Friday, September 17, 2010
The SEC today voted unanimously to propose measures that would require public companies to disclose additional information to investors about their short-term borrowing arrangements. The SEC's proposal would shed a greater light on a company's short-term borrowing practices, including what some refer to as balance sheet "window-dressing." The proposed rules are aimed to enable investors to better understand whether amounts of short-term borrowings reported at the end of reporting periods are consistent with amounts outstanding throughout the reporting periods.
Many financial institutions and other companies engage in short-term borrowing in order to fund operations. These financing arrangements can range from commercial paper, repurchase agreements, letters of credit, promissory notes and factoring. They generally mature in a year or less. The additional short-term borrowing disclosure information required under the proposed rules would be presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of a company's quarterly and annual reports.
The Commission also voted to issue an interpretive release that will provide guidance about existing requirements for MD&A disclosure about liquidity and funding.
Thursday, September 16, 2010
SEC Open Meeting Agenda for September 17, 2010
Item 1: SHORT-TERM BORROWINGS DISCLOSURE
Office: DIVISION OF CORPORATION FINANCE
Staff: Meredith Cross, Paula Dubberly, Felicia Kung, Christina Padden
The Commission will consider whether to propose rules that would require a public company to provide certain disclosures about its short-term borrowings in its filings with the Commission. The Commission will also consider whether to publish an interpretive release to provide guidance regarding the Commission's current disclosure requirements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" relating to liquidity and capital resources.
The suit by three former female employees charging Goldman Sachs with gender bias caused me to think of other issues related to gender gap:
SEC Commissioner Luis A. Aguilar recently spoke on Diversity in the Boardroom is Important and, Unfortunately, Still Rare, at the SAIS Center for Transatlantic Relations, Closing the Gender Gap: Global Perspectives on Women in the Boardroom, in Washington, D.C. on September 16, 2010. The title says it all.
On a related issue, Statistical Evidence on the Gender Gap in Law Firm Partner Compensation, by Marina Angel, Temple University - Beasley School of Law; Eun-Young Whang, University of Texas-Pan American; Rajiv D. Banker, Temple University - Fox School of Business; and Joseph Lopez, Temple University - James E. Beasley School of Law, was recently posted on SSRN. Here is the abstract:
Our study compiled the largest research sample on the gender gap in compensation at the 200 largest law firms by combining two large databases to examine why women partners are compensated less: because they are less productive than men partners or because they are women. The AmLaw 100 and 200 studies include gross revenue, profits, number of equity and non-equity partners, and the total number of lawyers at each firm. The Vault/MCCA Law Firm Diversity Programs study (Vault/MCCA) includes the gender ratios at each AmLaw 200 firm. Our study covers the years 2002 to 2007.
The ratio of women equity partners to women non-equity partners is 2.546 compared to a ratio of 4.759 for their men counterparts over the six year period studied. An increase of 1% in the proportion of women partners at a law firm is associated with 1.112% lowering of the overall compensation for all partners at the firm. This disparity in compensation between women and men partners exists even after controlling for the lower compensation of non-equity partners and the greater likelihood for women to remain non-equity partners. Women partners are paid less than men partners despite the fact that they are not less productive in generating RPL for their firms.
The average gross revenue of firms with the highest percentages of women lawyers was approximately $20 million dollars higher than firms with the lowest percentage of women lawyers, but the revenue per lawyer (RPL) of these firms dropped by approximately $120,000 per lawyer. The average compensation for the lawyers at the firm goes down as the proportion of women at a firm rises, indicating that women in all positions at a firm are paid less than their male counterparts.
Since 1988, a low of 40.6% and a high of 50.4% of first year J.D. students have been women. The proportion of women in positions of power at the AmLaw 200 firms should have increased over the ensuing twenty-six years. Women represented approximately 50% of the associate hires during the eighteen years prior to 2001 but only 15-16% of partners. The women who make it to partner are paid less than their men counterparts.
Our paper examines the gender gap problem in law firm compensation through an empirical lens. The results have important implications for economic discrimination research. Our statistical analysis concludes that women partners are compensated less than men on average at the AMLAW 200 law firms regardless of whether they are equity partners or non-equity partners. This gender disparity is not due to lower productivity of women partners. It is attributable to discriminatory practices under both disparate treatment and disparate impact analyses.
Wednesday, September 15, 2010
A federal court on September 13, 2010 found hedge fund manager Robert A. Berlacher, along with several of his investment advisory entities and various hedge funds he managed, liable for securities fraud in connection with the funds' PIPE investments. In the SEC enforcement action, the Court ordered the defendants to pay, jointly and severally, $352,363.68 in disgorgement.
According to the SEC's complaint, Berlacher - and his investment advisory entities (LIP Advisors, LLC, NCP Advisors, LLC, and RAB Investment Company, LLC) and the hedge funds he managed (Lancaster Investment Partners, L.P., Northwood Capital Partners, L.P., Cabernet Partners, L.P., Chardonnay Partners, L.P., Insignia Partners, L.P., and VFT Special Ventures, Ltd.) — made materially false representations to issuers in connection with two unregistered securities offerings that are commonly referred to as "PIPEs" (private investments in public equities).
In connection with the February 2004 Radyne ComStream, Inc. ("Radyne") PIPE, the Court found that Berlacher misrepresented in the securities purchase agreement that he did not hold a short position, directly or indirectly, in Radyne securities. Contrary to this representation, Berlacher, after learning about the PIPE, had established a "barrier option" position on a "basket" of securities (i.e., a portfolio of underlying assets), one of which included a short position in Radyne securities. Berlacher's "barrier option" on a "basket" of securities was an exotic derivative product that provided him with leverage and gave him the right to the underlying assets. Similarly, in connection with the May 2004 International Displayworks, Inc. ("IDWK") PIPE, Berlacher misrepresented in the securities purchase agreement that he had not engaged in any transactions in the company's securities when he had in fact, after learning about the PIPE, established a "barrier option" position that included positions in IDWK as part of its underlying "basket" of securities.
A coalition of consumer and investment adviser groups, including Consumer Federation of America, AARP, and NASAA, released a survey of 1319 investors conducted by ORC/Infogroup that shows that most U.S. investors are confused about which financial professionals are required to operate under a "fiduciary standard" requiring the financial professional to put their client's interest ahead of their own. At the same time, the vast majority of U.S. investors believe that all financial professionals providing investment advice should be required to operate under such a pro-investor standard, according to the new survey.
The SEC is currently conducting a study on the obligations of broker-dealers and investment advisers, as required by the Dodd-Frank Act.
Chief survey findings include the following:
• Nine out of 10 U.S. investors (91 percent) think that "a stockbroker and an investment adviser (who) provide the same kind of investment advisory services … should have to follow the same investor protection rules."
• Nearly all investors (97 percent) agree that "when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice."
• Nearly all U.S. investors (96 percent) agree that the fiduciary requirement should extend to insurance agents selling investments.
• At the same time, there is widespread misunderstanding about which financial professionals are held to the fiduciary standard:
♦ Three out of five U.S. investors mistakenly think that "insurance agents" have a fiduciary duty to their clients.
♦ Two out of three U.S. investors are incorrect in thinking that stockbrokers are held to a fiduciary duty.
♦ 76 percent of investors are wrong in believing that "financial advisors" – a term used by brokerage firms to describe their salespeople -- are held to a fiduciary duty.
♦ By contrast, 75 percent of investors think the fiduciary standard is in place for "financial planners" and 77 percent say the same about "investment advisers."
Tuesday, September 14, 2010
The SEC announced that on August 26, 2010, the U.S. District Court for the Southern District of New York entered final judgments approving settlements between the Commission and the defendants in the pending case against FTC Capital Markets, Inc. ("FTC"), FTC Emerging Markets ("Emerging Markets"), Guillermo David Clamens, and Lina Lopez. The judgments against Clamens, FTC and Emerging Markets order those defendants to pay over $20 million in disgorgement and penalties but provide for full satisfaction of their monetary obligations by defendants' release of their assets frozen at the start of the case and any other assets in the United States. The final judgments, to which the defendants consented without admitting or denying allegations in the Commission's complaint, also permanently enjoin all the defendants from future violations of the relevant provisions of the federal securities laws.
The Commission filed the action on May 19, 2009, charging Clamens, FTC, a registered broker-dealer controlled by Clamens, and Lopez, an FTC employee, with a fraudulent scheme to engage in tens of millions of dollars of unauthorized securities trading through the accounts of two FTC customers. According to the Commission's complaint, Clamens and Lopez defrauded the two FTC customers in part to conceal their prior fraudulent sale of $50 million in non-existent notes to a Venezuelan bank through defendant Emerging Markets, another Clamens-controlled entity. When the fictitious notes held by the Venezuelan bank purportedly came due in August 2008, Clamens allegedly misappropriated $50 million from the two FTC customers to fund the redemption. In addition, the Complaint alleged that Emerging Markets illegally acted as an unregistered broker-dealer.
Monday, September 13, 2010
LexisNexis informs me that the Securities Law Prof Blog has been nominated for its Top 25 Business Law Blogs of 2010. If you'd like to support the nomination, you can do so at either of the following links:
To submit a comment, log on to your free web center account. If you haven’t previously registered, you can do so on the Corporate & Securities Law Community or the UCC, Commercial Contracts & Business Law Community . Registration is free and does not result in sales contacts. The comment box is at the very bottom of the page. The comment period for nominations ends on October 8, 2010.
FINRA announced that it has censured and fined New York-based Trillium Brokerage Services, LLC, $1 million for using an illicit high frequency trading strategy and related supervisory failures. Trillium, through nine proprietary traders, entered numerous layered, non-bona fide market moving orders to generate selling or buying interest in specific stocks. By entering the non-bona fide orders, often in substantial size relative to a stock's overall legitimate pending order volume, Trillium traders created a false appearance of buy- or sell-side pressure.
This trading strategy induced other market participants to enter orders to execute against limit orders previously entered by the Trillium traders. Once their orders were filled, the Trillium traders would then immediately cancel orders that had only been designed to create the false appearance of market activity. As a result of this improper high frequency trading strategy, Trillium's traders obtained advantageous prices that otherwise would not have been available to them on 46,000 occasions. Other market participants were unaware that they were acting on the layered, illegitimate orders entered by Trillium traders.In addition to the nine traders, FINRA also took action against Trillium's Director of Trading and its Chief Compliance Officer. The 11 individuals were suspended from the securities industry or as principals for periods ranging from six months to two years. FINRA levied a total of $802,500 in fines against the individuals, ranging from $12,500 to $220,000, and required the traders to pay out disgorgements totaling about $292,000.
FINRA's investigation found that nine Trillium proprietary traders intentionally created the appearance of substantial selling or buying interest in the NASDAQ Stock Market and NYSE Arca exchange. Trillium's traders bought and sold NASDAQ securities in this manner in over 46,000 instances, resulting in total profits of approximately $575,000, of which the firm retained over $173,000 and subsequently was required to disgorge. In concluding this settlement, Trillium and the individual respondents neither admitted nor denied the charges, but consented to the entry of FINRA's findings. This conduct was initially referred to FINRA by NASDAQ's MarketWatch Department.
Sunday, September 12, 2010
Dodd-Frank: Resolution or Expropriation?, by Kenneth E. Scott, Stanford Law School, was recently posted on SSRN. Here is the abstract:
The 2010 financial reform law provides a summary procedure whereby the government can take over and liquidate a non-bank financial company if the Treasury Secretary decides it is in danger of a default with serious adverse economic consequences. The Constitution requires due process of law for the seizure of property, and this note describes the procedure provided. It is so truncated and minimal as to raise considerable doubt that it is valid under all prior standards.
Lucky CEOs and Lucky Directors, by Lucian A. Bebchuk, Harvard University - Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Yaniv Grinstein, Cornell University - Samuel Curtis Johnson Graduate School of Management; and Urs Peyer,
INSEAD - Finance, was recently posted on SSRN. Here is the abstract:
This paper integrates and further develops the analysis of two discussion papers we circulated earlier, “Lucky CEOs” and “Lucky Directors.” We study the relation between opportunistic timing of option grants and corporate governance, focusing on at-the-money “lucky” grants awarded at the lowest price of the grant month. We find that both CEO and independent directors received an abnormally high number of lucky grants, and that opportunistic timing of director grants was not merely a by-product of their coinciding with executive grants or of firms’ routinely timing all grants. Lucky grants to CEOs and directors are associated with higher CEO compensation from other sources, and are correlated with a lack of majority of independent directors on the board, no independent compensation committee with an outside blockholder, or a long-serving CEO. For any given firm, the odds of a lucky grant increased when the payoffs from luck were high and when a preceding grant was lucky.
Dodd-Frank: Quack Federal Corporate Governance Round II, by Stephen M. Bainbridge, University of California, Los Angeles (UCLA) - School of Law, was recently posted on SSRN. Here is the abstract:
In 2005, Roberta Romano famously described the Sarbanes-Oxley Act as “quack corporate governance.” In this article, Professor Stephen Bainbridge argues that the corporate governance provisions of the Dodd-Frank Act of 2010 also qualify for that sobriquet.
The article identifies 8 attributes of quack corporate governance regulation: (1) The new law is a bubble act, enacted in response to a major negative economic event. (2) It is enacted in a crisis environment. (3) It is a response to a populist backlash against corporations and/or markets. (4) It is adopted at the federal rather than state level. (5) It transfers power from the states to the federal government. (6) Interest groups that are strong at the federal level but weak at the Delaware level support it. (7) Typically, it is not a novel proposal, but rather a longstanding agenda item of some powerful interest group. (8) The empirical evidence cited in support of the proposal is, at best, mixed and often shows the proposal to be unwise.
All of Dodd-Frank meets the first three criteria. It was enacted in the wake of a massive populist backlash motivated by one of the worst economic crises in modern history. As the article explains in detail, the corporate governance provisions each satisfy all or substantially all of the remaining criteria.
Bail-Ins Versus Bail-Outs: Using Contingent Capital to Mitigate Systemic Risk, by John C. Coffee Jr.,
Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences, was recently posted on SSRN. Here is the abstract:
Because the quickest, simplest way for a financial institution to increase its profitability is to increase its leverage, an enduring tension will exist between regulators and systemically significant financial institutions over the issues of risk and leverage. Many have suggested that the 2008 financial crisis was caused because financial institutions were induced to increase leverage because of flawed systems of executive compensation. Still, there is growing evidence that shareholders acquiesced in these compensation formulas to cause managers to accept higher risk and leverage. Shareholder pressure then is a factor that could induce the failure of a systemically significant financial institution.
What then can be done to prevent future such failures? The Dodd-Frank Act invests heavily in preventive control and regulatory oversight, but this paper argues that the political economy of financial regulation ensures that there will be an eventual relaxation of regulatory oversight (“the regulatory sine curve”). Moreover, the Dodd-Frank Act significantly reduces the ability of financial regulators to effect a bail-out of a distressed financial institution and largely compels them to subject such an institution to a forced receivership and liquidation under the auspices of the FDIC.
Believing that there is a superior and feasible alternative to forcing a strained, but not insolvent, financial institution into a liquidation, this paper recommends a system of “contingent capital” under which, at predefined points, a significant percentage of a major financial institution’s debt securities would convert into an equity security. However, unlike earlier proposals for contingent capital, the conversion would be to a senior, non-convertible preferred stock with cumulative dividends and voting rights. The intent of this provision is to create a class of voting shareholders who would be rationally risk averse and would resist common shareholder pressure for increased leverage and risk-taking, but who would obtain voting rights only at the late stage when the financial institution enters the “vicinity of insolvency.”
This paper discusses (i) the possible design of such a security, (ii) the recent experience in Europe with issuances of similar securities, (iii) tax and other obstacles, (iv) the possibility of international convergence on a system of contingent capital, and (v) the existing authority of the Federal Reserve Board to implement such a requirement. It submits that contingent capital is an idea whose time is coming, but whose optimal design remains debatable.
Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part I): Conceptual Underpinnings and Economic Analysis, by Luzi Hail, University of Pennsylvania - The Wharton School; Christian Leuz, University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); University of Pennsylvania - Wharton Financial Institutions Center; and Peter D. Wysocki, University of Miami School of Business Administration, was recently posted on SSRN. Here is the abstract:
This article is Part I of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In this part, we develop the conceptual framework for our analysis of potential costs and benefits from IFRS adoption in the United States. Drawing on the academic literature in accounting, finance and economics, we assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We also discuss the compatibility of IFRS with the current U.S. regulatory and legal environment as well as the possible macroeconomic effects of IFRS adoption. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit tradeoff between (1) recurring, albeit modest, comparability benefits for investors, (2) recurring future cost savings that will largely accrue to multinational companies, and (3) one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. In Part II of the series (see Hail et al. 2010), we provide an analysis of the policy factors related to the decision and present several scenarios for the future evolution of U.S. accounting standards in light of the current global movement toward IFRS.
Tracking Berle’s Footsteps: The Trail of The Modern Corporation’s Last Chapter, by William W. Bratton,
University of Pennsyvlania Law Shool; European Corporate Governance Institute (ECGI), and Michael L. Wachter, University of Pennsylvania Law School, was recently posted on SSRN. Here is the abstract:
The Modern Corporation and Private Property’s most famous passage is its last chapter, entitled “The New Concept of the Corporation.” There the shareholder interest, painstakingly protected in most of the book, is trumped by the public interest. This Article reconsiders the last chapter, tracking its later footsteps. The Article first rereads the chapter, separating the message it sent to actors on the political stage in 1932 from a more general message it continues to send today. In the context of 1932 it endorsed corporatist theories and looked to immediate redeployment of corporate power and resources toward social welfare enhancement in a future corporatist state. Today the chapter tells us that corporations, and, by implication, corporate law, come to the wider political economy for instructions respecting the public interest, instructions that will vary across different contexts and times. Public duties can follow for corporate actors, but the initial onus lies squarely on the public and the state to articulate their demands clearly. The chapter, thus read, states no hard-wired, intrinsic connection between corporate power and any particular program of public responsibility. The Article goes on to follow the last chapter’s footsteps in later history. Post-war Berle modified the chapter’s vision to suit an altered political economy in which corporatism had failed and had been replaced by the regulatory state. There Berle situated corporate power in a state that contained it successfully, making it advantageous for managers to attend to public demands. Despite the change of time and context, managers retained their status as quasi-public servants in a system that required them to attend to public goals.
Finally, the Article looks at the world post Berle, where the regulatory state retreats and market-based controls advance, superannuating Berle’s political economy. Traces of the last chapter can be found in two distinct locations on this deregulatory landscape. The first is in the employment relationship. There the corporation, as the primary employer of workers, becomes the primary supplier of employee welfare provisions preferred by the state, the two leading examples being corporate offerings of health care insurance and retirement security through private pension plans. At the second location lie new patterns of government-mandated cooperation with societal goals. These new demands devolve on legal compliance. In some cases, as with the Foreign Corrupt Practices Act and the Sarbanes-Oxley Act, the goal is elimination of corporate corruption. In others, as with the anti-money laundering provisions in the Bank Secrecy Act, the corporation serves as the first layer of enforcement against corrupt practices by others. Berle could not have envisioned these developments - the footsteps have veered off onto a new trail. But the track is continuous - today’s corporate compliance regime embodies the last chapter’s precepts.