Sunday, October 31, 2010
The Insignificance of Proxy Access, by Marcel Kahan, New York University - School of Law, and Edward B. Rock, University of Pennsylvania Law School, was recently posted on SSRN. Here is the abstract:
The SEC recently adopted rules on proxy access. These rules grant shareholders who hold at least 3% of the company stock for three years the right to nominate directors and to have their nominees included in the company’s proxy statement and the ballots distributed by the company. Because proxy access is viewed as dramatically lowering the costs of an election contest, both proponents and opponents of these rules predict that they will have a significant impact. Contrary to this conventional wisdom, we argue that proxy access will lead to few shareholder nominations, that most of these nominees will be defeated, and that the occasional nominee who does get elected will have little impact.
Based on past involvement in shareholder activism, we believe that neither mutual funds nor private pension funds will make significant use of proxy access. Certain large public pension funds have shown a modest interest in activism and may make some nominations. The entities with the greatest interests in activism - hedge funds and union-affiliated funds - will generally not satisfy the ownership and holding period requirements.
When compared to traditional proxy contests and to withhold campaigns, proxy access involves significant disadvantages, while promising only modest advantages. The cost savings of proxy access compared to traditional contests are overstated because most proxy contests expenses are discretionary campaign expenses or relate to other expense items that are unaffected by the proxy access rule. By contrast, the limitations that come with proxy access are significant: the number of nominees a shareholder can propose is limited; the level of shareholder support required to gain a seat, as a practical matter, is increased; the company retains control over the design of the proxy cards; and the company retains exclusive access to preliminary voting information.
When compared to withhold-vote campaigns, the more certain effect on board makeup and governance from a successful proxy access campaign must be weighed against countervailing factors that reduce the likelihood of success: the higher level of shareholder support required for success; the greater challenge of positive versus negative campaigning; and the vulnerability of the dissident shareholders and their nominees to attacks by the company for lack of qualification or conflicts of interest. Such attacks will resonate especially for nominees by unions and public pension funds. Their inability or unwillingness to defend against such attacks without incurring significant expense may make it difficult to find qualified nominees.
Overall, we believe that proxy access will have some undesirable effects - it will result in some increase in company expenses and may rarely increase the leverage of shareholders whose interest conflict with those of shareholders at large - and some desirable ones - it may occasionally lead to the election of nominees at recalcitrant boards, where such nominees may have a modest impact on governance and a marginal impact on company value. None of these effects is likely to be very material, and the net effect is likely to be close to zero.
Corporate Governance and U.S. Capital Market Competitiveness, by Stephen M. Bainbridge, University of California, Los Angeles (UCLA) - School of Law, was recently posted on SSRN. Here is the abstract:
This essay was prepared for a forthcoming book on the impact of law on the U.S. economy. It focuses on the impact the corporate governance regulation has had on the global competitive position of U.S. capital markets.
During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve
Against Financial Regulation Harmonization: A Comment, by Roberta Romano, Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN. Here is the abstract:
This comment is on a paper by Christian Kirchner and Wulf Kaal, which proposes a variety of post-financial crisis regulatory reforms under a common theme of minimizing “regulatory arbitrage.” The comment focuses on one of their proposals, hedge fund regulation, and then picks up on the theme of regulatory arbitrage to discuss a broader reform issue regarding financial regulatory architecture. I contend that the move to regulate hedge funds is misguided because hedge funds were not a cause of the recent crisis, nor are they likely to cause a future one. Rather, the regulatory response to hedge funds can best be understood in terms of the historical pattern of hostility to short sellers. I further contend that the post-crisis emphasis on regulatory consolidation and harmonization, which is a common legislative response following a crisis, is as misguided as the regulatory focus on hedge funds. In particular, in a regime of global harmonization, regulatory error can result in heightened systemic risk, as regulatory incentives lead financial institutions worldwide to adopt similar business strategies. When such strategies fail, they do so on a global basis, and can thereby precipitate a global financial crisis. Accordingly, regulatory arbitrage, a byproduct of regulatory diversity, provides a valuable, and little appreciated, hedge against systemic failure.
Friday, October 29, 2010
The SEC has posted on its website a Sample Letter sent in October 2010 to public companies on accounting and disclosure issues related to potential risks and costs associated with mortgage and foreclosure-related activities or exposures. The letter is intended as a reminder of disclosure obligations to consider in upcoming Form 10-Qs and subsequent filings, in light of continued concerns about potential risks and costs associated with mortgage and foreclosure-related activities or exposures.
The SEC and the CFTC will hold a public meeting of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues on November 5.
Meeting agenda includes:
Receive a summary and recap from the staffs of the CFTC and SEC on the report issued Sept. 30, 2010.
Hear a report from the subcommittee on cross-market linkages.
Hear a report from the subcommittee on pre-trade risk management.
Discuss potential recommendations and responses.
The SEC's Office of the Chief Accountant and Division of Corporation Finance today published their first progress report on the Work Plan related to global accounting standards. The Commission directed agency staff earlier this year to execute the Work Plan to provide the information needed to evaluate the implications of incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers. The Commission indicated that following successful completion of the Work Plan and the convergence projects of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), it will be in a position in 2011 to determine whether to incorporate IFRS into the U.S. financial reporting system.
The Work Plan addresses six key areas:
- Sufficient development and application of IFRS for the U.S. domestic reporting system.
- The independence of standard setting for the benefit of investors.
- Investor understanding and education regarding IFRS.
- Examination of the U.S. regulatory environment that would be affected by a change in accounting standards.
- The impact on issuers both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies.
- Human capital readiness.
The SEC staff expects to continue to report periodically on the status of the Work Plan in 2011.
Thursday, October 28, 2010
The SEC charged two foreign currency traders and their Boston-based company with operating a fraudulent scheme in which they sent investors misleading account statements while stealing their funds and incurring major trading losses. According to the SEC, Craig Karlis and Ahmet Devrim Akyil fraudulently raised approximately $40 million from approximately 750 investors in a purported foreign currency (Forex) trading venture through their firm Boston Trading and Research LLC (BTR). Investors were falsely promised that BTR had a system in place to limit trading losses. BTR also falsely claimed to investors that "we do not profit unless you do" while in reality Karlis and Akyil were illegally diverting investor money for their own personal use as well as to fund BTR's operations and pay expenses for other companies with which they were associated.
According to the SEC's complaint, for a minimum investment of $10,000, investors could deposit money with the BTR program. BTR used a website, sales representatives and live presentations by Karlis and Akyil to solicit funds from investors around the world. Investors provided Akyil with a limited power of attorney that granted him the right to direct the trading of their funds in the Forex market. The SEC's complaint charges Akyil, Karlis, and BTR with violating the antifraud and registration provisions of the federal securities laws, and seeks civil injunctions, the return of ill-gotten gains, and financial penalties.
Separately, the U.S. Attorney's Office for the District of Massachusetts today unsealed an indictment charging Akyil and Karlis with criminal violations based on the same misconduct.
FINRA filed with the SEC its proposed rule change that would give customers the option of selecting all-public arbitrator panels in disputes with their brokerage firms or registered representatives. The SEC has not yet published the rule change for public comment, but it is sure to generate much discussion and controversy. FINRA previously announced that it was going to propose this rule change "to enhance confidence in and increase the perception of fairness in the FINRA arbitration process." SIFMA said that it was waiting to see the proposed rule change before commenting on it.
FINRA requests comment on a concept proposal to require broker-dealers to provide a disclosure statement for retail investors before commencing a business relationship with them. As conceived by FINRA staff, a possible new rule proposal would require a firm, at or prior to commencing a business relationship with a retail customer, to provide to the customer a written statement that sets forth the types of brokerage accounts and services the firm provides to retail customers and the conflicts associated with such services. A “retail customer” would mean a customer that does not qualify as an institutional account under NASD Rule 3110(c)(4), essentially entities and natural persons with total assets of less than $50 million. The comment period expires December 27, 2010.
Wednesday, October 27, 2010
The next Open Meeting of the SEC will be held on November 3, 2010. The subject matter of the Open Meeting will be:
The Commission will consider whether to adopt new Rule 15c3-5, Risk Management Controls for Brokers or Dealers with Market Access, under the Securities Exchange Act of 1934. The new rule would require brokers or dealers with access to trading directly on an exchange or alternative trading system (ATS), including those providing sponsored or direct market access to customers or other persons, to implement risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity. Among other things, new Rule 15c3-5 would effectively prohibit broker-dealers from providing "unfiltered" or "naked" sponsored access to any exchange or ATS.
The Commission will consider whether to propose a new rule under Section 763(g) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, to prohibit fraud, manipulation, and deception in connection with security-based swaps.
The Commission will consider whether to propose rules and forms to implement Section 21F of the Securities Exchange Act of 1934 (Exchange Act) entitled "Securities Whistleblower Incentives and Protection." Section 21F, as added by Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides that the Commission shall pay awards, under regulations prescribed by the Commission and subject to certain limitations, to eligible whistleblowers who voluntarily provide the Commission with original information about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action.
Section 929Y of Dodd-Frank directs the SEC to solicit public comment and conduct a study to determine the extent to which private rights of action under the antifraud provisions of the Securities Exchange Act of 1934 should be extended to cover transnational securities fraud. The Commission is soliciting comment on this question and on related questions. It will accept comments regarding issues related to the study on or before February 18, 2011. Study on Extraterritorial Private Rights of Action
The SEC announced that four former San Diego officials have agreed to pay financial penalties for their roles in misleading investors in municipal bonds about the city's fiscal problems related to its pension and retiree health care obligations. It's the first time that the SEC has secured financial penalties against city officials in a municipal bond fraud case. The SEC settlement requires judicial approval.
The SEC filed charges in April 2008 against former San Diego City Manager Michael Uberuaga, former Auditor & Comptroller Edward Ryan, former Deputy City Manager for Finance Patricia Frazier, and former City Treasurer Mary Vattimo. According to the SEC, he officials knew the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. They also were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, benefits were reduced, or city services were cut. However, despite this knowledge, they failed to inform municipal investors about the severe funding problems in 2002 and 2003 bond disclosure documents.
The four former officials agreed to settle the SEC's charges without admitting or denying the allegations and consented to the entry of final judgments that permanently enjoin them from future violations of Securities Act of 1933 Section 17(a)(2). Under the settlement terms, Uberuaga, Ryan, and Frazier each pay a penalty of $25,000 and Vattimo pays a penalty of $5,000.
In a speech before the National Economists Club, SIFMA President and CEO Tim Ryan identified the organization's priorities in implementing Dodd-Frank:
To be most effective, SIFMA is focusing primarily on seven areas:
· systemic risk, specifically the new Financial Stability Oversight Counsel and its research arm the Office of Financial Research;
· resolution authority and living wills;
· oversight of the over-the-counter derivatives market;
· securitization and the credit rating agencies;
· capital and liquidity standards via Basel and Dodd-Frank;
· the future of proprietary trading and private equity under what’s come to be known as the Volcker Rule; and
· the creation of a federal fiduciary standard for investment advisors and broker/dealers who provide personalized investment advice to retail investors.
I am pleased to report that a Lexis Nexis survey named the Securities Law Prof Blog one of the 25 best business blogs for 2010. Thanks to all of you who voted for me; I sincerely appreciate it! You can now vote for my blog to be the BEST BLOG -- go to the Lexis Nexis site. I have stiff competition, so I need your votes! Voting is open for one week.
Monday, October 25, 2010
The Special Inspector General of the TARP Program released its Quarterly Report dated Oct. 26, 2010. The 338-page report assesses TARP after two years and, consistent with previous reports, does not mince words in describing problems. It identifies as a fundamental non-financial cost of TARP the "potential harm to the Government's credibility that has attended this Program," because of the lack of transparency, program mismanagement, and flawed decision-making processes that have fueled public anger.
Saturday, October 23, 2010
The Post-Crisis and its Critics, by David T. Zaring, University of Pennsylvania - Legal Studies Department, was recently posted on SSRN. Here is the abstract:
What should we make of the continuing government oversight over the recipients of bailout funds in the aftermath of the financial crisis? It certainly blurs the public-private distinction and involves the state in business practices in which, as recently as 2007, it would not have dreamed of overseeing. In this brief symposium essay, I evaluate the government's slow exit from its dramatic market intervention and reject the oft-made, but rather unrealistic claim that its conduct represents a permanent abandonment of free market principles. After all, the regulators did not ask for the roles they were given in the aftermath of the collapse of the financial markets. And as the government’s crisis response matures, its market interventions have begun to look more and more prosaic. In fact, the government has acted as any other investor might in some cases, while in others it is doing things to the financial system that it has done many times before – and that investors expect the government to do. The government’s post-crisis roles as private equity manager and insolvency cleanup specialist are the sorts of tasks that we want it to take on, at least in extraordinary times – and they are essentially the same sort of services that we would expect of vulture funds and cramdown specialists in the private sector to provide were the intervention not to have happened.
The Power of Proxy Advisors: Myth or Reality?, by Stephen J. Choi, New York University - School of Law; Jill E. Fisch, University of Pennsylvania Law School - Institute for Law and Economics; and Marcel Kahan
New York University - School of Law, was recently posted on SSRN. Here is the abstract:
Recent regulatory changes increasing shareholder voting authority have focused attention on the role of proxy advisors. In particular, greater shareholder empowerment raises the question of how much proxy advisors influence voting outcomes. This Article analyzes the significance of voting recommendations issued by four proxy advisory firms in connection with uncontested director elections. We find, consistent with press reports, that Institutional Shareholder Services (ISS) is the most powerful proxy advisor and that, of the others, only Glass, Lewis & Co. seems to have a meaningful impact on shareholder voting.
This Article also attempts to measure the impact of voting recommendations on voting outcomes. Unlike prior literature, it distinguishes correlation from causality by examining both the recommendation itself and the underlying factors that may influence a shareholder’s vote. Using several different tests, we conclude that popular accounts substantially overstate the influence of ISS. Our findings reveal that the impact of an ISS recommendation is reduced greatly once company- and firm-specific factors important to investors are taken into consideration. Overall, we estimate that an ISS recommendation shifts 6%–10% of shareholder votes. We also determine that a major component of ISS’s influence stems from its role as an information agent, aggregating factors that its subscribers consider important.
Is Silence Golden? An Empirical Analysis of Firms that Stop Giving Quarterly Earnings Guidance, by Shuping Chen, University of Texas at Austin - Red McCombs School of Business; Dawn A. Matsumoto, University of Washington - Department of Accounting; and Shivaram Rajgopal, Emory University - Goizueta Business School, was recently posted on SSRN. Here is the abstract:
We investigate firms that stop providing earnings guidance ("stoppers") either by publicly announcing their decision ("announcers") or doing so quietly ("quiet stoppers"). Relative to firms that continue guiding, stoppers have poorer prior performance, more uncertain operating environments, and fewer informed investors. Announcers commit to nondisclosure because they (i) do not expect to report future good news; or (ii) have lower incentives to guide due to the presence of long-term investors. The three-day return around the announcement is negative. Stoppers subsequently experience increases in analyst forecast dispersion and decreases in forecast accuracy but no change in return volatility or analyst following
Securities Intermediaries and the Separation of Ownership from Control, by Jill E. Fisch, University of Pennsylvania Law School - Institute for Law and Economics, was recently posted on SSRN. Here is the abstract:
The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment.
The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means paradigm and in proposals to increase shareholder empowerment. Intermediation challenges the validity of this construct and raises questions about whether corporate law can rely on shareholders to constrain managerial power appropriately.
Friday, October 22, 2010
The SEC released its Strategic Plan for the next five years prepared in accordance with the Government Performance and Results Act of 1993. The plan sets out the Commission’s mission, vision, values, and strategic goals for fiscal years 2010 through 2015. After the plan surveys the forces shaping the SEC’s environment, it then details the outcomes the agency is seeking to achieve, the strategies and initiatives that will be undertaken to accomplish those outcomes, and the performance measures that will be used to gauge the agency’s progress.