Tag: SEC rulemaking

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]


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.


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 Importance of Being Earnest About Liquidity Risk Management

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 an open meeting of the SEC; 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.

The fund industry has witnessed substantial changes in recent years, including the rise of novel investment strategies, a growing use of derivatives, and an increased focus on assets that, traditionally, have been less liquid. Unfortunately, it appears that not all funds’ liquidity risk management practices have kept pace with these developments.

Today [September 22, 2015], the Commission considers proposing a set of rules and amendments that will help ensure that open-end investment companies—which include mutual funds and exchange traded funds—manage their liquidity risks in a prudent and responsible manner. The proposed changes will also help attenuate the dilution risks that confront long-term shareholders, and will give investors needed tools to monitor how well funds are managing their liquidity risk. These proposals are important, because they will adapt our decades-old liquidity regime to the fund industry’s new and vastly altered landscape. The proposals we consider today are especially timely, for at least two reasons. First, a study published just last night suggests that U.S. bond funds need to sharpen their methodologies for analyzing the liquidity of their portfolios, because their current methods might be inadequate. And second, a resurgence of volatility in the bond markets in recent months has, in concert with shifting market dynamics, thrust liquidity concerns in that space to the forefront.

These proposals are intended to foster a rigorous and analytically sound approach to liquidity risk management, while also helping investors to better gauge the ability of funds to fulfill redemption obligations.


Open-End Fund Liquidity Risk Management and Swing Pricing

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.

The Commission will consider a recommendation of the staff to propose a new rule and amendments designed to strengthen the management of liquidity risks by registered open-end investment companies, including mutual funds and exchange-traded funds (or ETFs).

Regulation of the asset management industry is one of the Commission’s most important responsibilities in furthering our mission to protect investors, maintain orderly markets, and promote capital formation. The Commission oversees registered investment companies with combined assets of approximately $18.8 trillion and registered investment advisers with approximately $67 trillion in regulatory assets under their management. At the end of 2014, 53.2 million households, or 43.3 percent of all U.S. households, owned mutual funds. Fittingly, next Tuesday, we will reflect on our history of regulating funds and advisers at an event to celebrate the 75th anniversary of the Investment Company Act and the Investment Advisers Act.


Title VII and Security-Based Swaps

Robert W. Reeder III and Dennis C. Sullivan are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan and Cromwell publication. The complete publication is available for download here.

In the first half of 2015, the Securities and Exchange Commission (the “SEC”) finalized or proposed a number of rules relating to security-based swaps (“SBSs”). These include final and proposed rules on the reporting and public dissemination of security-based swaps, proposed rules on security-based swap transactions arranged, negotiated or executed by U.S.-based personnel of a non-U.S. person and final rules on the registration of security-based swap data repositories (“SDRs”). This post provides an overview of these regulatory developments.


New FINRA Equity and Debt Research Rules

Annette L. Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum by Ms. Nazareth, Lanny A. SchwartzHilary S. Seo, and Zachary J. Zweihorn. The complete publication, including appendices, is available here.

The Financial Industry Regulatory Authority (“FINRA”) has adopted amendments to its equity research rules and an entirely new debt research rule. Member firms should review and revise their policies, procedures and processes to reflect the new rules, and analyze what organizational structure and business process changes will be necessary.

The main differences between FINRA’s Current Equity Rules and the New Equity and Debt Rules (as defined below) are outlined in the original publication, available here. Highlights include:


Hillary Clinton Announces Support for SEC Rulemaking on 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 that Presidential candidate Hillary Clinton just announced her support for SEC rulemaking that would require public companies to disclose their political spending to their shareholders.

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—far more comments than those submitted on any rulemaking petition in the Commission’s history.

A statement just released by the Clinton campaign expressed Clinton’s support for “SEC rulemaking requiring publicly traded companies to disclose all political spending to their shareholders.” It further indicated that “Clinton believes that information about how corporate funds are being used to fuel political activity and influence elected officials is material to investment decisions and should be made available to shareholders.”

In addition to Clinton’s announcement, there have been recently other notable expressions of support for the rulemaking petition. Last week, forty-four U.S. Senators sent a letter to the SEC chair to “express [their] support” for the rulemaking petition” and requested that the SEC Chair make the petition “a top priority for the SEC in the near term” (discussed on the Forum here). Earlier, in a letter in support of the rulemaking petition, former SEC Chairmen Arthur Levitt and William Donaldson and former Commissioner Bevis Longstreth stated that the rulemaking proposed in 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” (discussed on the Forum here).

As we have discussed in previous posts on the Forum, the case for rules requiring disclosure of corporate political spending is compelling. Moreover, as our article Shining Light on Corporate Political Spending shows, a close examination of the full range of objections that opponents of such rules have raised indicates that these objections, both individually and collectively, fail to provide an adequate basis for opposing rules that would make disclose corporate political spending to investors. The SEC should proceed to rulemaking in this area.

SEC and PCAOB on Audit Committees

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update by Ms. Gregory, Jack B. Jacobs and Thomas J. Kim.

Public company counsel and audit committee members should be aware of recent activity at the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) that could lead to additional regulation of audit committee disclosure and to federal normative expectations for how audit committees and their members behave.


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