Thursday, March 6, 2014

More protection for SOX whistleblowers- are private contractors ready?

This week in Lawson v. FMR, LLC the Supreme Court extended the reach of Sarbanes-Oxley to potentially millions more employers when it ruled that SOX's whistleblower protection applies to employees of private employers that contract with publicly-traded companies. In 2002, Congress enacted SOX with whistleblower protection provisions containing civil and criminal penalties. The law clearly protects whistleblowers who work for publicly-held companies, and courts have generally ruled against employees who work for privately-held firms. But the Department of Labor’s Administrative Review Board has ruled that contractors at public companies enjoy whistleblower protection as well. The Supreme Court agreed with that assessment, with Justice Ginsburg writing for the majority. The dissent, written by Justice Sotomayor, noted the "stunning reach" based on the majority's interpretation and opined that the extension was not what Congress intended.  The plaintiffs in Lawson did not work for Fidelity, but were contracted to provide advice to Fidelity Mutual Fund customers. Plaintiffs voiced concerns to management regarding problems with cost-accounting methodologies and the alleged improper retention of millions of dollars in fees. Because Fidelity has no employees of its own, it was not a party to the suit.

This development will likely be among the many that the Whistleblower Protection Advisory Committee will discuss at our meeting next week. I sit on a 12-person committee comprised of management, labor and the public for a two-year term, and we are reviewing two dozen laws that OSHA enforces to protect employees. SOX is just one of the financial laws covered by OSHA for whistleblower purposes. Although the comment/question period for the committee meeting is officially closed, those who want to submit comments or questions can still do so through http://www.regulations.gov. The meeting is open to the public on March 11th from 9 a.m. - 5 p.m. in Room N-3437 A-C, U.S. Department of Labor, 200 Constitution Ave., NW, Washington, DC 20210

 

 

 

 

 

March 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (1)

If It's Good Enough For Justice Kennedy....

Some law professors may remember when Justices Roberts and Kennedy opined on the value legal scholarship. Justice Roberts indicated in an interview that law professors spend too much time writing long law review articles about “obscure” topics.  Justice Kennedy discussed the value he derives from reading blog posts by professors who write about certs granted and opinions issued. I have no doubt that most law students don’t look at law review articles unless they absolutely have to and I know that when I was a practicing lawyer both as outside counsel and as in house counsel, I almost never relied upon them. If I was dealing with a cutting-edge issue, I looked to bar journals, blog posts and case law unless I had to review legislative history.

As a new academic, I enjoy reading law review articles regularly and I read blog posts all the time. I know that outside counsel  read blogs too, in part because now they’re also blogging and because sometimes counsel will email me to ask about a blog post. I encourage my students to follow bloggers and to learn the skill because one day they may need to blog for their own firms or for their employers.

Blogging provides a number of benefits for me. First, I can get ideas out in minutes rather than months via the student-edited law review process. This allows me to get feedback on works/ideas in progress. Second, it forces me to read other people’s scholarship or musings on topics that are outside of my research areas. Third, reading blogs often provides me with current and sophisticated material for my business associations and civil procedure courses. At times I assign posts from bloggers that are debating a hot topic (Hobby Lobby for example). When we discuss the Basic v. Levinson case I can look to the many blog posts discussing the Halliburton case to provide current perspective. 

But as I quickly learned, not everyone in the academy is a fan of blogging. Most schools do not count it as scholarship, although some consider it service. Anyone who considers blogging should understand her school’s culture. For me the benefits outweigh the detriment. Like Justice Kennedy, I’m a fan of professors who blog.  In no particular order, here are the mostly non-law firm blogs I check somewhat regularly (apologies in advance if I left some out): 

http://www.theconglomerate.org/  (thanks again for giving me first opportunity to blog a few months into my academic career!)

http://socentlaw.com/

http://www.fcpaprofessor.com/

http://law.wvu.edu/the_business_of_human_rights (currently on a short hiatus)

http://www.professorbainbridge.com/

http://lawprofessors.typepad.com/civpro/

http://prawfsblawg.blogs.com/prawfsblawg/

http://taxprof.typepad.com/

http://lawprofessors.typepad.com/securities/

http://www.thecorporatecounsel.net/blog/index.html

http://blogs.law.harvard.edu/corpgov/

http://www.delawarelitigation.com/

http://www.dandodiary.com/

 http://lawprofessors.typepad.com/whitecollarcrime_blog/

http://lawprofessors.typepad.com/mergers/

http://lawprofessors.typepad.com/laborprof_blog/

http://www.thefacultylounge.org/

http://opiniojuris.org/

I would welcome any suggestions of must-reads.

 

 

 

 

 

 

 

 

 

 

 

 

 

March 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Marcia Narine, Merger & Acquisitions, Securities Regulation, Social Enterprise, Teaching, Unincorporated Entities, Weblogs | Permalink | Comments (2)

Monday, March 3, 2014

Book Review: Harriman vs. Hill

What happens if short sellers of stock are unable to cover because no one has any shares to sell? That’s one of the many interesting issues in the new book, Harriman vs. Hill: Wall Street’s Great Railroad War, by Larry Haeg (University of Minnesota Press 2013). Haeg details the fight between Edward Henry Harriman, supported by Jacob Schiff of the Kuhn, Loeb firm, and James J. Hill, supported by J.P. Morgan (no biographical detail needed), for control of the Northern Pacific railroad. Harriman controlled the Union Pacific railroad and Hill controlled the Great Northern and Northern Pacific railroads. When Hill and Harriman both became interested in the Burlington Northern system and Burlington Northern refused to deal with Harriman, Harriman raised the stakes a level by pursuing control of Hill’s own Northern Pacific.

I’m embarrassed to admit that I wasn’t aware of either the Northern Pacific affair or the stock market panic it caused. I had heard of the Northern Securities antitrust case that grew out of the affair; I undoubtedly encountered it in my antitrust class in law school. (Everything the late, great antitrust scholar Phil Areeda said in that class is still burned into my brain.)

I’m happy I stumbled across this book, and I think you would enjoy it as well. Harriman vs. Hill has everything needed to interest a Business Law Prof reader: short selling; insider trading; securities fraud; a stock market panic; a hostile takeover; a historical antitrust case; and, of course, J. P. Morgan. This was a hostile takeover before hostile takeovers were cool (and before tender offers even existed, so the fight was pursued solely through market and off-market purchases).

The book does have a couple of shortcomings. One is a polemic at the end of the book against the antitrust prosecution. The antitrust case was clearly a political play by Theodore Roosevelt, and Haeg may be right that the railroads’ actions were economically defensible, but his discussion is a little too one-sided for my taste. Haeg also has a tendency to put thoughts into the characters’ minds (Hill might have been thinking . . .), but he only uses the device to add factual background, so it isn’t terribly offensive. Finally, Haeg occasionally gets the legal terminology wrong. For example, he refers to the railroad holding company “that the U.S. Supreme Court narrowly declared unconstitutional,” when what he means is that the court upheld the law outlawing the holding company. He only makes legal misstatements like that a couple of times, but those errors are very grating on a lawyer reading the book.

Still, in spite of those minor flaws, this is a very good book and I highly recommend it.

March 3, 2014 in Business Associations, Books, C. Steven Bradford, Corporate Governance, Corporations, Financial Markets, Merger & Acquisitions, Securities Regulation | Permalink | Comments (0)

Monday, February 10, 2014

Crowdfunding Problems? Blame Congress, Not the SEC

The SEC is taking some flak from crowdfunding proponents for its crowdfunding rules. Sherwood Neiss, one of the early proponents of a crowdfunding exemption, has taken the SEC to task, as has Representative Sam Graves, the chair of the House Committee on Small Business. See also this article.

These critics point out, correctly, that the crowdfunding exemption is too expensive and restrictive. The problem is that the critics are aiming at the wrong target. I’m no SEC apologist; I have criticized its approach to small business and the structure of its exemptions on a number of occasions. But, in this case, it’s not the SEC that deserves the blame. It’s Congress.

Almost everything the critics are concerned about originates in the statute itself, not in the SEC’s attempt to implement the statute. I pointed out the many problems with the JOBS Act’s crowdfunding exemption almost 18 months ago. The unnecessary cost, complexity, and liability issues the critics are currently complaining about are statutory problems.

Yes, the SEC has some discretion to change some of the objectionable provisions, but one should hardly expect the SEC, with no experience whatsoever with crowdfunding, to overrule the express requirements adopted by Congress. If anything, as I have pointed out here and here, the SEC is to be commended for cleaning up some of the problems created by the statute. 

The crowdfunding exemption is terribly flawed, but it’s not the SEC’s fault. If you’re looking for someone to blame, Congress is the place to start, particularly the Senate, which is responsible for the substitute language that became the final crowdfunding bill. The crowdfunding exemption needs to be fixed, but it’s Congress that will have to fix it.

February 10, 2014 in C. Steven Bradford, Entrepreneurship, Securities Regulation | Permalink | Comments (0)

Thursday, February 6, 2014

Is the SEC making it harder for companies to comply with the law?

One of my favorite professors/bloggers, Mike Koehler has an interesting post describing how and why the former DOJ FCPA Enforcement Chief criticized the SEC's handling of the FCPA. I used to read Mike's blog daily during my in-house days, and I share his views on the FCPA enforcement regime. 

His post is below and reiterates what I wrote about here about the number of enforcement officers who leave office and question the way in which the FCPA is prosecuted:

This post has a similar theme to this prior post.  The theme is – all one has to do is wait for former DOJ and SEC FCPA enforcement officials to blast various aspects of the current FCPA enforcement climate. Touching upon the same issues I first highlighted in this August 2012 post titled “The Dilution of FCPA Enforcement Has Reached a New Level With the SEC’s Enforcement Action Against Oracle,” as well as prior posts herehere and here, a former Assistant Chief of the DOJ’s FCPA Unit (William Stuckwisch - currently a partner at Kirkland & Ellis) blasts certain aspects of SEC FCPA enforcement inthis recent article published in Criminal Justice.

The article begins:

“Imagine the following scenario: You have guided your client, a publicly traded company, through the long and winding process that is a Foreign Corrupt Practices Act (FCPA) internal investigation. Afterward, or increasingly more often simultaneously, you then lead your client through presentation of the results of the investigation to the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC) (collectively, “government”). Ultimately, neither the internal investigation nor the government’s investigation finds any improper payment (or offers of payments) to any foreign official, or any other knowing misconduct. As a result, the government cannot pursue substantive FCPA antibribery charges against your client, and the DOJ cannot pursue any other FCPA-related criminal charges. Just when you begin to savor this significant success, you are ripped back to reality, as the SEC informs you that, nevertheless, your client faces civil enforcement under the FCPA’s internal controls provision and demands a significant penalty.  Unfortunately, this scenario is not a hypothetical for the FCPA Bar to deliberate at conferences and include as footnotes in memoranda addressing real-world client issues. Instead, it mirrors the facts publicly alleged in the SEC’s August 2012 enforcement action against Oracle Corporation, a case considered by many FCPA practitioners to be a stunning result.  [...]  In Oracle, the SEC faulted the US parent corporation for not auditing local distributors hired by its Indian subsidiary, without alleging that the distributors (or anyone else) had made any improper payment to any foreign government official.  Oracle is the latest example of the SEC’s expansive enforcement of the FCPA’s internal controls provision, and it potentially paints a bleak picture—one in which the provision is essentially enforced as a strict liability statute that means whatever the SEC says it means (after the fact).”

Elsewhere, Stuckwisch, the lead author of the article, notes:

“[G]iven the highly subjective nature of the internal controls provisions, companies will continue to feel at the SEC’s mercy once it opens an FCPA investigation, even if no improper payments (or offers of payments) are ever found.”  [...]  In our view, the true lesson of Oracle is not that this particular type of internal control is required, but rather that the internal controls provision is so broad, and the statutory standard of reasonable assurances so subjective, that the SEC has an almost unfettered ability to insist on a settlement, including a civil penalty, at the conclusion of virtually any FCPA investigation. Companies may be willing to enter into such settlements—particularly because, in the absence of a parallel DOJ action, they need not make any factual admissions (due to the “neither admit nor deny” nature of SEC settlements in such circumstances), and the cost of a settlement is often lower than continuing investigative and representative costs. But such settlements can have severe, unintended consequences. Perhaps most significantly, these settlements can lead other companies to misdirect their scarce compliance resources.”

Stuckwisch’s final observation is of course spot-on and generally restates the thesis from my 2010 article “The Facade of FCPA Enforcement.

 

February 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Sunday, January 26, 2014

Bullard on the SEC's Crowdfunding Proposal: Will it Work for Small Businesses?

Go here for the January 16, 2014 testimony of Mercer E. Bullard before the Committee on Small Business, United States House of Representatives, on the SEC's Crowdfunding Proposal.  Here is a brief excerpt (comment deadline is February 3):

The overriding issue for crowdfunding is likely to be how the narrative of investors frequently losing their entire investment plays out. If investors are perceived as losing only a small part of their portfolios because of business failures rather than fraud, or if their crowdfunding losses are set off by gains in other investments through diversification, the crowdfunding market could weather large losses and thrive. However, if fraudsters are easily able to scam investors under the cover of a crowdfunding offering, or stale financial statements routinely turn out to have hidden more recent, undisclosed financial declines, or there are investors who can’t afford the losses they incur, resulting in stories of personal financial distress – then crowdfunding markets will never become a credible tool for raising capital.

January 26, 2014 in Current Affairs, Entrepreneurship, Financial Markets, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Sunday, January 19, 2014

Nagy on Owning Stock While Making Law

Donna M. Nagy recently posted “Owning Stock While Making Law: An Agency Problem and A Fiduciary Solution” on SSRN.  Here is the abstract:

This Article focuses on Members of Congress and their widespread practice of holding personal investments in companies that are directly and substantially affected by legislative action. Whether entirely accurate or not, congressional officials with investment portfolios chock full of corporate stocks and bonds contribute to a corrosive belief that lawmakers can – and sometimes do – place their personal financial interests ahead of the public they serve.

Fiduciary principles provide a practical solution to this classic agency problem. The Article first explores the loyalty-based rules that guard against self-interested decision-making by directors of corporations and by government officials in the executive and judicial branches of the federal government. It then contrasts the strict anti-conflict restraints in state corporate law and federal conflicts-of-interest statutes with the very different set of ethical rules and norms that Congress traditionally has applied to the financial investments held by its own members and employees. It also confronts the parochial view that lawmakers’ conflicts are best deterred through public disclosure of personal investments and the discipline of the electoral process. The Article concludes with a proposal for new limitations on the securities that lawmakers may hold during their congressional service. Specifically, and as a starting place, Congress should prohibit its members (and their staffs) from holding securities in companies substantially affected by the work of any congressional committee on which they hold membership. But Congress should also explore the adoption of even stricter anti-conflict restraints, such as a statute or rule that would, subject to some narrow exceptions, prohibit members and senior staff officials from owning any securities other than government securities or shares in diversified mutual funds.

January 19, 2014 in Agency, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Thursday, January 16, 2014

Living in a Material World- From Naming and Shaming to Knowing and Showing: Will New Disclosure Regimes Finally Drive Corporate Accountability for Human Rights?

In my posts last Thursday (see here and here) and in others, I have explained why I don’t think that the Dodd-Frank conflicts minerals law is the right way to force business to think more carefully about their human rights impacts.  I have also blogged about the non-binding UN Guiding Principles on Business and Human Rights, which have influenced both the Dodd-Frank rule, the EU's similar proposal, and the State Department's required disclosures for businesses investing in Burma (see here). 

For the past few months, I have been working on an article outlining one potential solution.  But I was dismayed, but not surprised to read last week that the US government’s procurement processes may be contributing to the very problems that it seeks to prevent in Bangladesh and other countries with poor human rights records. This adds a wrinkle to my proposal, but my contribution to the debate is below:

Faced with less than optimal voluntary initiatives and in the absence of binding legislation, what mechanisms can interested stakeholders use as leverage to force corporations to take a more proactive role in safeguarding human rights, particularly due diligence issues in the supply chain?  Can new disclosure and procurement requirements provide enough incentives to have a measurable impact on the behavior of transnational corporations based in the United States? This Article argues that federal and state governments should take advantage of the fact firms are adapting to more rigorous transparency and due diligence demands from socially responsible investors, international stock exchange listing requirements, and enterprise risk management processes.

Corporations respond to incentives and penalties. Governments can and should  require stronger procurement contractual terms for contractors and subcontractors. The contract could require: (1) executive level, Sarbanes-Oxley like attestations regarding human rights policies and due diligence on impacts within the supply chain; (2) an audit by certified third parties and (3) suspension or debarment from contracts as well as clawbacks of executive bonuses and a portion of board compensation as penalties for false or misleading attestations.

Companies that do not choose to participate in government contracting programs will not have to complete the attestation or due diligence process but the benefits of participating will outweigh the costs.  The large number of participating firms will likely lead to the practice becoming an industry standard across sectors, thereby forestalling additional legislation, shareholder resolutions, and name and shame campaigns, and thus eventually leading to benefits for all stakeholders including those most directly affected.

 

 

January 16, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation, Social Enterprise | Permalink | Comments (1)

1 Report, 4 Issues

(1) Corporate Disclosures, (2) Indirect Advocacy, (3) Climate Change, and (4) Institutional Investors 

The Union of Concerned Scientists, an alliance of more than 400,000 citizens and scientists, released a report today: Tricks of the Trade: How Companies Influence Climate Policy Through Business and Trade Associations.  The report is based on data collected by CDP, an international not-for-profit that “works with investors, companies and governments to drive environmental disclosure”.  CDP administers an annual climate reporting questionnaire to more than 5,000 companies worldwide with the support of various institutional investors (722 institutional investors with over $87 trillion in capital). The 2013 questionnaire asked companies about climate policy influence, including board membership in trade associations, lobbying, and donations to research organizations.

Tricks of the Trade highlights outsourced political influence through the use of trade associations and interest groups that lobby on behalf of their members rather than the members engaging in these activities in their own name.  The report highlights 3 main issues:  (1) lack of transparency, (2) incongruence with the outsourced message among responding companies, and (3) the continued role that the Citizens United decision has on corporate spending and political discourse.

 Transparency:

  • Of the 5,557 companies that received the climate change questionnaire (through either CDP’s request or their voluntary participation), 2,323 responded, and only 1,824 (33 percent) of them replied publicly.
  • Ninety-seven Global 500 companies—the top 500 companies in the world by revenue—including Apple, Amazon, and Facebook, did not participate.  
  • In the Standard & Poor’s (S&P) 500—a market value index of large U.S. companies—166 companies, including Comcast and the Southern Company, did not participate.

The report highlights that proposed rules before the SEC for corporate political spending disclosures would address some transparency concerns and notes that the SEC has no plans to address this issue in 2014.  This is no small issue considering the number of institutional investors and amount of invested capital ($87 trillion, with a "T"!!) behind this initiatve.  CDP sends its survey to corporations on behalf of the signatory institutional investors who are shareholders.

These shareholder requests for information encourage companies to account for and be transparent about environmental risk. Transparency of this data throughout the global market place ensures the financial community has access to the best available corporate climate change information to help drive investment flows towards a low carbon and more sustainable economy

 Incongruence:

  • Ninety-five companies noted that at least one of their trade groups had a climate policy position that was partially or wholly inconsistent with their own, for a total of 172 such responses across all trade groups.

The 2013 questionnaire, while focused on climate change issues, is relevant to broader questions of corporate political influence and spending, the SEC’s agenda for 2014, and the role of corporate disclosures.   If you are teaching corporations/BA this semester, this 12 page report raises several issues that, in my opinion, would elicit a great classroom discussion when you get to the role and purpose of corporations,  sections on the disclosure regime of our securities markets, and even on shareholder rights to information.

-Anne Tucker

January 16, 2014 in Business Associations, Anne Tucker, Constitutional Law, Corporate Governance, Corporations, Financial Markets, Securities Regulation, Teaching | Permalink | Comments (0)

Thursday, January 9, 2014

Aaron Rodgers, Intel and the “Scarlet Letter” of Dodd-Frank- Part 2

On Tuesday, I attended the oral argument for the National Association of Manufacturers v. SEC—the Dodd-Frank conflict minerals case. Trying to predict what a court will do based on body language and the tone of questioning at oral argument, especially in writing, is foolish and crazy, but I will do so anyway.

I am cautiously optimistic that the appellate court will send the conflict mineral rule back to the SEC to retool based on the three arguments generated the most discussion. First, the judges appeared divided on whether the SEC  had abused its discretion by changing the statutory language requiring issuers to report if minerals “did” originate from the DRC or surrounding companies rather than the current SEC language of “may have” originated. This language would sweep in products in which there is a mere possibility rather than a probability of originating in covered countries. One judge grilled the SEC like I grill my law students about the actual statutory language and legislative intent, while another appeared satisfied with SEC’s explanation that issuers did not have to file if the lack of certainty was due to a small number of responses from suppliers or for lack of information. My prediction- if the SEC loses, they will have to rewrite this section to comport with Congressional intent.

The second main issue concerned the SEC’s failure to apply a de minimis exception to the rule. NAM’s lawyer provided a real-life example of a catalyst used in producing automobiles that sometimes washed away during production but at other times could leave just one part per million of tin in the finished product. Judge Srinivasan pointed out that if the mineral could wash away but the product could still function, then perhaps it wasn’t “necessary” as the law required for reporting. Judge Sentelle raised a concern about “breaking new ground” by requiring the SEC to enact a de minimis exception. The SEC bolstered its argument by indicating that no commentator that had proposed such an exception during the rulemaking process  had provided a workable threshold. My prediction- this is a toss up. This was the SEC’s most successful argument of the day.

Many commenters believed that the third argument—the First Amendment claim-- was spurious and/or a Hail Mary plea when NAM first raised it last year. Yet this argument provided the most interesting discussion of the day, especially since Judge Randolph specifically reminded NAM’s counsel to discuss it and not save it for rebuttal as NAM had planned. NAM argued that by requiring companies to declare on their websites that their products were not “DRC-Conflict Free,” thereby denouncing their own products, this amounted to a “scarlet letter.” NAM conceded that the government could ask for the information and could post it, but maintained that requiring companies to “shame” themselves was unconstitutional. This argument gained traction with both judges Randolph and Sentelle, who called it “compelled speech.” The judges also questioned the SEC on: whether the SEC had ever or should focus its efforts on communications to consumers; how the SEC would enforce the rule, asking whether a group of scientists would do product inspections; how this rule would achieve Congress’ intent of securing the safety of the Congolese people; whether the government could require companies to indicate whether they had used child labor overseas; and whether the intent of the shaming provision was to cause a boycott- bingo! My prediction- the SEC loses on this provision.

If the SEC does have to go back to the drawing board, it will be interesting to see how current Chair Mary Jo White influences the rule given her public statements about the rule being out of the SEC’s purview. I hope that the European Commission, which has done an impact analysis, will pay close attention as they roll out their own conflict minerals legislation to the EU.

Many have asked what I think the government should have done to help the people of Congo. Put simply, the government could and should fund and enforce the DRC Relief, Security, and Democracy Promotion Act of 2006, which has over a dozen provisions addressing security sector reform, minerals, infrastructure and other matters that could provide a more holistic solution. Next week, I will blog about other ways that the government could incentivize business to address human rights issues around the world.

January 9, 2014 in Constitutional Law, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (1)

Tuesday, January 7, 2014

CFTC and FERC Finally Play Nice(ish)

News Release

The Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) have signed two Memoranda of Understanding (MOU) to address circumstances of overlapping jurisdiction and to share information in connection with market surveillance and investigations into potential market manipulation, fraud or abuse. The MOUs allow the agencies to promote effective and efficient regulation to protect energy market competitors and consumers.

Finally, the CFTC and FERC seem to have resolved some serious jurisdictional overlap problems between the agencies related to Dodd-Frank (section 720(a)(1)), which required the agencies to adopt a Memorandum of Understanding (MOU) to resolve several key issues. It’s taken a while to get here.  Recall that settling (or at least improving) jurisdictional questions became especially acute in the wake of the Brian Hunter case, where the CFTC joined the defendant against FERC claiming that the CFTC had exclusive jurisdiction over Hunter’s alleged trading violations.  The DC Circuit agreed with Hunter and the CFTC (opinion pdf). 

At long last, there are two MOUs, one related to jurisdiction (pdf) and the other related to information sharing (pdf). According to the FERC news release, the jurisdiction MOU provides a process the agencies will use to notify one another of  issues “that may involve overlapping jurisdiction and coordinate to address the agencies’ regulatory concerns.“  The information sharing MOU creates procedures for the agencies to share information “of mutual interest related to their respective market surveillance and investigative responsibilities, while maintaining confidentiality and data protection.”

Perhaps the more interesting news (H/T: Craig Silverstein & Nathan Endrud) is the possibility of new licensing for wholesale power and natural gas market participants to deal with the people actually committing fraud and/or manipulating markets.   There is not agreement from all the commissioners that this is necessary, but it is an idea of note for this continually evolving market. 

January 7, 2014 in Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation | Permalink | Comments (0)

Monday, January 6, 2014

Osovsky on Secondary Trading Markets and Investor Protection

Adi Osovsky, an S.J.D. candidate at Harvard Law School, has posted an interesting new article on SSRN, The Curious Case of the Secondary Market with Respect to Investor Protection.

Here's the abstract:

The primary mission of the U.S. Securities and Exchange Commission is to protect investors. However, current securities regulation clearly separates between public markets and private markets with respect to investor protection. While the federal securities laws impose strict and costly disclosure and anti-fraud requirements on issuers that offer their securities to the public, they exempt private offerings from such rigid regime. The liberal approach toward private offerings is based on the assumption that investors in private markets are sophisticated and thus can "fend for themselves".

This Article explores the validity of such traditional dichotomy between the public market and the private market in a relatively new, organized secondary market for ownership interests in private companies with retail investor access (the "Secondary Market"). The Secondary Market provides investors and employees with an opportunity to sell their holdings even before the first exit event. It also allows greater flexibility in capital formation, which may enhance productivity and job growth. However, the Secondary Market raises serious problems with regard to investor protection.

As this Article shows, the rise of the Secondary Market has revealed conspicuous cracks in the wall traditionally separating the public and the private markets and the two markets’ participants – the sophisticated investors versus the unsophisticated investors. This separation was undermined by the penetration of unsophisticated investors to the private market sphere and by the erosion of the assumptions regarding the ability of Secondary Market’s participants to fend for themselves.

The Article suggests that the erosion of the sophistication presumption deems the classic dichotomy between the heavily regulated public market and the lightly regulated private market artificial. It calls for a reexamination of the current regulatory regime with respect to investor protection. Such reexamination is of particular importance in light of the new Jumpstart Our Business Startup (JOBS) Act that would enable private companies to stay private longer, and the Secondary Market to thrive.

I haven't read the article yet, but the issue Osovsky addresses is an important one. Even if accredited investors are able to protect themselves in exempted private offerings, the Internet (in conjunction with the liberalization of Rule 144) now makes it much easier for them to resell those securities to unsophisticated investors.

Secondary purchasers will have access to at least some information about the issuer. Rule 144 protects those resales only if the issuer is a reporting company [Rule 144(b)(1)(i)] or if current public information is available about the issuer [Rule 144(b)(1)(ii) and (b)(2), in conjunction with 144(c)]. But is the information required by Rule 144(c)(2) for non-reporting companies sufficient?

January 6, 2014 in C. Steven Bradford, Securities Regulation | Permalink | Comments (0)

Thursday, January 2, 2014

Can loyalty-driven securities solve the problem of short-termism? Probably not, according to a study.

The Generation Foundation (the “Foundation”), which focuses on sustainable capitalism, commissioned Mercer and Canadian law firm Stikeman Elliott LLP to study ways to foster more long-term thinking in the capital markets. In a prior report the Foundation proposed five actions to counteract the effects of short-termism including: (1) identifying and incorporating risks from stranded assets; (2) mandating integrated reporting; (3) ending the default practice of issuing quarterly earnings guidance; (4) aligning compensation structures with long-term sustainable performance; and (5) encouraging long-term investing with loyalty-driven securities. 

Loyalty-driven securities provide differentiated rights or rewards to shareholders based on their tenure of shareholding.  These rewards could include extra dividends, warrants or additional voting rights for owners who held shares for three years (or some other time period), limiting proxy access to shareholders of a specified minimum duration, or inferior voting rights for short-term shareholders.   The idea is not far-fetched. Apparently, the European Commission is considering proposals to reward certain shareholders with additional voting rights. 

In a report issued in December 2013 the Foundation, Mercer and the law firm outline the results of their legal review of almost a dozen countries and the interviews of over 120 experts. Interviewees included academics, pension funds, investors, and stakeholders such as GMI, Blackrock, UBS Global Asset Management, Ceres, the Conference Board, the Office of NYC Comptroller, Johnson & Johnson, Fidelity, Ira Millstein, CalSTRS, Aviva Investors and academics from Columbia and the London School of Economics. 

The report starts with the premise that “heightened interest in ‘short-termism’ also reflects the belief that causes of short-termism… are products of poorly designed organizational incentives and failures of corporate governance systems rather than simply a result of information asymmetry, technological innovation, or the cognitive limits of decision-makers.”

The study revealed that proposals to consider loyalty-driven securities --which are already allowed by law and in use in France -- met with considerable resistance.  Those who opposed them mentioned potential discrimination between shareholders; the risk of unintended consequences because it would favor certain types of investors such as passive investors; administrative complexities around share transfers, tracking of tenure and custody; the weakness of the incentive because the nature of the reward would not be enough to forego revenue; and finally a concern that loyalty-driven securities would not address the root causes of short-termism.

Three themes emerged from the interviews for continued study. First, the authors suggest longer time horizons for investment analysis and a review of different forms of capital including financial, physical and human.  Second, they recommend realigning frameworks for performance measurement and reward so that individuals will not be penalized for their longer-term decision-making. Third, they believe that investors may need more information and stronger relationships with companies so that they can have faith in long-term value creation and strategies and the executives in charge of implementation.

To effectuate this kind of change they recommend: better-informed fiduciary oversight; board and investment committee education programs; a database of sustainable financial market-certified candidates for board, trustee and investment committees; focus by policymakers and regulators on shaping laws conducive to long-term thinking; a live shadow-monitoring pilot to establish a set of metrics against which to monitor and report fund manager performance to clients; alignment of incentives related to executive compensation; a formal investor-issuer council for systemic risk; and a campaign to educate and encourage analysts and investors to question companies about their long-term strategy during  quarterly earnings calls.

Given my focus on corporate governance and sustainability, I read the report with great interest. Whether or not you favor loyalty-driven securities, the full report and appendices are worth a read. 

January 2, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation | Permalink | Comments (0)

Sunday, December 29, 2013

Bebchuk & Ferrell on “Rethinking Basic”

Lucian A. Bebchuk & Allen Ferrell recently posted “Rethinking Basic” on SSRN.  Here is the abstract:

In the Halliburton case, the United States Supreme Court is expected to reconsider next spring the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory and has facilitated securities class action litigation. In this paper we seek to contribute to the expected reconsideration.

We show that, in contrast to claims made by the parties, the Justices need not assess, or reach conclusions regarding, the validity or scientific standing of the efficient market hypothesis; they need not, as it were, decide whether they find the view of Eugene Fama or Robert Shiller more persuasive. We explain that class-wide reliance should not depend on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price. Indeed, based on our review of the large body of research on market efficiency in financial economics, we show that, even fully accepting the views and evidence of efficiency critics such as Professor Shiller, it is possible for market prices to be distorted by fraudulent disclosures. Conversely, even fully accepting the views and evidence of market efficiency by supporters such as Professor Fama, it is possible that market prices were not distorted by a fraudulent disclosure. In short, the academic debate on market efficiency, even assuming the Court was somehow in a position to adjudicate the relative merits, should not be the focus in determining class-wide reliance.

We put forward and analyze the merits and applicability of a modified rule that would make class-wide reliance depend on the existence of fraudulent distortion of market prices. We further discuss (i) how such a rule would retain some of the key insights behind the Basic rule but would avoid key drawbacks of it (including those identified by Justice White in his critique of the Basic opinion); (ii) the tools that would enable the federal courts to apply it effectively; and (iii) the allocation of the burden of proof.

December 29, 2013 in Current Affairs, Financial Markets, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Thursday, December 19, 2013

Changing Corporate Law to Make Companies More Sustainable- Perspectives from governments, academics and practitioners

On December 5th and 6th I attended and presented at the third annual Sustainable Companies Project Conference at the University of Oslo.  The project, led by Beate Sjafjell began in 2010 and attempts to seek concrete solutions to the following problem:

Taking companies’ substantial contributions to climate change as a given fact, companies have to be addressed more effectively when designing strategies to mitigate climate change. A fundamental assumption is that traditional external regulation of companies, e.g. through environmental law, is not sufficient. Our hypothesis is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.  

Members of the Norwegian government, the European Commission, the Organisation for Economic Cooperation and Development (“OECD”), and the United Nations Environmental Programme  (UNEP) Finance Initiative also presented with academics and practitioners from the US, Europe, Asia and Africa.

I did not participate in the first two conferences, but was privileged this year to present my paper entitled “Climate Change and Company Law in the United States: Using Procurement, Pay and Policy Changes to Influence Corporate Behavior.” The program and videos of the entire conference (click on the link of the panel discussions) are here. I presented last and my paper, with the others, will appear in a special edition of the Journal of European Company Law in 2014.

Professors David Millon and Celia Taylor rounded out the US delegation. Millon, who I learned first coined the phrase “shareholder primacy,” proposed a constituency statute for Delaware, but acknowledged that his proposal (even if it were passed) might not have much impact because of the twin influence of inventive-based compensation for executives and the role of institutional investors, who also seek short-term profit maximization. Taylor discussed the SEC Guidance on climate change disclosures recommending that they be made mandatory, but cautioned against disclosure overload and potential greenwashing.

Others provided insight on shareholder primacy and board duties from the UK, Norway, and Indonesia, and Tineke Lambooy presented the results of a meta study regarding boards and sustainability.  Gail Henderson, from Canada, used the concept of "undue hardship" in human rights law to propose a new burden to reduce environmental impacts. Mark Taylor, who was one of the many attendees who like me came straight from the UN Forum on Business and Human Rights, explained due diligence provisions in EU member state laws and argued that due diligence is emerging as a standard for compliant businesses.  Carol Liao discussed "catalytic innovation" and hybrid entities. Her blog about the conference is here.

A number of presenters focused on: auditing; integrated reporting; insurance, bankruptcy, contract, and insolvency law; and the role of sustainable investors (there are 50 sustainable stock indices), particularly large sovereign pension funds.  One of the more interesting proposals came from Ivo Mulder of UNEP, who is conducting a study on a sovereign credit risk model.  Sovereign bond markets represent 40% of global bond markets but there is no integration of environmental, social or governance factors even though risk mitigation is a key factor in fixed-income investing. He called for a new way of thinking about how bond securities are valued in primary and secondary markets.

Perhaps one of the most innovative proposals came from Endre Stavang, who suggested an “environmental option.” Specifically he and his co-author recommend enacting legislation that will empower certain green companies to transfer a call option to buy a block of its shares to an established company of their choice. He stressed that the option is free and that the exercise price would be the price of the green company’s share at the time of the transfer. The non-green receiving company would have a period of five years to exercise.

The abstracts from all of the presenters are available here. It was an intense two days of creative presentations, but hopefully these kinds of substantive public policy discussions, which include government, intergovernmental organizations, stakeholders and academics will have an impact. It’s the reason I joined academia.

Happy Holidays to all, and to my new Norweigian colleagues, Gledelig høytid.

 

 

 

 

December 19, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Science, Securities Regulation, Social Enterprise | Permalink | Comments (0)

Monday, December 16, 2013

Crowdfunding Intermediaries' Duty to Protect Against Fraud

I have been pondering one of the provisions in the SEC's proposed crowdfunding rules, and I have decided that it's extremely dangerous to crowdfunding intermediaries.

Reducing the Risk of Fraud: The Statutory Requirement

Section 4A(a)(5) of the Securities Act, added by the JOBS Act, requires crowdfunding intermediaries (brokers and funding portals) to take steps to reduce the risk of fraud with respect to crowdfunding transactions. The SEC is given rulemaking authority to specify the required steps, although the statute specifically requires "a background and securities enforcement regulatory history check" on crowdfunding issuer's officers and directors and shareholders holding more than 20% of the issuer's outstanding equity.

Proposed Rule 301

Proposed Rule 301 of the crowdfunding regulation implements this requirement.

A couple of the requirements of Rule 301 don't really relate to fraud, even though the section is captioned "Measures to reduce risk of fraud." Rule 301(a) requires the intermediary to have a reasonable basis for believing that the issuer is in compliance with the statutory requirements and the related rules. Rule 301(b) requires the intermediary to have a reasonable basis for believing that the issuer has means to keep accurate records of the holders of the securities it's selling. Neither of these requirements is particularly onerous because, in each case, the intermediary may rely on the issuer's representations unless the intermediary has reason to doubt those representations.

Rule 301(c)(2) enforces the background check requirement, as well as the "bad actor" disqualifications in Rule 503. The intermediary must not allow any issuer to use its crowdfunding platform unless the intermediary has a reasonable basis for believing that the issuer, its officers and directors, and its 20% equity holders are not disqualified by Rule 503.  To satisfy this requirement, the intermediary "must, at a minimum, conduct a background and securities enforcement regulatory history check" on each such person.

The Problematic Provision

The part of Rule 301 that really troubles me is the final requirement, in Rule 301(c)(2). The intermediary must deny issuers access to its platform if the intermediary "[b]elieves that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection." If an intermediary becomes aware of such information after its has already granted access to the issuer, the intermediary "must promptly remove the offering from its platform, cancel the offering, and return (or, for funding portals, direct the return of) any funds that have been committed by investors in the offering."

If this was all the regulation said, it would make sense: an intermediary can't let known or suspected bad actors use its platform. But that's not all it says. Rule 301(c)(2) adds this little nugget:

"In satisfying this requirement, an intermediary must deny access if it believes that it is unable to adequately or effectively assess the risk of fraud of the issuer or its potential offering."

It's one thing to say an intermediary should shut down the issuer if it's aware of problems or if there are red flags that should reasonably cause concern. But this last provision requires the intermediary to refuse access to the issuer unless it can affirmatively determine that the issuer poses no risk of fraud. And, of course, the only way to "adequately or effectively assess the risk of fraud" is through a full investigation of the issuer and its principals. The cost of fully investigating every issuer on the platform would be prohibitive, and certainly too much for the returns likely to be generated by hosting offerings of less than $1 million.

Intermediaries should be required to deny their platforms to issuers who they know pose a risk of fraud and intermediaries should be required to pursue any red flags that arise. But that should be it. Crowdfunding intermediaries should not be insurers against fraud, which is what this provision is trying to make them.

December 16, 2013 in C. Steven Bradford, Financial Markets, Securities Regulation | Permalink | Comments (2)

Sunday, December 15, 2013

Jay Brown on the Proxy Advisory Services Roundtable

Over at The Race to the Bottom, Jay Brown has compiled a series of post on the recent proxy advisory services roundtable.  Here are the relevant links:

  • Introduction ("To be frank … roundtables do not often move the issue forward.  Comments can be random or incomplete. In a room full of experts, they can be woefully unprepared and tendentious. Statements can be predictable and provide little additional value to the debate.  This Roundtable, however, was different. It was very well done.").
  • The Participants ("There was a good cross section of views to say the least.").
  • The Data ("[T]he evidence presented at the Roundtable indicated that the largest asset managers (BlackRock for example) viewed the recommendations as an input, not a controlling influence.").
  • Voting Decisions and the Need for Data Tagging ("Mutual funds must file voting data on Form N-PX…. [we should] require the filing of the data in an interactive format.").
  • The Issue of Concentration (“Concentration is … a structural issue that exists in many places in the securities markets and the proxy process.”).
  • Plumbing Problems (“Michelle Edkins from BlackRock … noted that BlackRock retained ISS not only for advice but for other services as well. Some of these services arose out of the ‘operating environment.’ She described the voting environment as ‘highly complex, terribly inefficient’ and ‘prone to error.’”).
  • The View of Consumers (“The discussion brought home several points.  First, investors want the services provided by the proxy advisory firms, an obvious enough point given that they pay for it.  But the comments demonstrated the role that demand played in the structure of the proxy process.”).
  • The View of Issuers (“Issuers and their allies raised a number of concerns about proxy advisory firms.  They ranged from industry concentration to conflicts of interest to the propensity to make mistakes in making recommendations.  The fact that the firms make recommendations yet seek business from issuers raised concerns, as Trevor Norwitz (2:37) said, about being 'shaken down when approached by the governance side . . .'”).
  • The Regulatory Privilege (“An interesting issue that arose off and on during the day was the role played by the Commission in connection with the use of proxy advisory firms and the creation of the current market structure.”).

December 15, 2013 in Corporate Governance, Current Affairs, Financial Markets, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Friday, December 13, 2013

Call for Papers: National Business Law Scholars Conference

The National Business Law Scholars Conference (NBLSC) will be held on Thursday, June 19th and Friday, June 20th at Loyola Law School, Los Angeles. This is the fifth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Presentations should focus on research appropriate for publication in academic journals, especially law reviews, and should make a contribution to the existing scholarly literature. We will attempt to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by April 4, 2014. Please title the email “NBLSC Submission – {Name}”. If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a commentator or moderator. A conference schedule will be circulated in late May.  More information is available here:  http://lls.edu/resources/events/listofevents/eventtitle,81539,en.html

 

Conference Organizers

Barbara Black (The University of Cincinnati College of Law)
Eric C. Chaffee (The University of Toledo College of Law)
Steven M. Davidoff (The Ohio State University Moritz College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia Law)

 

December 13, 2013 in Business Associations, Anne Tucker, Corporate Governance, Corporations, Financial Markets, Merger & Acquisitions, Securities Regulation, Unincorporated Entities | Permalink | Comments (0)

Thursday, December 12, 2013

Human Rights- What is the Proper Role for Business?

Last week I attended the UN Forum on Business and Human Rights in Geneva.  The Forum was designed to discuss barriers and best practices related to the promotion and implementation of the non-binding UN Guiding Principles on Business and Human Rights, which discuss the state’s duty to protect human rights, the corporation’s duty to respect human rights, and the joint duty to provide access to judicial and non-judicial remedies for human rights abuses. This is the second year that nation states, NGOs, businesses, civil society organizations, academics and others have met to discuss multi-stakeholder initiatives, how businesses can better assess their human rights impact, and how to conduct due diligence in the supply chain.

Released in 2011 after unanimous endorsement by the UN Human Rights Council, the Guiding Principles are considered the first globally-accepted set of standards on the relationship between states and business as it relates to human rights. The US State Department and the Department of Labor have designed policies around the Principles, and a number of companies have adopted them in whole or in part, because they provide a relatively detailed framework as to expectations.  Some companies faced shareholder proposals seeking the adoption of the Principles in 2013, and more will likely hear about the Principles in 2014 from socially responsible investors.  Several international law firms discussed the advice that they are now providing to multinationals about adopting the Principles without providing a new basis for liability for private litigants.

Although the organizers did not have the level of business representation as they would have liked of one-third of the attendees, it was still a worthwhile event with Rio Tinto, Unilever, Microsoft, Google, Nestle, Barrick Gold, UBS, Petrobras, Total, SA, and other multinationals serving as panelists. Members of the European Union Parliament, the European Union Commission and other state delegates also held leadership roles in shaping the discussion on panels and from the audience.

Some of the more interesting panels concerned protecting human rights in the digital domain; case studies on responsible investment in Myanmar (by the State Department), the palm oil industry in Indonesia and indigenous peoples in the Americas; the dangers faced by human and environmental rights defenders (including torture and murder); how to conduct business in conflict zones; public procurement and human rights; developments in transnational litigation (one lawyer claimed that 6,000 of his plaintiffs have had their cases dismissed since the Supreme Court Kiobel decision about the Alien Tort Statute); mobilizing lawyers to advance business and human rights; the various comply or explain regimes and how countries are mandating or recommending integrated reporting on environmental, social and governance factors; tax avoidance and human rights; human rights in international investment policies and contracts; and corporate governance and the Guiding Principles.

As a former businessperson, many of the implementation challenges outlined by the corporate representatives resonated with me. As an academic, the conference reaffirmed how little law students know about these issues.  Our graduates may need to advise clients about risk management, international labor issues, corporate social responsibility, supply chain concerns, investor relations, and new disclosure regimes. Dodd-Frank conflict minerals and the upcoming European counterpart were frequently mentioned and there are executive orders and state laws dealing with human rights as well.

Traditional human rights courses do not typically address most of these issues in depth and business law courses don’t either. Only a few law firms have practice areas specifically devoted to this area- typically in the corporate social responsibility group- but many transactional lawyers and litigators are rapidly getting up to speed out of necessity. Small and medium-sized enterprises must also consider these issues, and we need to remember that “human rights” is not just an international issue. As business law professors, we may want to consider how we can prepare our students for this new frontier so that they can be both more marketable and more capable of advising their clients in this burgeoning area of the law.  For those who want to read about human rights and business on a more frequent basis, I recommend Professor Jena Martin’s blog.  

December 12, 2013 in Business Associations, Corporate Governance, Corporations, Current Affairs, Ethics, Financial Markets, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (1)

Wednesday, December 4, 2013

SEC Excludes Political Spending Disclosures from 2014 Rule Making Agenda

Earlier this week the SEC released its 2014 rulemaking agenda and excluded from the list is a proposal for public companies to disclose political spending.  In 2011, the Committee on Disclosure of Corporate Political Spending, comprised of 10 leading corporate and securities academics, petitioned the SEC to adopt a political spending disclosure rule.  This petition has received a historic number of comments—over 640,000—which can be found here.

The Washington Post reported that after the petition was filed,

A groundswell of support followed, with retail investors, union pension funds and elected officials at the state and federal levels writing to the agency in favor of such a requirement. The idea attracted more than 600,000 mostly favorable written comments from the public — a record response for the agency.

Omitting corporate political spending from the 2014 agenda has received steep criticism from the NYT editorial board in an opinion piece written yesterday declaring the decision unwise “even though the case for disclosure is undeniable.” Proponents of corporate political spending disclosure like Public Citizen are “appalled” and “shocked” by the SEC’s decision, while the Chamber of Commerce declares the SEC’s omission a coup that appropriately avoids campaign finance reform.

Included in the 2014 agenda are Dodd-Frank and JOBS Act measures, as well as a proposal to enhance the fiduciary duties owed by broker-dealers.  More on the agenda in future posts….

-Anne Tucker

December 4, 2013 in Anne Tucker, Corporate Governance, Corporations, Current Affairs, Financial Markets, Securities Regulation | Permalink | Comments (0)