Category Archives: Securities Regulation

Those Short-Sighted Attacks on Quarterly Earnings

Robert C. Pozen  is a senior lecturer at MIT’s Sloan School of Management. Mark Roe is a professor at Harvard Law School. Related research from the Program on Corporate Governance includes Corporate Short-termism—In the Boardroom and in the Courtroom by Mark Roe (discussed on the Forum here); and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The clamor against so-called corporate short-term thinking has been steadily rising, with a recent focus on eliminating the quarterly earnings report that public firms issue. Quarterly reports are said to push management to forgo attractive long-term projects to meet the expectations of investors and traders who want smooth, rising earnings from quarter to quarter.

The U.K. recently eliminated mandatory quarterly reports with the goal of lengthening the time horizon for corporate business decision-making. And now Martin Lipton, a prominent U.S. corporate lawyer, has proposed that U.S. companies’ boards be allowed to choose semiannual instead of quarterly reporting. The proposal resonates in Washington circles: Presidential candidate Hillary Clinton has criticized “quarterly capitalism” as has the recently departed Republican SEC Commissioner Daniel Gallagher.

But while quarterly reporting has drawbacks, the costs of going to semiannual reporting clearly outweigh any claimed benefits.


SCOTUS Declines Petition on Insider Trading Ruling

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

Today [October 5, 2015], the United States Supreme Court declined to hear the petition for a writ of certiorari (the “Petition”) filed by the United States Department of Justice (“DOJ”) in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), a landmark decision that dismissed indictments against two insider trading defendants. By declining to hear the Petition, the Supreme Court ensured that the Second Circuit’s decision in Newman will remain binding in the Second Circuit and influential across the country.

As we explain below, two of Newman’s holdings are particularly important: first, that the government must prove that a remote tippee knew or should have known of the personal benefit received by a tipper in exchange for disclosing nonpublic information; and second, that the benefits alleged by the government in United States v. Newman were not sufficient to support a conviction, as they were not sufficiently “consequential.”


Will a New Paradigm for Corporate Governance Bring Peace?

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The decades-long conflict that is currently raging over short-termism and activist hedge funds strikes me as analogous to the Thirty Years’ War of the 17th Century, albeit fought with statistics (“empirical evidence”), op-eds and journal articles rather than cannon, pike and sword. I decided, after some thirty-six years in the front line of the army defending corporations and their boards, that pursuing the thought might result in an essay more interesting (and perhaps a bit more amusing) than my usual memos and articles.

In 1618, after two centuries of religious disputation and tenuous co-existence, the ascension of the staunchly partisan Ferdinand II as Holy Roman Emperor sparked a revolt that disrupted the balance of power in Europe and began the Thirty Years’ War. The War quickly involved the major powers of Europe. The conflict resulted in the Peace of Westphalia and the redrawing of the religious and political map of Europe, a new paradigm for the governance of Europe.

In 1985, a century of disputation as to the roles of professional management, boards of directors and shareholders of public companies similarly resulted in the disruption of the balance of power and general prosperity. In the two decades immediately preceding 1985, corporate raiders had perfected the front-end-loaded, two-tier, junk-bond-financed, bust-up tender offer, using tactics such as the “Highly Confident Letter” to launch a takeover without firm financing, “greenmail” (accumulating a block of stock and threatening a takeover bid unless the target company repurchases the block at a premium to the market) and litigation attacking protective state laws. Public companies did not have sufficient time or means to defend against corporate raiders. The battles culminated in two key 1985 decisions of the Delaware Supreme Court that restored the balance of power between boards of directors and opportunistic shareholders. In the Unocal case, the court upheld the power of the board of directors to reject, and take action to defeat, a hostile takeover bid, and in the Household case, it sustained the legality of the poison pill, which I had introduced three years earlier in an effort to level the playing field between corporate raiders and the companies they targeted.


SEC Interpretation of “Whistleblower” Definition

Nicholas S. Goldin is a partner at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher publication by Mr. Goldin, Peter H. BresnanYafit Cohn, and Mark J. Stein.

On August 4, 2015, the Securities and Exchange Commission (“SEC”) issued an interpretive release to clarify its reading of the whistleblower rules it promulgated in 2011 under Section 21F of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The release expressed the SEC’s view that the employment retaliation protection accorded by the Dodd-Frank Act and codified in Section 21F is available to individuals who report the suspected securities law violation internally, rather than to the SEC. [1]


Asset Managers: AML ready?

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Jeff Lavine, Adam Gilbert, and Armen Meyer. The complete publication, including footnotes and appendix, is available here.

On August 25th, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed anti-money laundering requirements for US investment advisers. The proposal requires advisers that are registered with the Securities and Exchange Commission (SEC) to establish anti-money laundering (AML) programs, to report suspicious activities related to money laundering and terrorist financing, and to comply with other sections of the Bank Secrecy Act (BSA).

If finalized as proposed, the impact of these new requirements will vary. Advisers owned by bank holding companies (BHCs) are already subject to similar requirements that are applicable to their BHC parents and enforced by the Federal Reserve. These advisers will nevertheless likely experience an increase in regulatory oversight, as the proposal now allows the SEC to enforce AML requirements.


Remarks on Small and Emerging Companies

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As you know, the term of this Committee expires September 24, 2015. The advice and expertise the Committee has provided to the Commission on a variety of issues over the last four years has been incredibly helpful to us. And, as today’s [September 23, 2015] agenda reflects, you are continuing those contributions. Your contributions have shown the importance of this Committee, and I am pleased to announce that the Commission is renewing its charter for another two-year term. The Commission will be selecting members and it is my hope that many of you will continue your service. I look forward to our continuing dialogue and being the beneficiary of your insight and suggestions.


NYSE Expands Rules on Material News and Trading Halts

Stuart H. Gelfond is a partner in the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Gelfond, Victoria D. Laubach, and Hayley S. Cohen.

Recently, the New York Stock Exchange LLC (“NYSE” or “Exchange”) filed a proposed rule change with the Securities and Exchange Commission to amend the NYSE Listed Company Manual (the “Manual”), effective September 28, 2015. [1] The proposed amendments (i) expand the pre-market hours during which companies with listed securities are required to notify the Exchange prior to disseminating material news, (ii) provide guidance related to the release of material news after the close of trading on the Exchange and (iii) permit the Exchange to halt trading in certain additional circumstances, including when it needs to obtain more information about a listed company’s news release.


Announcement of New Rulemaking Database

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent public statement, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Strong regulations are central to the Commission’s mission. For more than 80 years, we have used rulemaking to establish a comprehensive framework for our securities markets that protects investors, enhances market integrity, and promotes capital formation. The rulemaking process is the means through which the Commission responds to the ever-changing securities markets, targets and attacks harmful practices in those markets, and meets the goals mandated by Congress. Our rules provide important standards against which we assess compliance in our examinations and hold wrongdoers accountable in our enforcement actions.


The Volcker Rule as Structural Law

John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School.

In response to the 2008 financial crisis the US Congress introduced the “Volker Rule”—a novel law generally barring banking organizations from proprietary trading and investing in hedge and private equity funds. Before implementing the Volcker Rule, US governmental agencies are required by administrative law to follow specified notice-and-comment procedures, and courts have a role in enforcing an obligation that agencies not be “arbitrary” in finalizing regulations. Many continue to advocate that the financial agencies also use quantified cost-benefit analysis in doing so. In principle, ad law requirements should help the public evaluate the impact of the Rule and hold agencies accountable in exercising their discretion and delegated authority in choosing among ways to implement a legislative requirement. However, in The Volcker Rule as Structural Law: Implications for Cost-Benefit Analysis and Administrative Law, a forthcoming article in a symposium issue of the Capital Markets Law Journal that focuses on the Volcker Rule, I build on prior work published in the Yale Law Journal and Law and Contemporary Problems to argue that the effects of a structural law such as the Volcker rule and its implementation by agencies cannot be reliably or precisely quantified, and courts err when they attempt to force agencies to do so under the guise of review for procedural regularity or substantive rationality.


Opening Remarks at the 75th Anniversary of the Investment Company Act and Investment Advisers Act

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks on the 75th Anniversary of the Investment Company Act and Investment Advisers Act. The full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. Thank you for coming today [September 29, 2015], and welcome to the SEC, both those here in person and through our webcast. Before I say anything else, I would like to acknowledge staff from the Division of Investment Management for their hard work in putting this anniversary program together. In particular, kudos go to Director Dave Grim, Jennifer McHugh, Bridget Farrell and Jamie Walter. I also would like to thank my fellow Commissioners who are introducing the panels, and all of the stellar panelists who will be sharing with us their insights throughout the day.

Today, we celebrate 75 years of the Investment Company Act and the Investment Advisers Act—two pieces of legislation that came to shape the financial markets as we know them. And this event is more than an anniversary celebration—it is a day to reflect on this extraordinary regulatory system that has facilitated the management and growth of assets for millions of Americans and other investors from around the world. In these opening remarks, my assignment is to first take us on a brief historical tour and then come back full circle to today where we see just how powerful and alive these Acts are in the modern markets.

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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    David Fox
    Stephen Fraidin
    Byron Georgiou
    Larry Hamdan
    Carl Icahn
    Jack B. Jacobs
    Paula Loop
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Morton Pierce
    Barry Rosenstein
    Paul Rowe
    Rodman Ward