Tag: Securities Regulation


Financial Innovation and Governance Mechanisms

The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. My new article, Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency (forthcoming in Business Lawyer, Spring 2015) focuses on two phenomena: “decoupling” (e.g., “empty voting,” “empty crediting,” and “hidden [morphable] ownership”) and the structural transparency challenges posed by financial innovation (and by the primary governmental response to such challenges). In decoupling, much has happened since the 2006-2008 series of sole- and co-authored articles (generally with Bernard Black and one with Jay Westbrook) developed and refined the pertinent analytical framework. In transparency, the analytical framework for “information,” developed and refined in 2012-2014, can contribute not only to the comprehensive new SEC “disclosure effectiveness” initiative but also to resolving complications arising from the creation of a new parallel public disclosure system—the first new system since the creation of the SEC.

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The SEC Opens a New Front in Whistleblower Protection

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, John F. Savarese, and David B. Anders.

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, John F. Savarese, and David B. Anders.

For some time, SEC officials have expressed concern about confidentiality agreements that may deter corporate employees from submitting whistleblower reports. The SEC has now brought its first enforcement action in this area, a settled case in which the respondent agreed to pay a $130,000 civil penalty without admitting or denying the SEC’s findings. According to the SEC’s order, the company required its employees to sign confidentiality agreements at the outset of interviews in internal investigations. The agreements prohibited witnesses from communicating with anyone else any of “the subject matter discussed during the interview.” Such communication was permissible only if the employee first obtained authorization from the company’s legal department. The SEC found that this practice violated Rule 21F-17, which prohibits taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”

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Reasonable Investor(s)

The following post comes to us from Tom C. W. Lin at Temple University Beasley School of Law.

The following post comes to us from Tom C. W. Lin at Temple University Beasley School of Law.

Much of financial regulation for investor protection is built on a convenient fiction. In regulation, all investors are identically reasonable investors. In reality, they are distinctly diverse investors. This fundamental discord has resulted in a modern financial marketplace of mismatched regulations and misplaced expectations—a precarious marketplace that has frustrated investors, regulators, and policymakers.

In a new article, Reasonable Investor(s), published in the Boston University Law Review, I examine this fundamental discord in financial regulation, and seek to make a general positive claim and a specific normative claim. First, the general positive claim contends that a fundamental dissonance between investor heterogeneity in reality and investor homogeneity in regulation has created significant discontent in financial markets for both regulators and investors. Second, the specific normative claim argues that policymakers should formally recognize a new typology of algorithmic investors as an early step towards better acknowledging contemporary investor diversity, so as to forge more effective rules and regulations in a fundamentally changed marketplace. Together, both claims aim to highlight the harms caused by not better recognizing contemporary investor diversity and explain how we can begin to address those harms. Ultimately, the article aspires to create a new and better framework for thinking about investors and investor protection.

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Implications of the SEC’s Plans to Amend Rule 15b9-1

Annette 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 an article by Ms. Nazareth and Jeffrey T. Dinwoodie that first appeared in Traders Magazine.

Annette 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 an article by Ms. Nazareth and Jeffrey T. Dinwoodie that first appeared in Traders Magazine.

The overwhelming majority of SEC-registered broker-dealers must also be members of FINRA. Through a commonly overlooked exemption in SEC Rule 15b9-1, some broker-dealers that operate proprietary-only businesses are able to avoid FINRA regulation. The SEC recently voted to on a proposal to amend this rule on March 25.

While it is not clear whether the SEC will seek to eliminate the exemption or narrow its availability, the rulemaking could have important implications for firms currently relying on the exemption and, more broadly, for the ongoing market structure debate.

Let’s explore the history of this exemption and some of the possible implications of an SEC rulemaking.

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2015 IPO Study

The following post comes to us from Proskauer Rose LLP and is based on the Executive Summary of a Proskauer publication; the complete publication, including extensive analysis of multiple industry sectors and foreign private issuers, is available here.

The following post comes to us from Proskauer Rose LLP and is based on the Executive Summary of a Proskauer publication; the complete publication, including extensive analysis of multiple industry sectors and foreign private issuers, is available here.

We examined 119 U.S.-listed IPOs with a minimum deal size of $50 million in 2014, representing about half of the overall market for deals meeting those criteria. Our study covered a range of industries and included foreign private issuers and master limited partnerships, but excluded certain uncommon deal structures.

This edition expands on last year’s study (discussed on the Forum here) in several important ways. Collectively, these enhancements widen our perspective and, in the process, deepen our analysis.

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Supreme Court’s Omnicare Decision Muddies Section 11 Opinion Liability Standards

The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

The Supreme Court has a long history of rejecting expansive interpretations of implied private rights of action under Section 10(b) of the Securities Exchange Act. Most notably, since 1975, it rejected the argument that mere holders, rather than only purchasers and sellers, may bring private damage actions under Section 10(b), rejected the argument that Section 10(b) liability may be imposed based on negligence rather than scienter, rejected the argument that Section 10(b) may be applied to “unfair” as opposed to fraudulent conduct, rejected the argument that purchase price inflation is enough to show damages under Section 10(b), rejected the argument that Section 10(b) reaches aiders and abettors rather than only primary violators, and rejected efforts to muddy the distinction between primary and secondary liability under Section 10(b).

The Court, however, has barely even mentioned Section 11 of the Securities Act in its opinions, much less interpreted it. Section 11, unlike Section 10(b), 1) provides an express private right of action, 2) is limited to misrepresentations and omissions in a registration statement, and 3) requires no proof of culpability although defendants other than an issuer have due diligence affirmative defenses. The Supreme Court’s March 24, 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, is the Court’s first meaningful foray into Section 11. Unfortunately, the decision, which addresses opinion liability under Section 11, provides an amorphous standard that is likely to lead to unpredictable results. It should provide little comfort to plaintiffs or defendants and should make defendants more cautious about including unnecessary opinions in registration statements and, where appropriate, should lead them to carefully qualify opinions that they do include.

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Preparing for the Regulatory Challenges of the 21st Century

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent remarks at the Georgia Law Review’s Annual Symposium, Financial Regulation: Reflections and Projections; 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.

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent remarks at the Georgia Law Review’s Annual Symposium, Financial Regulation: Reflections and Projections; 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.

During my tenure as an SEC Commissioner, our country’s economy has experienced extreme highs and lows. In fact, the country experienced the worst financial crisis since the Great Depression, followed by the current period of significant economic growth where the stock market has grown by around 165% from the low point of the financial crisis.

I have had a front-row seat to all of this, as I became an SEC Commissioner just weeks before the financial crisis hit our nation. As a result, I witnessed first-hand just how fragile our capital markets can be, and the need for a robust and effective SEC to protect them. First, let me provide a snapshot of what went on. I was sworn-in as an SEC Commissioner on July 31, 2008. Within a few weeks, on September 15, 2008, Lehman Brothers filed for bankruptcy. To give you a sense of its rapid decline, within 15 days, its share price went from $17.50 per share to virtually worthless. The demise of Lehman Brothers is often seen as the first in a rapid succession of events that led to an unimaginable market and liquidity crisis. These events included:

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The Role of Academics and Industry in Improving Equity Market Structure

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the University of Notre Dame, Mendoza College of Business, Center for the Study of Financial Regulation; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the University of Notre Dame, Mendoza College of Business, Center for the Study of Financial Regulation; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [March 13, 2015], I want to focus my remarks on the equities markets, and specifically equity market structure. Although it may be hard for some of you in this room to believe, in the 20 months since I began this job, some have suggested that I am a so-called “market structure expert.” While such comments are certainly flattering, I cannot accept the compliment. Of course, my academic research, my private and public sector experience, and my current role as a Commissioner at the Securities and Exchange Commission (“SEC” or the “Commission”) have all given me unique insights into the functioning of our equities markets. However, like many people in this room, I still consider myself a “student of markets.” With so many issues to examine and debate, and the continued evolution of the financial markets, I think we can agree there is more for all of us to observe and learn.

It has been fifteen months since I gave my first speech on equity market structure. Both before and since, my colleagues at the Commission have kept the issue of market structure in the forefront through their own public remarks. Congress also has been expressing keen interest in equity market structure, shining a bright light on the issue. And we have had some unsolicited prompting by a bestselling author, who, to put it lightly, does not have flattering things to say about the current state of the equity markets in what many refer to as simply “The Book.” Given all of this attention, I am frankly disappointed that we at the SEC have accomplished very little.

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A Few Observations on Shareholders in 2015

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent address at Tulane’s 27th Annual Corporate Law Institute; 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.

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent address at Tulane’s 27th Annual Corporate Law Institute; 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.

Today [March 19, 2015], I will share a few observations on three specific areas: the current state of shareholder activism; the shareholder proposal process; and fee-shifting bylaws. I know your next two panels take up aspects of these important topics, but I think the space is lively and big enough for all of us to comment.

The Current Activism Landscape

There are different views on what is meant by “shareholder activism,” but just the word “activism” triggers an adverse reaction from many companies. Reflexively painting all activism negatively is, in my view, using too broad a brush and indeed is counterproductive. To me, the term activism captures the range of efforts by investors to influence a company’s management or decision-making. Some of it is constructive. In certain situations, activism seeks to bring about important changes at companies that can increase shareholder value. Now, some of you may find the juxtaposition of the word “activism” with “shareholder value” does not comport with your sense of reality. Some of you also believe that activists are not interested in increasing long-term value for shareholders and other stakeholders. Still others will assert that activists are simply short-term traders looking to make a quick dollar. I did say this was a lively topic with many different views.

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Private Equity Fund Managers: Annual Compliance Reminders and New Developments

The following post comes to us from David J. Greene, partner focusing on investment fund formation, structuring, and related transactions at Latham & Watkins LLP, and is based on a Latham client alert by Mr. Greene, Amy Rigdon, Barton Clark, and Nabil Sabki.

The following post comes to us from David J. Greene, partner focusing on investment fund formation, structuring, and related transactions at Latham & Watkins LLP, and is based on a Latham client alert by Mr. Greene, Amy Rigdon, Barton Clark, and Nabil Sabki.

US federal laws and regulations, as well as the rules of self-regulatory organizations, impose numerous yearly reporting and compliance obligations on private equity firms. While these obligations include many routine and ongoing obligations, new and emerging regulatory developments also impact private equity firms’ compliance operations. This post provides a round-up of certain annual or periodic investment advisory compliance-related requirements that apply to many private equity firms. In addition, this post highlights material regulatory developments in 2014 as well as a number of expectations regarding areas of regulatory focus for 2015.

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