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.
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 Weldon, 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 Weldon, Securities Regulation | Permalink | Comments (0)
Tuesday, June 14, 2016
The New York Times ran the article How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions last weekend. It's an interesting piece that provides a look at Donald Trump's east coast casino experience. The article is, as one might expect, critical of his dealings and notes that Trump made money even when his ventures when bankrupt.
Though I will not defend any of Trump's dealings, there are few issues raised that I think are worthy of a some discussion and clarification.1 The post that follows suggests how to consider Trump's business history and place that history in a political context.
Saturday, June 11, 2016
A colleague sent me a link to a White House blog post focusing on Title III of the Jumpstart Our Business Startups Act (JOBS Act), known as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND Act). The main theme of the blog post, entitled The Promise of Crowdfunding and American Innovation, is stated in its summary: ''Crowdfunding' rule makes it possible for entrepreneurs across the country to raise small-dollar investments from ordinary Americans." This much is true. And the post accurately notes that "previous forms of crowdfunding" also already did this.
But the post goes on to extol the virtues of the CROWDFUND Act, which offers (among other things) a registration exemption for investment (or securities) crowdfunding--a very special type of crowdfunding involving the offer or sale of debt, equity, investment contracts, or other securities. Or at least the blog post tries to extol the virtues of the CROWDFUND Act. I am not buying it. In fact, the post doesn't come up with much of substance to praise . . . .
The coauthors focus a key paragraph on explaining why the CROWDFUND Act is heavy on investor protection provisions. But they do not talk about the costs of the legislation in relation to its potential benefits, except in the most superficial way--mentioning "risks" without classifying them and outlining the "multiple layers of investor protections." Although it was written before the final Securities and Exchange Commission rules were adopted under the CROWDFUND Act, my article for the Kentucky Law Journal offers a more detailed picture of benefits and costs and shares my view that the costs are likely to outweigh the benefits for many market participants.
Maybe sensing this (and the possible lack of success of the CROWDFUND Act that may result from this imbalance), the coauthors of the White House blog post offer the following:
One encouraging recent sign is not only the launch of many new regulated crowdfunding platforms, but also the growing ecosystem of “startups helping startups” to provide services for this new marketplace—making it easier for entrepreneurs to fulfill disclosure requirements, verify investor credentials, educate investors, and more. Over time, these new tools may increase transparency and provide strong accountability not only for “the crowd,” but also for the “family and friends” that have long served as entrepreneurs’ first source of seed capital.
This is a super effect of crowdfunding generally and of securities crowdfunding under the CROWDFUND Act specifically--the emergence of new services and market participants to support crowdfunding and small capital raising more generally. I predicted this in my first article on crowdfunding (co-authored with one of my former students) : "Because '[c]rowdfunding is a market of and for the participants,' some traditional financial intermediaries may be shut out of this sector of the capital formation process. No doubt, however, new support roles for crowdfunding will develop as the industry matures." [(p. 930, n.263) (citations omitted)] But these market innovations would be more pronounced, imv, if the CROWDFUND Act provided participants with a more balanced set of costs for the benefits provided. As the blog post notes, "it’s still a fact that not every entrepreneur has access to needed capital." More can be done to solve this problem with a registration exemption that allows for small capital raising--funding at well less than the $1 million level set under the CROWDFUND Act--at less cost.
The blog post concludes with more platitudes. ("America’s entrepreneurs are our engines of economic growth, innovation, and job creation . . . .") Really, this blog post is a bit of a puff piece--manifesting both good marketing (for those who read and believe it) and overoptimism.
But then again, what did I expect from a blog post put out by White House staff? I suppose, given the President's support for the CROWDFUND Act (and the JOBS Act overall--which the coauthors also praise more generally in a paragraph of the post), I should expect the White House to promote the use of the CROWDFUND Act through these kinds of public relations messages. OK. I get that. Nevertheless, I admit to being disappointed that more is not being done in the Executive Branch and elsewhere to point out the shortcomings of the CROWDFUND Act and fine tune the regulation of securities crowdfunding so that it can have its maximum positive impact on business and project innovators and investors alike. Instead, I fear that well intending proponents are over-promoting the CROWDFUND Act, which may ultimately sour folks on securities crowdfunding as a capital raising alternative if few are able to take advantage of the current regulatory exemptions. We'll see. I hope I am wrong in worrying about this. Time will tell.
Monday, May 30, 2016
This year, my research and writing season has started off with a bang. While grading papers and exams earlier this month, I finished writing one symposium piece and first-round-edited another. Today, I will put the final touches on PowerPoint slides for a presentation I give the second week in June (submission is required today for those) and start working on slides for the presentation I will give Friday.
All of this sets into motion a summer concert conference, Barbri, and symposium tour that (somewhere along the line) got a bit complicated. Here are the cities and dates:
New Orleans, LA - June 2-5
Atlanta, GA - June 10-11
Nashville, TN - June 17
Chicago, IL - June 23-24
Seattle, WA - June 27
I know some of my co-bloggers are joining me along the way. I look forward to seeing them. Each week, I will keep you posted on current events as best I can while managing the research and writing and presentation preparations. The topics of my summer research and teaching run the gamut from insider trading (through by-law drafting, agency, unincorporated business associations, personal property, and benefit corporations) to crowdfunding. A nice round lot.
This coming week, I will be at the Law and Society Association annual conference. My presentation at this conference relates to an early-stage project on U.S. insider trading cases. The title and abstract for the project and the currently envisioned initial paper (which I would, of course, already change in a number of ways) are as follows:
May 30, 2016 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, Research/Scholarhip, Securities Regulation, Social Enterprise, Teaching, White Collar Crime, Writing | Permalink | Comments (0)
Wednesday, May 25, 2016
Last week the SEC announced insider trading charges against former-Dean Foods Company board member Thomas C. Davis and professional sports gambler, William “Billy” Walters of Las Vegas. Involved in the case is professional golfer, Phil Mickelson, named as a relief defendant in the case. Davis owed money to Walters and began passing along confidential information first about Dean Foods, and later about Darden Restaurants. Walters passed along his insider knowledge of Dean Foods to Mickelson, who also owed Walters money.
For those unfamiliar,
"the SEC may seek disgorgement from “nominal” or “relief” defendants who are not themselves accused of wrongdoing in a securities enforcement action where those persons or entities (1) have received ill-gotten funds, and (2) do not have a legitimate claim to those funds." S.E.C. v. DCI Telecommunications, Inc., 122 F. Supp. 2d 495, 502 (S.D.N.Y. 2000).
The SEC issued a statement on Friday detailing the alleged wrong doing by all parties and announcing that "Mickelson will repay the money he made from his trading in Dean Foods because he should not be allowed to profit from Walters’s illegal conduct.”
As most insider trading cases are, the facts are fascinating. This would make a great exam hypo, and I am flagging it for my casebook section on insider trading.
Tuesday, May 3, 2016
What factors generate a healthy secondary market in securities? That is my question for this week. I have found myself struggling with this question since I was first called by a reporter writing a story for The Wall Street Journal about a work-in-process written by one of our colleagues, Seth Oranburg (a Visiting Assistant Professor at Chicago-Kent College of Law). The article came out yesterday (and I was quoted in it--glory be!), but the puzzle remains . . . .
Secondary securities markets have been hot topics for a while now. I followed with interest Usha Rodrigues's work on this paper, for example, which came out in 2013. Yet, that project focused on markets involving only accredited investors.
Seth's idea, however, is intended to prime a different kind of secondary market in securities: a trading platform for securities bought by the average Joe (or Joan!) non-accredited investor in a crowdfunded offering (specifically, an offering conducted under the CROWDFUND Act, Title III of the JOBS Act). [Note: I will not bother to unpack the statutory acronyms used in that last parenthetical expression, since I know most of our readers understand them well. But please comment below or message me if you need help on that.] Leaving aside one's view of the need for or desirability of a secondary market for securities acquired through crowdfunding (which depends, at least to some extent, on the type of issuer, investment instrument, and investor involved in the crowdfunding), the idea of fostering a secondary securities market is intriguing. What, other than willing buyers and sellers and a facilitating (or at least non-hostile) regulatory environment, makes a trading market in securities?
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).
Wednesday, April 13, 2016
SEC Concept Release on Financial Disclosures in form S-K: Risk, Reporting Frequency and Sustainability
Today (April 13, 2016), the SEC made public a much anticipated concept release regarding financial disclosures in form S-K. The release seeks public comment on "modernizing certain business and financial disclosure requirements in Regulation S-K." The comment period is open for the next 90 days.
The release is 341 pages, so needless to say, I haven't gotten through the document. In it's entirety at least. By my initial count there are over 35 substantive issues in the release and many more technical/procedures ones. I've highlighted 3 issues that are relevant to prior BLPB discussions: Risk, Reporting Frequency and Sustainability.
Risk management and risk reporting in item 503(c) and 305 are addressed starting on page 146.
"[W]e consider whether requiring additional disclosure of management’s approach to risk and risk management and consolidating risk-related disclosure would, on balance, be beneficial to investors and registrants. We also seek to better understand how our disclosure requirements could be updated to enhance investors’ ability to evaluate a registrant’s risk exposures. We are especially interested in feedback on how we can improve the content and readability of the risk factors included in a filing as well as the potential advantages and disadvantages of different approaches to risk-related disclosure."
Reporting frequency as a component of the investor time horizons (aka short/long term investment) are discussed on page 280. The Commission questioned the frequency of financial reporting noting the adoption of semi-annual reporting in 1955 and quarterly reporting in 1970. Summarizing the current debate on quarterly reporting, the Commission states:
"The value of quarterly financial reporting has been the subject of debate. Opponents of quarterly reporting argue that frequent financial reporting may lead management to focus on short-term results to meet or beat earnings targets rather than on long-term strategies. Consequently, some have argued that quarterly reports should be discontinued or made voluntary in the United States.
Tuesday, April 12, 2016
There are those I-need-to-pinch-myself moments in life that come along every once in a while. I was lucky enough to have one last week. I was invited to attend a conference and comment on two interesting draft papers written by two law faculty colleagues whose work I have long admired and who are lovely people. And the location was Miami Beach. Does it get any better than that for a law professor who likes the beach? I think not.
The event was the annual conference for the Institute for Law and Economic Policy (ILEP). The conference theme was "Vindicating Virtuous Claims." The papers will be published in the Duke Law Journal, which co-sponsored the program.
I will save details on the papers for later (when the papers are finalized). But I will briefly describe each here. The first paper on which I commented, written by Rutheford B ("Biff") Campbell (University of Kentucky College of Law), argues for federal preemption of state securities regulation governing the offer and sale of securities, since federal preemption would be more efficient. The second paper, written by James D. ("Jim") Cox (Duke University School of Law, who was honored at the event and received the most amazing tribute from his Dean, David Levi, at the closing dinner), argues for attaching more value to the normative effects of judicial decisions arising out of indeterminate doctrine (using materiality and the business judgment rule as core examples). I know that last part is a mouthful, but read it again, and I think you'll get it . . . .
Both papers were intellectually stimulating, and both scholars were quite engaging in their presentations. The other invited commentators were interesting and thought-provoking. And the day was filled overall with other interesting academic paper panels and a lively keynote lunch speaker. Together with the panel discussion on the evolution of Rule 23 and dinner the night before, it was an action-packed, invigorating conference!
. . . And then there was the time I spent after the conference recollecting myself (and writing student bar recommendation letters). The weather was cooperative (downright sunny and warm), and the surroundings at the hotel (food, accommodations, etc.) were fabulous. My Facebook friends got tired of my colorful photos and happy posts, especially since many of those folks were in locales further North and to the East in which it was cold and snowing on Saturday or Sunday.
So, I am taking this opportunity to note and celebrate my good fortune on, and to offer thanks for, being invited to the ILEP conference to comment on the forthcoming scholarly work of two great business law colleagues. I met some fascinating, pleasant new people among the conference constituents (from the bench, bar, and academy). And I enjoyed time on a chaise lounge. [sigh] But now, it's back to the reality of the final few weeks of the semester. I wish everyone the best in pushing through.
Tuesday, March 29, 2016
The Rock Center for Corporate Governance at Stanford University seeks to hire a resident academic fellow to begin in September or October 2016 for a 12-month or one-academic-year term, with the possibility of renewal for a second year. The fellow will pursue his or her own independent research, as well as work closely with Stanford Law School faculty on a range of projects related to corporate governance, securities regulation, vehicles for public and private investment, and financial market reform. The ideal candidate has excellent academic credentials and experience in relevant fields of practice. The position is particularly well suited to a practicing attorney, with either a litigation or transactional background, seeking a transition to academia, or a post-doctoral economics or finance student with interests in corporate governance. More information can be found at https://stanfordcareers.stanford.edu/job-search?jobId=70496.
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 Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)
Tuesday, March 22, 2016
Legal commentators and the media have been abuzz with news of President Obama's nomination of Judge Merrick Garland to the Supreme Court. If there was ever reason to be abuzz, in the world of legal news, this is it. Try to find a summary of Judge Garland's record in dealing with business law issues, however, and you are met with a silent, dark internet. Aside from mentions of Judge Garland having taught anti-trust at Harvard there is little discussion of his business jurisprudence. The D.C. Circuit court hears an administratively heavy caseload, but Judge Garland has been on the bench for nearly 20 years! I set out to uncover his business law barometer. My initial searches produced 19 opinions that he authored on business law matters, which are mostly securities cases but also include a piercing the corporate veil and contracts claims among others. While I am no online search wizard and am positive that I have missed some relevant cases, this is what I produced after such wide-net casting as "business law", "corporations", "partnership", "board of directors", "shareholders" etc. You get the idea, I ran several undeniably broad searches. The initial case list is provided below, and was generated (along with annotations) through WestLaw. Please comment if you have relevant cases to add. I may add commentary on the cases in a future post if there is interest... (and time).
Securities Law Cases
- Horning v. S.E.C., 570 F.3d 337 (D.C. Cir. 2009)
SECURITIES REGULATION - Brokers and Dealers. Mid-trial correction of sanction the SEC sought did not deprive broker-dealer firm’s former director of due process.
- Graham v. S.E.C., 222 F.3d 994 (D.C. Cir. 2000)
SECURITIES REGULATION - Fraud. Registered representative aided and abetted customer’s fraud.
- Katz v. S.E.C., 647 F.3d 1156 (D.C. Cir. 2011)
SECURITIES REGULATION - Brokers and Dealers. Former registered representation made unsuitable investment recommendations for her customers.
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.
Friday, March 4, 2016
Presidential candidate Donald Trump has repeatedly stated that he never plans to eat Oreo cookies again because the Nabisco plant is closing and moving to Mexico. Trump, who has starred in an Oreo commercial in the past, is actually wrong about the nature of Nabisco’s move, and it’s unlikely that he will affect Nabisco’s sales notwithstanding his tremendous popularity among some in the electorate right now. Mr. Trump has also urged a boycott of Apple over how that company has handled the FBI’s request over the San Bernardino terrorist’s cell phone.
Strangely, I haven’t heard a call for a boycott of Apple products following shareholders’ rejection of a proposal to diversify the board last week. I would think that Reverend and former candidate Al Sharpton, who called for the boycott of the Oscars due to lack of diversity would call for a boycott of all things Apple. But alas, for now Trump seems to be the lone voice calling for such a move (and not because of diversity). In fact, I’ve never walked past an Apple Store without thinking that there must be a 50% off sale on the merchandise. There are times when the lines are literally out the door. Similarly, despite the #Oscarssowhite controversy and claims from many that the boycott worked because the Oscars had historically low ratings, viewership among black film enthusiasts was only down 2% this year.
So why do people constantly call for boycotts? According to a Freakonomics podcast from January, they don’t actually work. Historians and economists made it clear in interviews that they only succeed as part of an established social movement. In some cases they can backfire leading to a "buycott," as it did for Chik Fil A. The podcast also put into context much of what we believe are the boycott “success stories,” including the Montgomery Bus Boycott with Rosa Parks and the sit in movement related to apartheid in the 1980s.
I have spent much of my time looking at disclosure legislation that is based in part on the theory that informed consumers and socially-responsible investors will boycott or divest holdings (see here, here, and here). In particular, I have focused on the Dodd-Frank conflict minerals corporate governance disclosure and why I don’t think that using name and shame laws work—namely because consumers talk a good game in surveys but actually don’t purchase based on social criteria nearly as much as NGOs and legislators believe.
The SEC was supposed to decide whether to file a cert petition to the Supreme Court on the part of the conflict minerals legislation that was struck down on First Amendment grounds by March 9th but they now have an extension until April. Since I wrote an amicus brief in the case at the lower level, I have a particular interest in this filing. I had planned my business and human rights class on disclosures and boycotts around that cert. filing to make it even more relevant to my students, who will do a role play simulation drafted by Professor Erika George representing civil society (NGOs, investors, and other stakeholders), the electronics industry, the US government (state department, Congress, and SEC), Congolese militia, the Congolese government, and the Congolese people. The only group they won’t represent is US consumers, even though that’s the target group of the Dodd-Frank disclosure. I did tweak Professor George’s materials but purposely chose not to add in the US consumer group. After my students step out of their roles, we will have the honest discussions about their own views and buying habits. I’ll try not to burst any boycott bubbles.
March 4, 2016 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Business, International Law, Law School, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, Teaching | Permalink | Comments (1)
Monday, February 29, 2016
Federal and state securities regulation is the personification of what conservatives refer to pejoratively as “big government.” Businesses can’t raise money unless they first get permission from the government and, in many states, that permission turns on a regulator’s determination of whether the offer is fair. The cost of compliance is a serious drag on capital formation, especially small business capital formation. Federal and state securities laws also generate a tremendous amount of plaintiff’s litigation, another conservative bugaboo.
We’ve seen conservative efforts at the federal level to limit securities regulation and litigation—for example, the Private Securities Litigation Reform Act and the JOBS Act. But, unless things are going on at the state level that I’m not aware of, there doesn’t seem to be a corresponding effort at the state level.
That’s surprising, because the Republicans have greater control at the state level than they do at the federal level. There are 31 Republican governors and the Republicans control both chambers of the state legislature in 30 states, plus Nebraska’s unicameral legislature. Republicans control both the governorship and the state legislature in 24 states.
Why hasn’t there been a push to change state securities regulation? Are Republicans satisfied with state regulation? If so, that’s surprising because Rutheford Campbell and others have pointed to state securities regulation as a major drag on small business capital formation. Are politicians at the state level not as anti-government? Or is there something else going on that I’m missing?
I’m not arguing that state securities laws should be limited (at least, not in this post). I’m just curious why it hasn’t happened.
Wednesday, February 24, 2016
Having just taught a corporate governance seminar class on the proxy process (from a company's perspective), proxy advisory services, and institutional voting, I have the upcoming proxy season on my mind. There are a great collection of resources available for those interested for academic or practice-related reasons. My students found many of these summaries to be a good distillation of the issues and introduction to the nuts and bolts of proxy access. I have provided my list of resources below, in addition to a quick summary of the major governance issues likely to be on the table in 2016.
Major Governance Issues:
- Dodd Frank pay ratio disclosure
- Say on Pay majority voting
- Executive compensation disclosures subject to new SEC interpretations
- Proxy Access Bylaws (see New York campaign)
- Audit Committee Disclosures
- Independent Chair proposals
2016 Proxy Season Resources: