Wednesday, September 7, 2016
Stock pricing in the securities market responds to supply and demand. This is intuitive with regard to individual securities. We understand that if more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, the price decreases if more want to sell than buy. I wonder to what extent regulators have examined the role of retirement saving plans in flooding the market with demand to buy new securities and which can drive up stock prices overall. Consider this historical graph of the NYSE trading average. Observe the sharp rise beginning in the late 1980's with the introduction of individual retirement savings plan and the beginning of the defined contribution society.
chart source: Forecast Chart
New Department of Labor regulations open the door for state governments to sponsor retirement savings plans for non-government workers. See for example, California's proposed plans. The rules, proposed in 2015, became final on August 30, 2016. You can read a summary of the proposed plans published by The Brookings Institute and a DOL interpretive bulletin. Also being considered are proposed rules authorizing high-population cities to sponsor similar plans in states that don't create the non-government worker retirement savings plans. Collectively, these regulations are intended to facilitate the retirement savings of the estimated 55 million small business workers who do not currently have the option of participating in a retirement savings plan. This policy decision encourages retirement saving and promotes individual financial stability. It also means that more worker/saver/investors (a group I have called Citizen Shareholders in prior works) will be encouraged to invest in the private securities market. The demand cycle continues and can be sustained so long as there are as many or more worker/saver/investors as there are folks liquidating their retirement savings. In other words, a severely aging workforce/population could pose a demand/supply problem for the securities market.
Wednesday, August 31, 2016
House Representative Carolyn B. Maloney, Democrat of New York, sent a formal request to a slew of federal agencies to share trading data collected in connection with the Volcker Rule. The Volcker Rule prohibits U.S. banks from engaging in proprietary trading (effective July 21, 2015), while permitting legitimate market-making and hedging activities. The Volcker Rule restricts commercial banks (and affiliates) from investing investing in certain hedge funds and private equity, and imposes enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities.
Representative Maloney requested the Federal Reserve, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and the Securities and Exchange Commission to analyze seven quantitative trading metrics that regulators have been collecting since 2014 including: (1) risk and position limits and usage; (2) risk factor sensitivities; (3) value-at-risk (VaR) and stress VaR; (4) comprehensive profit and loss attribution; (5) inventory turnover; (6) inventory aging; and (7) customer facing trade ratios.
Representative Maloney requested the agencies analyze the data and respond to the following questions:
The extent to which the data showed significant changes in banks’ trading activities leading up to the July 21, 2015 effective date for the prohibition on proprietary trading. To the extent that the data did not show a significant change in the banks’ trading activities leading up to the July 21, 2015 effective date, whether the agencies believe this is attributable to the banks having ceased their proprietary trading activities prior to the start of the metrics reporting in July 2014.
Whether there are any meaningful differences in either overall risk levels or risk tolerances — as indicated by risk and position limits and usage, VaR and stress VaR, and risk factor sensitivities — for trading activities at different banks.
Whether the risk levels or risk tolerances of similar trading desks are comparable across banks reporting quantitative metrics. Similarly, whether the data show any particular types of trading desks (e.g., high-yield corporate bonds, asset-backed securities) that have exhibited unusually high levels of risk.
How examiners at the agencies have used the quantitative metrics to date.
How often the agencies review the quantitative metrics to determine compliance with the Volcker Rule, and what form the agencies’ reviews of the quantitative metrics take.
Whether the quantitative metrics have triggered further reviews by any of the agencies of a bank’s trading activities, and if so, the outcome of those reviews
Any changes to the quantitative metrics that the agencies have made, or are considering making, as a result of the agencies’ review of the data received as of September 30, 2015.
The agencies' response to the request may provide insight into Dodd-Frank/Volcker Rule, the role of big data in the rule-making process (and re-evaluation), and bigger issues such as whether systemic financial risk is definable by regulation and quantifiable in data collection. I will post regulatory responses, requested by October 30th, here on the BLPB.
August 31, 2016 in Anne Tucker, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Investment Banking, Legislation, Private Equity, Securities Regulation, Venture Capital | Permalink | Comments (0)
Monday, August 22, 2016
We are now more than three months into the Title III crowdfunding experiment. I have been wanting to get back to posting on Title III crowdfunding since my "LIVE" post back in May, but so much other fun stuff has been going on! So, to make me feel a bit better on that point, I will share some current crowdfunding data with you all in this post based on publicly available information obtained from a Westlaw search performed yesterday (Sunday, August 21, 2016). [Note to the powers that be at the SEC: EDGAR makes it hard to find the aggregated set of Form C filings unless you are collecting data on an ongoing basis. I hope that changes as EDGAR continues to improve . . . .]
At the outset, I will note that others have offered their own reports on Title III crowdfunding since I last posted (including here, here, and here). These reports offer some nice summaries. This post offers a less comprehensive data dump focusing in on completed offerings and withdrawn offerings. At the end, I offer some limited observations from the information provided here about crowdfunding as a small-business capital-raising alternative, the need for EDGAR adjustments, inferences about the success of Title III crowdfunded offerings, and platform disclosure about withdrawn offerings.
First, however, the top-level Westlaw-based summary:
Total Form C filings: 85 (275 filings show on Westlaw, but only 85 are non-exhibit filings representing distinct offerings)
Total Form C/A filings (amendments, including exhibit filings): 153
Total Form C-U filings (updates): 4
Total Form C-W filings (withdrawals): 2
The remainder of this post takes a shallow dive into the updates and withdrawals. Filings in each case are presented in reverse chronological order by filing date. All referenced dates are in 2016. Issuer names are copied from filings and may not be the actual legal names of the entities.
Wednesday, August 17, 2016
If it is true that “a good thing cannot last forever,” the recent turn of events concerning appraisal arbitrage in Delaware may be a proof point. A line of cases coming out of the Delaware Court of Chancery, namely In re Appraisal of Transkaryotic Therapies, Inc., No. CIV.A. 1554-CC (Del. Ch. May 2, 2007), In re Ancestry.Com, Inc., No. CV 8173-VCG (Del. Ch. Jan. 5, 2015), and Merion Capital LP v. BMC Software, Inc., No. CV 8900-VCG (Del. Ch. Jan. 5, 2015), have made one point clear: courts impose no affirmative evidence that each specific share of stock was not voted in favor of the merger—a “share-tracing” requirement. Despite this “green light” for hedge funds engaging in appraisal arbitrage, the latest case law and legislation identify some new limitations.
What Is Appraisal Arbitrage?
Under § 262 of the Delaware General Corporation Law (DGCL), a shareholder in a corporation (usually privately-held) that disagrees with a proposed plan of merger can seek appraisal from the Court of Chancery for the fair value of their shares after approval of the merger by a majority of shareholders. The appraisal-seeking shareholder, however, must not have voted in favor of the merger. Section 262, nevertheless, has been used mainly by hedge funds in a popular practice called appraisal arbitrage, the purchasing of shares in a corporation after announcement of a merger for the sole purpose of bringing an appraisal suit against the corporation. Investors do this in hopes that the court determines a fair value of the shares that is a higher price than the merger price for shares.
In Using the Absurdity Principle & Other Strategies Against Appraisal Arbitrage by Hedge Funds, I outline how this practice is problematic for merging corporations. Not only can appraisal demands lead to 200–300% premiums for investors, assets in leveraged buyouts already tied up in financing the merger create an even heavier strain on liquidating assets for cash to fund appraisal demands. Additionally, if such restraints are too burdensome due to an unusually high demand of appraisal by arbitrageurs seeking investment returns, the merger can be completely terminated under “appraisal conditions”—a contractual countermeasure giving potential buyers a way out of the merger if a threshold percentage of shares seeking appraisal rights is exceeded. The article also identifies some creative solutions that can be effected by the judiciary or parties to and affected by a merger in absence of judicial and legislative action, and it evaluates the consequences of unobstructed appraisal arbitrage.
The Issue Is the “Fungible Bulk” of Modern Trading Practices
In the leading case, Transkaryotic, counsel for a defending corporation argued that compliance with § 262 required shareholders seeking appraisal prove that each of its specific shares was not voted in favor of the merger. The court pushed back against this share-tracing requirement and held that a plain language interpretation of § 262 requires no showing that specific shares were not voted in favor of the merger, but only requires that the current holder did not vote the shares in favor of the merger. The court noted that even if it imposed such a requirement, neither party could meet it because of the way modern trading practices occur.
August 17, 2016 in Anne Tucker, Business Associations, Case Law, Corporate Finance, Corporate Governance, Corporations, Delaware, Financial Markets, Private Equity, Shareholders | Permalink | Comments (0)
Wednesday, August 3, 2016
The Federal Reserve Board announced its enforcement actions against Goldman Sachs from 2012-2014 events where a Goldman Sachs banker, a former NY Fed employee, received confidential documents from a NY Fed employee. The individuals involved plead guilty to the resulting charges and Goldman Sachs paid fines in New York. The Federal Reserve Board took separate actions this week based upon evidence that the banker "repeatedly obtained, used and disseminated [confidential supervisory information or CSI] ... including CSI concerning financial institutions’ confidential CAMELS ratings, non-public enforcement actions, and confidential documents prepared by banking regulators." Even though Goldman Sachs terminated the banker involved and reported the matter to authorities, apparently the misconduct was sustained over a long-enough period of time and used to "solicit business" in a way that compelled Federal Reserve Board Action.
The Fed's release and copies of the orders are available here. The sanctions against Goldman Sachs include the monetary fine as well a requirement to 'Within 90 days of this Order, ...submit to the Board of Governors an acceptable written plan, and timeline for implementation, to enhance the effectiveness of the internal controls and compliance functions regarding the identification, monitoring, and control of confidential supervisory information."
Financial press coverage of the matter is available in a variety of outlets:
Thursday, July 21, 2016
Jamie Dimon (JP Morgan Chase), Warren Buffet (Berkshire Hathaway), Mary Barra (General Motors), Jeff Immet (GE), Larry Fink (Blackrock) and other executives think so and have published a set of "Commonsense Principles of Corporate Governance" for public companies. There are more specifics in the Principles, but the key points cribbed from the front page of the new website are as follows:
Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;
■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;
■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the board have a strong lead independent director with clearly defined authorities and responsibilities;
■ Our financial markets have become too obsessed with quarterly earnings forecasts. Companies should not feel obligated to provide earnings guidance — and should do so only if they believe that providing such guidance is beneficial to shareholders;
■ A common accounting standard is critical for corporate transparency, so while companies may use non-Generally Accepted Accounting Principles (“GAAP”) to explain and clarify their results, they never should do so in such a way as to obscure GAAP-reported results; and in particular, since stock- or options-based compensation is plainly a cost of doing business, it always should be reflected in non-GAAP measurements of earnings; and
■ Effective governance requires constructive engagement between a company and its shareholders. So the company’s institutional investors making decisions on proxy issues important to long-term value creation should have access to the company, its management and, in some circumstances, the board; similarly, a company, its management and board should have access to institutional investors’ ultimate decision makers on those issues.
I expect that shareholder activists, proxy advisory firms, and corporate governance nerds like myself will scrutinize the specifics against what the signatories’ companies are actually doing. Nonetheless, I commend these business leaders for at least starting a dialogue (even if a lot of the recommendations are basic common sense) and will be following this closely.
Wednesday, July 20, 2016
Last week on the blog I featured the smart book Empire of the Fund by sharing excerpts from a conversation with author, Professor William Birdthistle. In discussing the book, he shared with me some insights on writing a book: its process, genesis and use in the classroom. I am fascinated by other's people writing process in the continual effort to improve my own.
writing a book...
[W]riting a book was more of a challenge than I expected, even though I told myself it was simply a collection of law review articles. It turns out that the blinking cursor on an empty screen is more taunting when you're obliged to fill hundreds of pages. Brief stints of productivity need to be repeated again and again and, until it all exists, nothing really exists. I developed a convoluted system of drafting notes, then sitting down with a research assistant to record a chat about those notes, then working that recording into an outline. That process still left me with plenty of writing to do, but I found it much easier to expand, polish, and revise those outlines than to fight the demon blank page.
Talking through your ideas forces you to synthesize the materials. It also retains the humanity behind the arguments. This method makes a lot of sense when you read Professor Birdthistle's book because it feels like he is talking to you— just in a way that is smarter, better organized and more pithy than most of us can muster in the average conversation. His book doesn't read like the belabored, bloated, and laborious sections that all too often find their way in law review articles (my own included).
genesis for the book...
The contents, to a large extent, have actually come from the classroom -- as these materials serve as the syllabus for a seminar I've taught for a few years. The seminar, called Investment Funds, is almost always popular: in a go-go market, all the students want to hear about private equity and hedge funds; then in downturns, I get a sober audience of students who want to know more about their 401(k)s.
application to broader classes...
I often work this material in to my BusOrg and SecReg classes too: so, I emphasize the role of funds on topics like corporate purpose (does charitable giving look different if the corporate funds might otherwise go to 401(k) holders), proxy contests (in which mutual funds are major institutional investors but often conspicuously absent from these fights), shorting (where the securities are often borrowed from mutual funds and ETFs), and behavioral versus neoclassical theory (quoting heavily from a wonderful disagreement between Judges Easterbrook and Posner in Jones v. Harris before it went to the Supreme Court).
Since almost all students will soon be figuring out their own 401(k) and mutual fund investments, I've found that it's easy to make business issues far more salient to their lives. Even to the saints who'll soon have a 403(b).
the role of behavioral work...
Finally, I highlight Professor Birdthistle's observations about changes to the corporate law landscape made space for a book like his to contribute, in a serious way, to the academic and popular debate about the efficacy of the mutual fund market.
I've been struck by the change in our intellectual and academic disposition towards investing problems. I've been in the academy for a decade now and, when I began, the rational investor model was so thoroughgoing that it was difficult to discuss problems of individual investing. Many conversations -- and job talks -- required a first-principles exegesis about how this market might possibly be anything other than highly efficient. But a tide of behavioral work in recent years has helped explain why investors might struggle, and a good deal of empirical work has concretely shown how they struggle. So conversations today focus more upon solutions rather than on whether there is even a problem.
To this last point, I wonder what ideas and principles, which seem untouchable today, will give way to the next generation's breakthrough. I think is a particularly heartening message for young scholars--not all of the work has been done! Keep at it! And it is an important message for folks who aren't writing in the mainstream. For folks who are passionate about their work, but feeling like their ideas aren't garnering the right cache with the right audiences. This is where you persevere so long as the work is thorough and well researched. Maybe you and your work are contributing to an important intellectual advancement. You could be changing the tides in ways that in presently imperceptible, but significant nonetheless. So as the August submission deadline looms and the summer hours threaten to languish, press on!
Because this post is a compilation of quotes, I now turn to Garrison Keeler to close:
Be well, do good work, and keep in touch.
*Query: Are the best motivational speeches are the ones you write for yourself?
Wednesday, July 13, 2016
Professor William Birdthistle at Chicago-Kent College of Law is publishing his new book, Empire of the Fund with Oxford University Press. A brief introductory video for the book (available here) demonstrates both Professor Birdthistle’s charming accent and talent for video productions (this is obviously not his first video rodeo). Professor Birdthistle has generously provided our readers with a window into the book’s thesis and highlights some of its lessons. I’ll run a second feature next week focusing on the process of writing a book—an aspiration/current project for many of us.
Empire of the Fund is segmented into four digestible parts: anatomy of a fund describing the history and function of mutual funds, diseases & disorders addressing fees, trading practices and disclosures, alternative remedies introducing readers to ETFs, target date funds and other savings vehicles, and cures where Birdthistle highlights his proposals. For the discussion of the Jones v. Harris case alone, I think I will assign this book to my corporate law seminar class for our “book club”. As other reviewers have noted, the book is funny and highly readable, especially as it sneaks in financial literacy. And now, from Professor Birdthistle:
Things that the audience might learn:
The SEC does practically zero enforcement on fees. [pp. 215-216] Even though every expert understands the importance of fees on mutual fund investing, the SEC has brought just one or only two cases in its entire history against advisors charging excessive fees. Section 36(b) gives the SEC and private plaintiffs a cause of action, but the SEC has basically ignored it; even prompting Justice Scalia to ask why during oral arguments in Jones v. Harris? Private plaintiffs, on the other hand, bring cases against the wrong defendants (big funds with deep pockets but relatively reasonable fees). So I urge the SEC to bring one of these cases to police the outer bounds of stratospheric fund fees.
The only justification for 12b-1 fees has been debunked. [pp. 81-83] Most investors don't know much about 12b-1 fees and are surprised by the notion that they should be paying to advertise funds in which they already invest to future possible investors. The industry's response is that spending 12b-1 fees will bring in more investors and thus lead to greater savings for all investors via economies of scale. The SEC's own financial economist, however, studied these claims and found (surprisingly unequivocally for a government official) that, yes, 12b-1 fees certainly are effective at bringing in new investment but, no, funds do not then pass along any savings to the funds' investors. I sketch this out in a dialogue on page 81 between a pair of imaginary nightclub denizens.
Target-date funds are more dangerous than most people realize. [pp. 172-174] Target-date funds are embraced by many as a panacea to our investing problem and have been extremely successful as such. But I point out some serious drawbacks with them. First, they are in large part an end-of-days solution in which we essentially give up on trying to educate investors and encourage them simply to set and forget their investments; that's a path to lowering financial literacy, not raising it (which may be a particularly acute issue if my second objection materializes). Second, TDFs rely entirely on the assumption that the bond market is the safety to which all investors should move as they age; but if we're heading for a historic bear market on bonds (as several intelligent and serious analysts have posited), we'll be in very large danger with a somnolent investing population
Thursday, July 7, 2016
SEC disclosures are meant to provide material information to investors. As I hope all of my business associations students know, “information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”
Regulation S-K, the central repository for non-financial disclosure statements, has been in force without substantial revision for over thirty years. The SEC is taking comments until July 21st on on the rule however, it is not revising “other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants.” Specifically, as stated in its 341-page Comment Release, the SEC seeks input on:
- whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;
- whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;
- whether, and if so how, we could revise our requirements to enhance the protection of investors;
- whether our current requirements appropriately balance the costs of disclosure with the benefits;
- whether, and if so how, we could lower the cost to registrants of providing information to investors, including considerations such as advancements in technology and communications;
- whether and if so, how we could increase the benefits to investors and facilitate investor access to disclosure by modernizing the methods used to present, aggregate and disseminate disclosure; and
- any challenges of our current disclosure requirements and those that may result from possible regulatory responses explored in this release or suggested by commenters.
As of this evening, thirty comments had been submitted including from Wachtell Lipton, which cautions against “overdisclosure” and urges more flexible means of communicating with investors; the Sustainability Accounting Standards Board, which observes that 40% of 10-K disclosures on sustainability use boilerplate language and recommends a market standard for industry-specific disclosures (which SASB is developing); and the Pension Consulting Alliance, which agrees with SASB’s methodology and states that:
[our] clients increasingly request more ESG information related to their investments. Key PCA advisory services that are affected by ESG issues include:
- Investment beliefs and investment policy development
- Manager selection and monitoring
- Portfolio-wide exposure to material ESG risks
- Education and analysis on macro and micro issues
- Proxy voting and engagement
This is an interesting time for people like me who study disclosures. Last week the SEC released its revised rule on Dodd-Frank §1504 that had to be re-written after court challenges. That rule requires an issuer “to disclose payments made to the U.S. federal government or a foreign government if the issuer engages in the commercial development of oil, natural gas, or minerals and is required to file annual reports with the Commission under the Securities Exchange Act.” Representative Bill Huizenga, the Chairman of the House Financial Services Subcommittee on Monetary Policy and Trade, introduced an amendment to the FY2017 Financial Services and General Government (FSGG) Appropriations bill, H.R. 5485, to prohibit funding for enforcement for another governance disclosure--Dodd-Frank conflict minerals.
SEC Chair White has herself questioned the wisdom of the SEC requiring and monitoring certain disclosures, noting the potential for investor information overload. Nonetheless, she and the agency are committed to enforcement. Her fresh look at disclosures reflects a balanced approach. If you have some spare time this summer and think the SEC’s disclosure system needs improvement, now is the time to let the agency know.
Sunday, July 3, 2016
The University of Akron Law Review recently published its Symposium on Law and SocioEconomics. You can find a full list of the contributions here (Volume 49, Issue 2). As one of the organizers of the symposium, I had the honor of writing a conclusion to the issue, titled Socio-Economics: Challenging Mainstream Economic Models and Policies. I provide the abstract below, and you can read the entire piece here.
At a time when many people are questioning the ability of our current system to provide economic justice, the Socio-Economic perspective is particularly relevant to finding new solutions and ways forward. In this relatively short conclusion to the Akron Law Review’s publication, Law and Socio-Economics: A Symposium, I have separated the Symposium articles into three groups for review: (1) those that can be read as challenging mainstream economic models, (2) those that can be read as challenging mainstream policy conclusions, and (3) those that provide a good example of both. My reviews essentially take the form of providing a short excerpt from the relevant article that will give the reader a sense of what the piece is about and hopefully encourage those who have not yet done so to read the entire article.
Friday, July 1, 2016
This post concerns the rights and responsibilities of whistleblowers. I sit on the Department of Labor Whistleblower Protection Advisory Committee. These views are solely my own.
Within a week of my last day as a Deputy General Counsel and Chief Compliance Officer for a Fortune 500 company and shortly before starting my VAP in academia, I testified before the House Financial Services Committee on the potential unintended consequences of the proposed Dodd-Frank whistleblower law on compliance programs. I blogged here about my testimony and the rule, which allows whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act to receive 10 to 30 percent of the amount of the recovery in any action in which the Commission levies sanctions in excess of $1 million dollars. During my testimony in 2011, I explained to some skeptical members of Congress that:
…the legislation as written has a loophole that could allow legal, compliance, audit, and other fiduciaries to collect the bounty although they are already professionally obligated to address these issues. While the whistleblower community believes that these fiduciaries are in the best position to report to the SEC on wrongdoing, as a former in house counsel and compliance officer, I believe that those with a fiduciary duty should be excluded and have an “up before out” requirement to inform the general counsel, compliance officer or board of the substantive allegation or any inadequacy in the compliance program before reporting externally.
Thankfully, the final rule does have some limitations, in part, I believe because of my testimony and the urgings of the Association of Corporate Counsel, the American Bar Association and others. In a section of the SEC press release on the program discussing unintended consequences released a few weeks after the testimony, the agency stated:
However, in certain circumstances, compliance and internal audit personnel as well as public accountants could become whistleblowers when:
- The whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors.
- The whistleblower believes that the entity is engaging in conduct that will impede an investigation.
- At least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer – or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.
At least two compliance officers or internal audit personnel have in fact received awards—one for $300,000 and another for $1,500,000. When I served on a panel a couple of years ago with Sean McKessy, Chief of the Office of the Whistleblower, he made it clear that he expected lawyers, auditors, and compliance officers to step forward and would not hesitate to award them.
Compliance officers have even more incentive to be diligent (or become whistleblowers) because of the DOJ Yates Memo, which requires companies to serve up a high ranking employee in order for the company to get cooperation credit in a criminal investigation. I blogged about my concerns about the Memo’s effect on the attorney-client relationship here, stating:
The Yates memo raises a lot of questions. What does this mean in practice for compliance officers and in house counsel? How will this development change in-house investigations? Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ? Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ? What impact will this memo have on attorney-client privilege? How will the relationship between compliance officers and their in-house clients change? Compliance officers are already entitled to whistleblower awards from the SEC provided they meet certain criteria. Will the Yates memo further complicate that relationship between the compliance officer and the company if the compliance personnel believe that the company is trying to shield a high profile executive during an investigation?
The US Chamber of Commerce shares my concerns and issued a report last month that echoes the thoughts of a number of defense attorneys I know. I will be discussing these themes and the Dodd-Frank Whistleblower aspect at the International Legal Ethics Conference on July 14th at Fordham described below:
Current Trends in Prosecutorial Ethics and Regulation
Ellen Yaroshefsky, Cardozo School of Law (US) (Moderator); Tamara Lave, University of Miami Law School (US); Marcia Narine, St. Thomas University School of Law (US);Lawrence Hellman, Oklahoma City University School of Law (US); Lissa Griffin, Pace University Law School (US); Kellie Toole, Adelaide Law School (Australia); and Eric Fish,Yale Law School (US)
Nationally and internationally, prosecutors' offices face new, as well as ongoing, challenges and their exercise of discretion significantly affects individuals and entities. This panel will explore a wide range of issues confronting the modern prosecutor. This will include certain ethical obligations in handling cases, organizational responsibility for wrongful convictions, the impact of the exercise of prosecutorial discretion in whistleblower cases, and the cultural shifts in prosecutors' offices.
To be clear, I believe that more corporate employees must go to jail to punish if not deter abuses. But I think that these mechanisms are the wrong way to accomplish that goal and may have a chilling effect on the internal investigations that are vital to rooting out wrongdoing. If you have any thoughts about these topics, please leave them below or email me at email@example.com. My talk and eventual paper will also address the relationship between Sarbanes-Oxley, the state ethical rules, and the Catch-22 that in house counsel face because of the conflicting rules and the realities of modern day corporate life.
July 1, 2016 in Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine, Securities Regulation, White Collar Crime | Permalink | Comments (1)
Tuesday, June 28, 2016
SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, "Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability." The full speech is available here.
In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I'd turn those thoughts into an annotated version of the speech. In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves. Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals. Here's my initial take:
June 28, 2016 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation, Shareholders, Social Enterprise | Permalink | Comments (1)
Friday, June 17, 2016
On Wednesday, the EU finally outlined its position on conflict minerals. The proposed rule will affect approximately 900,000 businesses. As I have discussed here, these “name and shame” disclosure rules are premised on the theories that: 1) companies have duty to respect human rights by conducting due diligence in their supply chains; 2) companies that source minerals from conflict zones contribute financially to rebels or others that perpetuate human rights abuses; and 3) if consumers and other stakeholders know that companies source certain minerals from conflict zones they will change their buying habits or pressure companies to source elsewhere.
As stated in earlier blog posts, the US Dodd- Frank rule has been entangled in court battles for years and the legal wranglings are not over yet. Dodd-Frank Form SD filings were due on May 31st and it is too soon to tell whether there has been improvement over last year’s disclosures in which many companies indicated that the due diligence process posed significant difficulties.
I am skeptical about most human rights disclosure rules in general because they are a misguided effort to solve the root problem of business’ complicity with human rights abuses and assume that consumers care more about ethical sourcing than they report in surveys. Further, there are conflicting views on the efficacy of Dodd-Frank in particular. Some, like me, argue that it has little effect on the Congolese people it was designed to help. Others such as the law’s main proponent Enough, assert that the law has had a measurable impact.
The EU's position on conflict minerals is a compromise and many NGOs such as Amnesty International, an organization I greatly respect, are not satisfied. Like its US counterpart, the EU rule requires reporting on tin, tantalum, tungsten, and gold, which are used in everything from laptops, cameras, jewelry, light bulbs and component parts. Unlike Dodd-Frank, the rule only applies to large importers, smelters, and refiners but it does apply to a wider zone than the Democratic Republic of Congo and the adjoining countries. The EU rule applies to all “conflict zones” around the world.
Regular readers of my blog posts know that I teach and research on business and human rights, and I have focused on corporate accountability measures. I have spent time in both Democratic Republic of Congo and Guatemala looking at the effect of extractive industries on local communities through the lens of an academic and as a former supply chain executive for a Fortune 500 company. I continue to oppose these disclosure rules because they take governments off the hook for drafting tough, substantive legislation. Nonetheless, I look forward to seeing what lessons if any that the EU has learned from the US when the member states finally implement and enforce the new rule. In coming weeks I will blog on recent Form SD disclosures and the progress of the drafting of the final EU rule.
June 17, 2016 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Law, Legislation, Marcia Narine, Securities Regulation | Permalink | Comments (0)
Thursday, June 16, 2016
8th Annual Berle Symposium - Benefit Corporations and the Firm Commitment Universe - June 27-28, 2016 - Seattle, WA
Three Business Law Prof Blog editors (myself included) are presenting at the upcoming Berle Symposium on June 27-28 in Seattle.
Colin Mayer (Oxford) is the keynote speaker, and I look forward to hearing him present again. I blogged on his book Firm Commitment after I heard him speak at Vanderbilt a few of years ago. The presenters also include former Chancellor Bill Chandler of the Delaware Court of Chancery. Given that Chancellor Chandler's eBay v. Newmark decision is heavily cited in the benefit corporation debates, it will be quite valuable to have him among the contributors. The author of the Model Benefit Corporation Legislation, Bill Clark, will also be presenting; I have been at a number of conferences with Bill Clark and always appreciate his thoughts from the front lines. Finally, the list is packed with professors I know and admire, or have read their work and am looking forward to meeting.
More information about the conference is available here.
June 16, 2016 in Anne Tucker, Business Associations, Conferences, Corporate Governance, Corporations, CSR, Delaware, Financial Markets, Haskell Murray, Joan Heminway, Law School, Social Enterprise | Permalink | Comments (0)
Wednesday, June 15, 2016
Starting 2 weeks ago at Law & Society, I began participating in a series of conversations that can be boiled down to this: Artificial Intelligence and the Law. Even the ABA is on to this story, which means it has reached a peak saturation point. Exciting, scary, confusing, skeptical and a variety of other reactions have been thrown into the conversations across the legal studies gamut from algorithms in parole & criminal sentencing to its use to generate social credit scores (thank you Nizan Packin for opening my eyes to this application). In another LSA shout out, I want to highlight to forthcoming scholarship of Ben Edwards at Barry College where he criticizes the conflicts of interest in investment advise channels. One possible work around he explores is relying on robo-advisors: In the few years since I have looked at digital investment advise, the field has changed, matured, grown! So much so that FINRA has issued a report on digital investment advise, and is unsurprisingly skeptical of the technology application that poses a significant threat to its members (new release synopsis available here). For the uninitiated, check out this run down of popular robo-advisors and Forbes article. Skepticism about the sustainability of low-fee model can be found here; and optimism about its ability to change the world can be found here.
A robo-advisor (robo-adviser) is an online wealth management service that provides automated, algorithm-based portfolio management advice without the use of human financial planners. Robo-advisors (or robo-advisers) use the same software as traditional advisors, but usually only offer portfolio management and do not get involved in more personal aspects of wealth management, such as taxes and retirement or estate planning.
Wednesday, April 20, 2016
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the US Commodity Futures Trading Commission (CFTC) promulgated rules to regulate the swaps marketplace, securities trades that were previously unregulated and a contributing factor in the 2008 financial crisis. The CFTC oversees the commodity derivatives markets in the USA and has dramatically increased regulations and enforcement as a result of Dodd-Frank. As of January 2016, the CFTC finalized Dodd-Frank Rules exemptive orders and guidance actions. Commodity derivatives market participants, whether acting as a commercial hedger, speculator, trading venue, intermediary or adviser, face increased regulatory requirements including:
- Swap Dealer Regulation such as De Minimis Exceptions, new capital and margin requirements to lower risk in the system, heightened business conduct standards to lower risk and promote market integrity, and increase record-keeping and reporting requirements so that regulators can police the markets.
- Derivative Transparency and Pricing such as regulating exchanges of standardized derivatives to increase competition, information and arbitrage on price.
- Establishing Derivative Clearinghouses for standardized derivatives to regulate and lower counter party risks
The full list of CFTC Dodd Frank rulemaking areas is available here. In conjunction with the new regulations, the CFTC has stepped up enforcement actions according to a 2015 CFTC enforcement report detailing 69 enforcement actions for the year. Through these enforcement actions, the CFTC collected $2.8 billion in fines (outpacing SEC collections of $2 billion with a much larger agency budget and enforcement docket).
Thursday, April 14, 2016
Today in my Business and Human Rights class I thought about Ann's recent post where she noted that socially responsible investor Calpers was rethinking its decision to divest from tobacco stocks. My class has recently been discussing the human rights impacts of mega sporting events and whether companies such as Rio Tinto (the medal makers), Omega (the time keepers), Coca Cola (sponsor), McDonalds (sponsor), FIFA (a nonprofit that runs worldwide soccer) and the International Olympic Committee (another corporation) are in any way complicit with state actions including the displacement of indigenous peoples in Brazil, the use of slavery in Qatar, human trafficking, and environmental degradation. I asked my students the tough question of whether they would stop eating McDonalds food or wearing Nike shoes because they were sponsors of these events. I required them to consider a number of factors to decide whether corporate sponsors should continue their relationships with FIFA and the IOC. I also asked whether the US should refuse to send athletes to compete in countries with significant human rights violations.
Because we are in Miami, we also discussed the topic du jour, Carnival Cruise line's controversial decision to follow Cuban law, which prohibits certain Cuban-born citizens from traveling back to Cuba on sea vessels, while permitting them to return to the island by air. Here in Miami, this is big news with the Mayor calling it a human rights violation by Carnival, a County contractor. A class action lawsuit has been filed seeking injunctive relief. This afternoon, Secretary of State John Kerry weighed in saying Carnival should not discriminate and calling upon Cuba to change its rules.
So back to Ann's post. In an informal poll in which I told all students to assume they would cruise, only one of my Business and Human Rights students said they would definitely boycott Carnival because of its compliance with Cuban law. Many, who are foreign born, saw it as an issue of sovereignty of a foreign government. About 25% of my Civil Procedure students would boycott (note that more of them are of Cuban descent, but many of the non-Cuban students would also boycott). These numbers didn't surprise me because as I have written before, I think that consumers focus on convenience, price, and quality- or in this case, whether they really like the cruise itinerary rather than the ethics of the product or service.
Tomorrow morning (Friday), I will be speaking on a panel with Jennifer Diaz of Diaz Trade Law, two members of the US government, and Cortney Morgan of Husch Blackwell discussing Cuba at the ABA International Law Section Spring Meeting in New York. If you're at the meeting and you read this before 9 am, pass by our session because I will be polling our audience members too. And stay tuned to the Cuba issue. I'm not sure that the Carnival case will disprove my thesis about the ineffectiveness of consumer pressure because if the Secretary of State has weighed in and the Communist Party of Cuba is already meeting next week, it's possible that change could happen that gets Carnival off the hook and the consumer clamor may have just been background noise. In the meantime, Carnival declared a 17% dividend hike earlier today and its stock was only down 11 cents in the midst of this public relations imbroglio. Notably, after hours, the stock was trading up.
April 14, 2016 in Ann Lipton, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Law, Law School, Marcia Narine, Teaching | Permalink | Comments (0)
Wednesday, March 30, 2016
CALL FOR PAPERS
2016 Financial Stability Conference
“Innovation, Market Structure, and Financial Stability”
The Federal Reserve Bank of Cleveland and the Office of Financial Research invite the submission of research and policy-oriented papers for the 2016 Financial Stability Conference to be held December 1-2, 2016, in Washington, D.C. The objectives of this conference are to highlight research and advance the dialogue on financial market dynamics that affect financial stability, and to disseminate recent advances in systemic risk measurement and forecasting tools that assist in macroprudential policy development and implementation.
PAPER SUBMISSION PROCEDURE
The deadline for submissions is July 31, 2016. Please send completed papers to:firstname.lastname@example.org Notification of acceptance will be provided by September 30, 2016. Travel and accommodation expenses will be covered for one presenter for each accepted paper.
A pdf version of this call for papers is available here
Friday, March 25, 2016
I feel badly for Chipotle. When I have taught Business Associations, I have used the chain’s Form 10-K to explain some basic governance and securities law principles. The students can relate to Chipotle and Shake Shack (another example I use) and they therefore remain engaged as we go through the filings. Chipotle has recently been embroiled in a public relations nightmare after a spate of food poisonings occurred last fall and winter, a risk it pointed out in its February 2015 10-K filings. The stock price has fluctuated from $750 a share in October to as low as $400 in January and then back to the mid $500 range. After some disappointing earnings news the stock is now trading at around $471.
Clean Yield Group, concerned that the company will focus only on bringing its stock back to “pre-crisis levels,” filed a shareholder proposal March 17th asking the company to link executive compensation with sustainability efforts. The proposal claims that the CEO was overpaid by $40 million in 2014 and states in part:
A number of studies demonstrate a firm link between superior corporate sustainability performance and financial outperformance relative to peers. Firms with superior sustainability performance were more likely to tie top executive incentives to sustainability metrics.
Leading companies are increasingly taking up this practice. A 2013 study conducted by the Investor Responsibility Research Institute and the Sustainable Investments Institute found that 43.4% of the S&P 500 had linked executive pay to environmental, social and/or ethical issues. These companies traverse industry sectors and include Pepsi, Alcoa, Walmart, Unilever, National Grid, Intel and many others…
Investor groups focusing on sustainable governance such as Ceres, the UN Global Compact, and the UN Principles for Responsible Investment (which represents investors with a collective $59 trillion AUM) have endorsed the establishment of linkages between executive compensation and sustainability performance.
Even with the adjustments to executive pay incentives announced this week in reaction to Chipotle’s ongoing food-borne illness crisis, Chipotle shareholders have consistently approved excessively large pay packages to our company’s co-chief executives that dangerously elide accountability for sustainability-related risks. This proposal provides the opportunity to rectify this situation.
If shareholders approve the compensation package on our company’s 2016 proxy ballot, by year-end, Mr. Ells and Mr. Moran will have pocketed nearly $211 million for their services since 2011. Shareholders have not insisted upon direct oversight of sustainability matters as a condition of employment or compensation, and the present crisis illustrates the probable error in that thinking.
This week, the Compensation Committee of the Board announced that it would withhold 2015 bonuses for executive officers. It has also announced that executive officers’ 2016 performance bonuses will be solely tied to bringing CMG stock back, over a three-year period, to its pre-crisis level.
This is a shortsighted approach that skirts the underlying issues that may have contributed to the E. coli and norovirus outbreaks that have left hundreds of people sickened, injured sales, led to ongoing investigations by health authorities and the federal government, damaged our company’s reputation, and will likely lead to expensive litigation. For years, Chipotle has resisted calls by shareholders to implement robust and transparent management and reporting systems to handle a range of environmental, social and governance issues that present both risks to operations as well as opportunities. While no one can know for certain whether a more rigorous management approach to food safety might have averted the current crisis, moving forward, shareholders can insist upon a proactive approach to the management of sustainability issues by altering top executives’ compensation packages to incentivize it.
The last sentence of the paragraph above stuck out to me. The shareholder does not know whether more rigorous sustainability practices would have prevented the food poisonings but believes that compensation changes incentivizing more transparency is vital. I’m not sure that there is a connection between the two, although there is some evidence that requiring more disclosure on environmental, social, and governance factors can lead to companies uncovering operational issues that they may not have noticed before. Corporate people are fond of saying that “what gets measured gets treasured.” Let’s see what Chipotle’s shareholders treasure at the next annual meeting.
March 25, 2016 in Business Associations, Compensation, Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Shareholders | Permalink | Comments (0)
Wednesday, March 16, 2016
Being near to celebrity, even academic celebrity, can be exciting. I feel unjustifiable pride and exhilaration in the nomination of George Washington Law School professor Lisa Fairfax to be a SEC commissioner. The White House announced her nomination last October, and the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings yesterday for Lisa Fairfax (democratic nominee) and Hester Peirce (republican nominee). Professor Fairfax is being heralded as having "written extensively in favor of shareholder rights, shareholder activism, and gender and racial diversity on corporate boards." Her scholarship is available on her SSRN page. Hester Peirce, another academic of sorts, is a senior fellow at the Mercatus Center at George Mason University researching financial markets and an adjunct professor. The Mercatus Center is a "university-based research center... advanc[ing] knowledge about how markets work to improve people’s lives by training graduate students, conducting research, and applying economics to offer solutions to society’s most pressing problems." Her writing is available here.
The hearing process was reported by the WSJ as "tough" for both nominees. The confirmation process is by no means a given in the current political climate. A video of the hearing is available for viewing. Additionally, each nominee submitted a statement and financial records as a part of the confirmation process. Download FairfaxStatement Download FairfaxFinancialDisclosure Download PeirceStatement Download PeirceFinancialDisclosure
Lisa Fairfax summarized her credentials to be a Commissioner:
As a law professor, over the last fifteen years I have had the privilege of teaching Corporations and Securities Law to the next generation of practitioners, judges, and regulators, so that they can understand the increasingly complex world in which companies must operate, markets must perform, and regulators must monitor. My teaching, along with my research and writing in these areas, have given me a deep understanding of the issues confronting the SEC, as well as a strong desire to help tackle those issues head on.
Fairfax's statement also stated her view of the SEC:
[I] believe deeply in the SEC’s three part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. ... I believe that the SEC’s three-part mission statement is more than a statement; it is a set of guiding principles that should shape every aspect of the agency’s activities. ...I believe the SEC’s work must be aimed at ensuring that investors are protected at all times, and that investors have confidence in the markets and the financial system.
The SEC also has a responsibility to facilitate access to needed capital for all participants in the market, from the corporation and small business owner in need of cash and credit, to the individual investing to support a family, finance a child’s education, or ensure a comfortable retirement.
Hester Peirce, who previously worked with the SEC’s Division of Investment Management, Commissioner Paul Atkins, and the SEC Investor Advisory Committee wrote:
My desire to serve at the SEC is motivated by the conviction that the capital markets help unlock people’s potential. Investors build their retirement nest eggs, their down payments, and their children’s college funds. Vibrant capital markets find and fund individuals and companies with brilliant ideas that can enhance people’s lives and the nation’s prosperity.
My belief in the capital markets’ ability to enrich our communities is built on lessons I have learned at the Peirce family dinner table, in classrooms at Case Western Reserve and Yale, and from mentors and colleagues throughout my career.
I am academically (and personally) interested in the role of retirement investors in capital markets so I noted with interest that both nominees spoke of the relevance of capital markets and the SEC to individual (retirement) investors.
The Committee is expected to vote on April 7, 2016.