Category Archives: Legislative & Regulatory Developments

Derivatives and Uncleared Margins

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, Armen Meyer, and Christopher Scarpati.

Over the past two weeks, the US banking regulators released their much anticipated final margin requirements for the uncleared portion of the derivatives market. [1] This portion amounts to over $250 trillion of the global $630 trillion outstanding and has up to now been operating in “business as usual” mode, [2] while other derivatives have been pushed into clearing. The final rule’s release completes a long process since it was proposed in 2011 and re-proposed in 2014. [3]

The good news for the industry is that the final rule is generally aligned with international standards [4] and similar requirements proposed in major foreign jurisdictions. Most notably, the final rule increases the threshold of swap activity that would bring a financial end user (e.g., hedge fund) within the rule’s scope from $3 billion to $8 billion. This change, which aligns the rule with European and Japanese proposals, eases the compliance burden of smaller, less-risky market participants.


The Continuing Work of Enhancing Small Business Capital Formation

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement at the SEC Government-Business Forum on Small Business Capital Formation; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As everyone participating in today’s [November 19, 2015] Forum knows well, our nation’s small businesses spur innovation, produce technological change, and drive job creation across the greater economy. In fact, from mid-2009—or what some pinpoint as the end of the “Great Recession”—to mid-2013, small businesses accounted for approximately 60% of net new jobs. More recently, statistics compiled through the first three quarters of 2014 show that our nation’s 28 million small business owners have been responsible for an even greater share of overall job creation, accounting for between 73% and 84% of net new jobs during that period. There can be no doubt that facilitating an environment that nurtures and breeds successful startups and small companies is critical to the health of our greater economy.


SEC Adopts Final Rules for Crowdfunding

Andrew J. Foley is a partner in the Corporate Department of Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum.

On October 30, 2015, the Securities and Exchange Commission (the “SEC”) adopted final rules under Title III of the Jumpstart Our Business Startups (“JOBS”) Act. These rules relate to a new exemption under the Securities Act of 1933 (the “Securities Act”) that will permit securities-based crowdfunding by private companies without registering the offering with the SEC. The crowdfunding proposal (“Regulation Crowdfunding”) follows the 2013 crowdfunding rule proposal in most significant respects and represents a major shift in how small U.S. companies can raise money in the private securities market.


The Pay Ratio Rule: Preparing for Compliance

Avrohom J. Kess is partner and head of the Public Company Advisory Practice at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher/FW Cook co-publication authored by Mr. Kess, Yafit Cohn, Bindu M. Culas, and Michael R. Marino, available here.

On August 5, 2015, the Securities and Exchange Commission (SEC) adopted its much-anticipated final rule implementing the pay ratio disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Section 953(b) of the Dodd-Frank Act instructed the SEC to adopt rules requiring reporting companies to disclose the median of the annual total compensation of all company employees other than the company’s chief executive officer (CEO), the CEO’s annual total compensation and the ratio between these two numbers.


New Records in SEC Enforcement Actions

John C. Wander is a partner in the Shareholder Litigation & Enforcement practice at Vinson & Elkins LLP. This post is based on a Vinson & Elkins publication authored by Mr. Wander, Jeffrey S. JohnstonClifford Thau, and Olivia D. Howe.

In late October, the Securities and Exchange Commission announced that under the leadership of chair Mary Jo White and enforcement director Andrew Ceresney, the SEC has continued to ramp up enforcement activity. In its 2015 fiscal year, the SEC reported filing a total of 807 actions for the year—including 507 independent enforcement actions, 168 follow-on actions, and 132 actions for delinquent filings—resulting in $4.19 billion in monetary penalties and disgorgements.

SEC Rulings on Shareholder Proposals and Ordinary Business Rule

Elizabeth Ising is a partner and Co-Chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Ms. Ising, Sarah E. Fortt, Julia LapitskayaRonald O. MuellerKasey Levit Robinson, and Lori Zyskowski.

On October 22, 2015, the Securities and Exchange Commission’s (“SEC” or “Commission”) Division of Corporation Finance (the “Division”) issued Staff Legal Bulletin No. 14H (“SLB 14H”), setting forth a dramatically different standard for when it will concur that a shareholder proposal that conflicts with a company proposal can be excluded from the company’s proxy statement under Rule 14a-8(i)(9). The Division also reaffirmed its views on the application of the “ordinary business” standard in Rule 14a-8(i)(7). SLB 14H is available here.


Making Capital Formation Work for Smaller Companies and Investors

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Small businesses are vital to our nation’s economic growth and well-being. In fact, our nation’s small business owners create almost two out of every three new jobs and employ more than half of the U.S. workforce. It is therefore important to provide opportunities for entrepreneurs and investors to come together and put capital to productive uses through the development of new ideas, products, and services that make America stronger and create new jobs that bring financial security.

Ultimately, the success of small businesses depends on their ability to access capital. To that end, because many small businesses are thought to have more difficulty than established businesses in getting traditional loans, Congress has provided the Commission with authority to promulgate rules to facilitate access by small businesses to financing from the capital markets.

In order for these rules to be successful, and, just as critically, sustainable, the Commission is tasked with creating an ecosystem for capital formation that works for small businesses and investors alike. Thus, the challenge is to develop a system that enables businesses to raise capital in a cost-effective way and, at the same time, provide ways to benefit and protect investors. After all, without investors, there can be no capital formation.


The SEC Proposed Clawback Rule

Joseph E. Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this column. The complete publication, including footnotes, is available here. Related research from the Program on Corporate Governance includes Excess-Pay Clawbacks by Jesse Fried and Nitzan Shilon (discussed on the Forum here).

On July 1, 2015, the Securities and Exchange Commission (SEC) issued Proposed Rule 10D-1 relating to so-called “clawbacks” pursuant to Section 10D of the Securities and Exchange Act of 1934 (the Exchange Act). Section 10D of the Exchange Act was added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

(On Aug. 5, 2015 the SEC issued its final rule requiring the disclosure of the ratio of the annual pay of the CEO to the median annual pay of all employees (excluding the CEO). Issuers subject to the rule must comply with it for the first fiscal year beginning on or after Jan. 1, 2017. The pay ratio rule will be the subject of a future post.)


Fifty-Eight Members of the US House of Representatives Support the Rulemaking Petition for Transparency in Corporate Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

We are pleased to report that a group of fifty-eight members of the House of Representatives last week sent a letter to SEC Chair Mary Jo White expressing support for the rulemaking petition on corporate political spending submitted by the committee of corporate and securities law experts that we co-chaired. We are delighted that these fifty-eight members of the House of Representatives have added their voices to the unprecedented support that our petition has already received.

In July 2011, we co-chaired a committee on the disclosure of corporate political spending and served as the principal draftsmen of the rulemaking petition that the committee submitted. The petition urged the SEC to develop rules requiring public companies to disclose their spending on politics. To date, the SEC has received more than 1.2 million comments on the proposal—more than any rulemaking petition in the Commission’s history.

Taking notice of the overwhelming support that the petition had received, the SEC placed consideration of the petition on its regulatory agenda in 2013. Unfortunately, Chair Mary Jo White encountered significant political pressure to remove the petition from the Commission’s agenda, and the Commission chose to delay consideration of rules in this area.

In their letter, the fifty-eight Representatives stated that they are writing to “express [their] support for” the rulemaking petition. They urged the SEC chair “to reconsider the frustrating decision to remove corporate political disclosure from the regulatory agenda and make corporate political disclosure a top priority for protecting investors.”

The Representatives’ letter that forty-four Senators sent Chair White in August. The Senators’ letter stated that the Chair should make the petition “a top priority for the SEC in the near term, and inform [the Senators] of the basis for [the SEC Chair’s] decision should [the SEC Chair] not plan to include it on the Commission’s agenda for the upcoming year.” Earlier this year, a bipartisan group of former SEC officials (including former Chairmen Arthur Levitt and William Donaldson) sent a letter to SEC Chair White stating that the petition is a “slam dunk” and that the SEC’s failure to act “flies in the face of the primary mission of the Commission, which since 1934 has been the protection of investors.”

As we have discussed in previous posts on the Forum, the case for rules requiring disclosure of corporate political spending is compelling. Moreover, as we showed in our article Shining Light on Corporate Political Spending, a close examination of the objections that opponents of such rules have raised indicates that these objections, both individually and in combination, fail to provide an adequate basis for opposing rules that would mandate the disclosure of corporate political spending to investors. The SEC should proceed with rulemaking in this area without further delay.

The fifty-eight members of the House of Representatives who signed the letter (available here) supporting the rulemaking petition are:


Exceptions to Rule 14a-8 Shareholder Proposals Exclusion

David A. Katz is a partner specializing in the areas of mergers and acquisitions and complex securities transactions at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz and Sabastian V. Niles. Mr. Niles is counsel at Wachtell Lipton specializing in rapid response shareholder activism and preparedness, takeover defense, corporate governance, and M&A.

Yesterday [October 22, 2015], the Staff of the Securities and Exchange Commission’s Division of Corporation Finance issued Staff Legal Bulletin No. 14H. SLB14H formally narrows the long-standing approach to interpreting Rule 14a-8(i)(9), which permits a company to exclude a shareholder proposal that otherwise complies with Rule 14a-8 from its proxy statement “[i]f the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”


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