulatory developments in Part IV (Frontiers), covering sustainability and cryptoassets. The three parts are preceded by Part I (Introduction), which includes our above-mentioned analytical framework, a historical analysis of convergence of financial regulation, and the comparative institutional architecture of financial regulation and supervision.

The relevance of this comparative exercise is manifold. To begin with, it helps the reader understand how policymakers’ preferences vary geographically and over time. For example, jurisdiction A’s stricter enforcement of banking regulation compared with jurisdiction B, or the adoption of a more stringent approach than in the past, often reflects distinct social, economic, and political choices. Moreover, the functional approach sheds light on the legal mechanisms and degree of harmonization needed to address emerging challenges for financial regulation, such as blockchain-based transactions or the increasing relevance of sustainable finance.

A key premise of the book is that the relationship between regulatory convergence and market efficiency, as well as financial stability, varies with time and between sectors. Therefore, our book does not seek to determine the optimal level of harmonization. We personally doubt that such an optimal level exists or can be determined. Rather, we aim to provide a hitchhiker’s guide to navigate the complexities of converging or diverging financial regulations.

This research handbook aims at a broad readership, including but not limited to policymakers, graduate students, and academics in law and in economics. A globe-spanning group of contributors, coupled with the functional approach, provides the reader with a broad overview of how financial regulation converges (or not) towards common standards in key jurisdictions. More importantly, the book provides the analytical tools to understand and interpret financial regulation from a comparative perspective, even in jurisdictions not directly covered. As this book is research-driven, we do not seek to provide definitive answers, but we do hope to frame the relevant questions.

This post comes to us from professors Edoardo Martino and Hossein Nabilou at the University of Amsterdam and Alessio Pacces at the University of Amsterdam and currently visiting Stanford Law School. It is based on their recent book, “Comparative Financial Regulation,” available here. A version of this post appeared on the Oxford Business Law Blog.

Categories
Corporate Governance

Commitment and Optionality in the Control of Controlling Shareholders

My colleague Eric Talley at Columbia Law School has proposed an ingenious modification of SB 21 – scheduled for a vote today in the Delaware legislature – that highlights the contractarian traditions of Delaware law and builds off the experience with fiduciary duty contractarianism in Section 102(b)(7).

I want to suggest an additional framing and a minor modification to Talley’s proposal, a friendly amendment. The additional framing is this.  In the corporate law and governance debate, the controlling shareholder is offered as the solution to managerial agency costs, the tendency of management to pursue its own goals rather than shareholder goals.  Controllers have incentives to monitor managers closely and the capacity to bring this monitoring into the operation of the firm. This can produce gains for all concerned.  The concern is the flip side: “controller shareholder agency costs,” the capacity of the controller to extract the “private benefits of control,” including an excess share of corporate cash flows through various diversionary transactions.

The efficiency of controlling-shareholder governance depends upon appropriate control of its potential misuse.  We see this in a cross-national comparison.  In the U.S., a selling controller can retain its control premium.  Elsewhere, the “mandatory bid” rule generally prevails, meaning that a selling controller must share its premium with other shareholders. What accounts for the difference is trust in U.S. courts, most particularly Delaware courts, to maintain a system of fiduciary litigation that will minimize add-on private benefit extraction by a new controller.

The control of controlling-shareholder conduct is particularly important in the case of dual-class common stock because the dual-class structure creates a wedge between cash flow rights and control rights that is a constant temptation.  Control creates the capacity to divert cash flow  to the controller, and the wedge heightens the temptation.  An example: For each $100 diverted by a controller with 55 percent of the control rights (and thus the power to select directors) but only 40 percent of the cash flow rights, the controller nets out $60; with 20 percent of the cash flow rights, the controller nets out $80.  Over time, as the controller wants greater liquidity and diversification, the wedge will grow.

Thus this crucial insight: Incorporating in Delaware is a commitment strategy by a controller to assure investors in an IPO and purchasers on a secondary market that the controller will not extract impermissible private benefits of control, namely a material non-pro rata benefit for the controller and a detriment to the other shareholders.[1] The controller’s commitment is to subject itself to Delaware’s rigorous fiduciary-duty regime, including courts, for transactions with the controller where serious fiduciary questions might be raised.

Capital market developments, including changes in stock-listing rules that have opened the way to dual-class structures, have resulted in many more controller fiduciary-duty cases in Delaware over the past decade.  Some think that the current Delaware standards are too intrusive and demanding.  But here is the ingenuity of Talley’s opt-in proposal: It preserves the availability of a demanding fiduciary-duty regime for some controllers but permits others to opt out.  The optionality lets controlled companies choose on the basis of anticipated pricing in an IPO and subsequent capital market considerations as between two regimes.

My addition is minor.  For companies with a dual-class structure, approval of the opt-out by a majority of the outstanding shares of each class is conclusive. If challenged, the opt-out would be evaluated under a waste standard. If the two classes vote as a single class on the opt-out, and a majority of the low-voting shares do not vote in favor, then the opt-out, if challenged, should be evaluated under the TripAdvisor structure.

For companies with a single class, approval of the opt-out by a majority of the disinterested shareholders is conclusive. Otherwise the opt-out, if challenged, would also be evaluated under the TripAdvisor structure.

As a final point, I think a controller choosing to opt into the alternative regime should be able to lower the threshold for a “facts and circumstances” determination of control.  For example, the present standard is 33 percent.  A party that  holds only 20 percent, say, and wants to commit to the new Delaware regime for single-sided controller transactions, should be able to adopt a 20 percent threshold in the opt-in.

Here is the proposed language for a new Section 102(b)(8):

A provision adopting the safe harbor rule as reflected in Delaware General Corporation Law Section 144A, provided that the provision (i) is in the initial charter of a corporation organized in Delaware, (ii) in the case of an existing corporation with more than one class of common stock, is approved by a majority of the outstanding shares of each class; and (iii) in the case of an existing corporation with a single class of common stock, is approved by a majority vote of the outstanding stock and by a majority vote of the shares not owned or otherwise controlled by a party owning 50 percent of the outstanding stock (a “disinterested majority”).  In the case of (ii) or (iii), if the provision has been approved by a majority of the voting power entitled to cast votes for the board of directors, or for a majority of the board, but in the case of (ii) not bv a majority of the outstanding stock for all classes, and in the case of (iii) not by the disinterested majority, any litigation that challenges the controller’s fiduciary duty in adopting the charter amendment shall be evaluated under the standard set forth by the Delaware Supreme Court in Maffei et al. v Palkon et al (TripAdvisor). The provision may modify the safe harbor rule of Section 144A to the extent of reducing the minimum percentage required for the determination of a “controlling stockholder.”

ENDNOTE

[1] Sinclair Oil. V. Levien, 280 A.2d 717 (1971).

This post comes to us from Jeffrey N. Gordon, the Richard Paul Richman Professor of Law at Columbia Law School.

Categories
Corporate Governance

Ropes & Gray Discusses California’s Request for Feedback on Climate Disclosure Laws

The California Air Resources Board is seeking public feedback as part of its implementation of California’s pending GHG emissions and climate risk disclosure laws. These laws – the Climate Corporate Data Accountability Act (SB 253) and the Climate Related Financial Risk Act (SB 261) – are further discussed in this post.

Launched on December 15, CARB’s solicitation seeks feedback on 29 specific questions. These are organized under five main topics, which are further divided into 13 numbered questions (some with subparts). The three general topic areas are applicability, standards in regulation and data reporting. There also are sections specific to each of the Climate Corporate Data Accountability Act and the Climate Related Financial Risk Act.

More specifically, among other things, the solicitation seeks feedback on the following:

  • What it means to do business in California.
  • How to ensure that CARB’s regulations stay current and in alignment with standards incorporated into the Acts as they evolve and that reporting minimizes duplication of effort.
  • The specifics of scopes 1, 2 and 3 reporting.
  • Assurance providers and standards.
  • Required disclosures and the reporting year and timeframe for biennial climate risk reporting.
  • Current reporting practices.

Respondents also can provide any additional information they feel is important to inform CARB’s work to implement the Acts.

The solicitation is open until February 14, 2025. It can be accessed here.

The take-away: subject companies will want to consider whether to provide feedback to CARB, either directly or through their trade associations. We expect that CARB will receive an extremely large volume of responses, given the passion that climate disclosure generates on both the left and the right, albeit for quite different reasons. The anticipated imminent demise of the SEC’s climate disclosure rules for public companies is likely to add fuel to the number of comments. As a comparison, in its comment process, the SEC received more than 14,000 submissions (see this White Paper analyzing the submissions, which may provide some insight into who will respond to CARB’s consultation).

In other related news

The last couple of weeks have been a busy time for California’s landmark climate disclosure laws.

On December 5, CARB published an Enforcement Notice relating to the Acts, which is discussed in this Ropes & Gray post. In the Enforcement Notice, CARB indicated that it will exercise enforcement discretion for the first reporting cycle on the condition that entities demonstrate good faith efforts to comply with the requirements of the law. This enforcement discretion is aimed at supporting entities actively working toward full compliance. Therefore, for the first reporting cycle, CARB will not take enforcement action for incomplete reporting against entities, as long as they make a good faith effort to retain all data relevant to GHG emissions reporting for their prior fiscal year.

In response, California Senators Scott Wiener and Henry Stern (the sponsors of SB 253 and 261) sent a letter to CARB Chair Liane Randolph expressing serious concern about the Enforcement Notice. They asserted that the Enforcement Notice falls far short of full compliance with the Climate Corporate Data Accountability Act and urged CARB to take immediate action to comply fully and to clarify that it will issue implementing regulations by the (already-extended) July 1, 2025 statutory deadline (see this post).

Senators Wiener and Stern also expressed frustration at the perceived lack of progress CARB has made to implement the Act, noting that six months after the budget was passed appropriating funds for implementation – mainly hiring staff to craft the required regulations – CARB has yet to post a job description for that staffing. The letter does not ask for a written response, but instead threatens that the signatories will seek to bring CARB leadership before the California Legislature for Oversight hearings in 2025 if they fail to see timely action on hiring the staff needed to implement the Climate Corporate Data Accountability Act and the taking of other public steps to promulgate regulations to implement it according to the statutory timeline. In its subsequent solicitation for feedback, CARB noted it is already in the process of hiring staff, presumably in response to the Senators’ assertion.

This post comes to us from Ropes & Gray LLP. It is based on the firm’s memorandum, “California Launches Public Consultation on Climate Disclosure Laws, and Other Recent Developments,” dated December 18, 2024, and available here.

Categories
Finance & Economics

How to Tackle Spoofing Through Market Design

The recent scandal involving TD Securities LLC[1] has served as a stark reminder of the dark side of high-frequency trading. While this particular case has garnered significant attention, it is far from an isolated incident. Spoofing, a form of market manipulation that involves placing and canceling large orders to deceive other market participants, has become a pervasive problem in today’s highly automated financial markets. From Wall Street to emerging markets, this insidious practice is eroding investor confidence and undermining the integrity of our financial system.

The Dodd-Frank Act of 2010 was the first legislation to specifically mention spoofing, and it triggered enforcement activity that increased over the following years. Current regulation is founded on the principle of prohibition and prosecution. However in practice, illegal market manipulation is often assessed and punished case by case. Consequently, market-regulation enforcement is a matter for the administrative authorities and the criminal courts, both of which have some discretion. The effectiveness of enforcement actions is regularly proven. Landmark cases include – in addition to the recent case involving TD Securities – United States V. Coscia, which involved a trader in commodity futures markets who was sentenced to three years in prison, a civil fine of more than $25 million, and a $12 million disgorgement penalty. In another case, Chicago-futures-market trader Igor Oystacher and his firm were ordered to pay $2.5 million in civil fines and placed on probation for three years. In 2020, J.P. Morgan was ordered to pay $920 million for spoofing involving Treasury futures. This is the largest fine ever imposed by the Commodity Futures Trading Commission (CFTC).

But along with these successful prosecutions have come other challenges and an increasing belief that these cases are just the tip of the iceberg. In a new article, we provide three explanations for why :

  • Spoofing is hard to detect: There are so many legitimately canceled orders that regulators have to process millions of data records daily to detect manipulation and to ascertain that an order was not bona fide.
  • Spoofing is hard to prove: Sanctions are constrained by the burden of proof in a high-frequency and algorithmic framework, which implies using thealgorithms itself as evidence of intent. Moreover, trading supervision is mainly focused on detecting suspicious and abnormal price changes – but price impacts are assessed in a world where HFT manipulators often trade insignificant quantities within a low-latency recurrent strategy.
  • Spoofing is hard to discourage: As spoofing is frequent and diffuse, it does not formally or systematically affect price accuracy or the spread in real time.

If prosecution is the public weapon, market design could be the private one. The underlying principle is to make the cost of engaging in spoofing activities exceed any potential gains. While regulators can increase fines to deter such behavior, improvements in market design, such as enhanced surveillance systems and reduced latency, can also significantly diminish the profitability of spoofing.

Yet, both regulators and exchanges are acutely aware that even minor tweaks to a market infrastructure (e.g., decimalization, order priority, latency, or transparency) can trigger significant ripple effects.

With this in mind, how can we reduce the profitability of deceptive practices without compromising market quality or the interests of other participants? Given the risks associated with trial-and-error approaches, regulators and market operators need a more systematic alternative. Our research offers a novel solution by conducting in-depth simulations of various market scenarios.

Using sophisticated software[2] to replicate a virtual financial market, we have analyzed the impact of different market designs on the profitability of spoofing. This methodology, known as agent-based modeling, is widely used in economics and management research and more specifically in financial market microstructure[3]. By conducting simulations, we can compare before and after scenarios. For instance, we analyzed the profitability of spoofing strategies before and after the introduction of a random delay in market-order execution, which is the most direct and targeted approach to mitigate high-frequency spoofing tactics that rely on rapid order cancellation and execution. Our findings show that this subtle alteration in the market design can effectively reduce the attractiveness of spoofing without compromising overall market quality.

Of course, these results are not generally applicable, nor is that the goal of this methodology. Its strength lies in its ability to provide a unique, context-specific view of market dynamics, from individual trader behavior to broader price movements. Our study offers a valuable contribution to the ongoing debate about how to effectively address manipulative practices and foster the growth of market designs (like IEX) that promote market fairness and integrity.

ENDNOTES

[1] https://www.sec.gov/newsroom/press-releases/2024-160

[2] https://artificialmarket.univ-lille.fr/

[3] See for instance, the seminal works of Santa Fe Institute: Palmer, R. G., Arthur, W. B., Holland, J. H., LeBaron, B., & Tayler, P. (1994). Artificial economic life: a simple model of a stockmarket. Physica D: Nonlinear Phenomena, 75(1-3), 264-274.

This post comes to us from Daniel Ladley at the University of Leicester School of Business in the UK, Nathalie Oriol at the University of Côte d’Azur – GREDEG – CNRS in France, and Iryna Veryzhenko at LIRSA-CNAM in France. It is based on their recent article, “High-Frequency Spoofing, Market Fairness and Regulation,” available here.

Categories
Corporate Governance

How Classified Boards Have Evolved Over the Last Thirty Years

Classified boards, which divide directors into staggered classes with only one class standing for reelection annually, have long been considered a powerful defense against hostile corporate takeovers. Despite their widespread use, they remain a topic of intense debate. While studies have provided mixed evidence of whether the benefits of classified boards outweigh their costs, more recent research suggests that the costs of these governance structures may increase as firms mature. However, there has been limited investigation into how the use of classified boards evolves over a firm’s life and whether this approach has changed in response to broader shifts in the corporate governance landscape. This gap in the literature is especially relevant in light of institutional developments, such as stricter regulatory environments, enhanced information transparency, an upsurge of passive investors, and growing shareholder activism, all of which may influence when and why firms adopt or abandon classified boards.

In a forthcoming study, we examine these dynamics. We analyze the changing patterns of classified boards over the past three decades, shedding light on their implications for shareholder value. The conventional belief suggests that classified boards are disappearing from corporate America, particularly among well-established firms in the S&P 1500 Index. However, more recent findings indicate that young firms are increasingly likely to go public with a classified board and that, while the costs of having a classified board become significantly higher as firms mature, firms rarely opt to declassify their boards. We expand on these findings by examining a more comprehensive sample of firms over an extended period, uncovering new evidence of how and why the use of classified boards has evolved and its implications for shareholder value.

To explore this evolution, we used machine learning, textual analysis, and hand-collection techniques to develop a comprehensive dataset, available here, that tracks nearly all U.S. public firms from 1991 to 2020. It has three times more firm-year observations than other commercial databases do.

This dataset challenges prevailing assumptions. Among S&P 1500 firms, the prevalence of classified boards declined from 58 percent in the early 1990s to 31 percent in 2020. In contrast, the number of classified boards at firms outside the S&P 1500 rose from 42 percent to 52 percent over the same period. These findings suggest that classified boards remain a meaningful feature of corporate governance for most firms.

Importantly, our research also reveals significant changes in how classified boards are used throughout a firm’s life. In the 1990s, their use declined only slightly as firms matured. However, between 2001 and 2010, there was a more pronounced shift, with usage dropping from 65 percent among the youngest firms to 46% percent among the most mature. This trend accelerated from 2011 to 2020, falling from 73 percent for newly public firms to 33 percent for older firms. These shifts highlight the increasing dynamism of corporate governance practices as firms adapt their structures to align with changing market demands.

Several factors drive these changes. Younger firms, especially those heavily invested in innovation-driven activities such as research and development or intangible assets, often find classified boards appealing because they provide stability and protection against short-term disruptions. However, as firms age, the benefits of classified boards diminish, and the associated agency costs become more apparent. External pressures have also played a role in shaping governance practices. The rise of passive institutional investors, increased shareholder activism, and lower costs of collective action have made it easier for firms to declassify their boards. These forces have contributed to a faster and more widespread declassification process among mature firms.

The value implications of these shifts are also noteworthy. During the 1990s and 2000s, classified boards generally increased the value of younger firms but lowered the value of mature firms, leading to a “value reversal” as firms aged. By the 2010s, this pattern largely disappeared as firms adjusted their governance structures to align with shareholder interests. This evolution reflects broader changes in the corporate governance landscape, where increased scrutiny from market participants has helped reduce the frictions that had prevented firms from optimizing their board structures over their lives.

Over the past 30 years, the role of classified boards has undergone a profound transformation. No longer a static feature of corporate governance, they now represent a more dynamic tool that firms adapt to suit their needs across different stages of their lives. Our findings underscore the importance of flexibility in corporate governance, showing how firms are increasingly tailoring their board structures to align with evolving markets.

This post comes to us from professors Scott Guernsey at the University of Tennessee, Feng Guo at Iowa State University, and Tingting Liu and Matthew Serfling at the University of Tennessee. It is based on the recent paper, “Thirty Years of Change: The Evolution of Classified Boards,” forthcoming in the Journal of Finance and available here. The classified board dataset and accompanying code can be downloaded here.