Business Law Prof Blog

HP Loses Bid For No Action Letter

HP asked the SEC staff to issue a no action letter on the company's intended refusal to include a shareholder proposal on its firm proxy.  The shareholder proposal recommends a bylaw that would enable a 3 percent shareholder for two years to submit names for election to the board of directors that the firm would include on the firm proxy.  The SEC declined to issue the letter.  If HP decides to follow through on its refusal, the proposing shareholders are likely to sue in federal court to contest the refusal.

Defending SOX

David Henry writes in Business Week that "Not Everyone Hates Sarbox: The Much Maligned New Rules are A Big Hit With Investors."  He surveys large investment managers that make the simple point that SOX makes a companies financial better.  There are fewer earnings restatements, and fewer adjustments for unusual charges and write-offs, expensing of stock options, and better internal controls on the integrity of the accounting numbers.  In short, corporate financial statements are more reliable.  No-one disputes the SOX produces better financials, the issues is at what cost.  We could hang a CEO now and again that cooked the books and financial records would be much, much better but we are unwilling to incur the costs of such Draconian punishment.  It is an interesting game theory problem -- with harsh accounting rules, investors know more and invest with less risk in the short term, but incur more problems in the long run as companies expend too much money on accounting compliance and too little time and money on operations.  We all know more about companies that are less productive (and, given an international market, less globally competitive).   Money managers, who are paid by beating market indexes, may very narrowly focused on immediate performance and the group we should least pay attention to on whether the regulations make social sense.

New Study on Options Back Dating

John M. Bizjak and Michael L. Lemmon, finance professors, report that applying a filter of 20 percent or more of a company's options grants are suspicious (defined as a grant in which the company's stock price fell immediately before the grant ant rose substantially after the grant) to all public companies that granted options form 1996 to 2002, produced at total estimate of 1,400 publicly traded companies that backed dated executive options (43 percent of the total).  They also found that the probability a company would back date options rose by a third to a half if one of the directors was also on the board of another company that was already backdating options.  Apparently the practice spread like a virus, through direct human to human contact.

NASD Members Vote to Approve Merger of NASD and NYSE SROs

Members of the National Association of Securities Dealers (NASD) voted 2,671 to 1,440 (with 83 percent of those eligible voting) to approve a merger of the NASD SRO with the SRO of the NYSE Group.  The SRO of the NYSE, NYSE Regulation Inc., remains a not-for-profit company that has been separated from the exchange trading operations, which is a for-profit corporation.  NASD members were promised a $35,000 payment on the closing.  The merger has the public endorsement of the SEC Chairman.  Some details of a merger agreement have yet to be finalized, however, and the SEC must approve the final arrangement.  I have argued in earlier blogs (and in articles dating back to 1992) against any Super SRO on the grounds the SRO regulatory system is itself flawed.  I would prefer that the SEC be the primary front- line regulator (licensor and enforcer) with individual markets in competition with each other on their reputations (and systems) for trading integrity.  My views have been, of course, roundly ignored.   If SROs are a given, however, the merger may make sense. 

Bloomberg Schumer Report

New York City Mayor Michael Bloomberg and Senator Charles Schumer (D.N.Y.) today released a lengthy report prepared by McKinsey & Co. calling for changes to legal rules in order to keep New York City the world's leading financial center.  The study used interviews with fifty financial section CEOs.  The report found that the United States has recently lost global market share in the financial services industry and concluded with detailed recommendations on legal changes to stem the slide.  The authors call for, among other things, changes to Sarbanes-Oxley, easing immigration restrictions on financial service industry participants, limits on punitive damage awards, increased arbitration of securities disputes, and a merger of the SEC and CFTC.   It is a measure of the severity of the problem when on sees New York liberal Democrats, who often favor increased government regulation and participation in economic matters, advocate what is traditionally a Republican position on regulations specific to the finanicial services industry. The report echos themes in a report issued last year by the Committee on Capital Markets Regulation, led by former Bush administration officials (Glenn Hubbard and John Thornton).