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The Regulation of Proxy Advisory Firms

Posted by Ken Bertsch, Council of Institutional Investors, on

Monday, September 26, 2016

Corporate Governance Reform and Transparency Act, Glass Lewis, H.R. 5311, Institutional Investors, ISS, Pension funds, Proxy advisors, Proxy season, Proxy voting, SEC, Securities regulation, Shareholder voting
More from: Ken Bertsch, Council of Institutional Investors

Ken Bertsch is Executive Director of the Council of Institutional Investors. This post is based on a letter sent by the Council of Institutional Investors to the United States Senate Committee on Banking, Housing, and Urban Affairs, regarding the legislation of H.R. 5311, the Corporate Governance Reform and Transparency Act of 2016.

September 6, 2016

The Honorable Richard C. Shelby
Chairman
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, DC 20510

The Honorable Sherrod Brown
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, DC 20510

Re: Proposed Legislation Relating to Proxy Advisory Firms

Dear Mr. Chairman and Ranking Member Brown:

I am writing on behalf of the Council of Institutional Investors (CII), a nonpartisan, nonprofit association of employee benefit plans, foundations and endowments with combined assets under management exceeding $3 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families. Our associate members include a range of asset managers with more than $20 trillion in assets under management. [1]

How to Disclose a Cybersecurity Event: Recent Fortune 100 Experience

Posted by Luke Dembosky and Jeremy Feigelson, Debevoise & Plimpton LLP, on

Monday, September 26, 2016

Accountability, Cybersecurity, Disclosure, Filings, Financial reporting, Form 8-K, Regulation FD, Risk disclosure, Risk management, SEC, Shareholder communications
More from: Benjamin Pedersen, Brett Novick, David Becker, Jeremy Feigelson, Jim Pastore, Luke Dembosky, Paul Rodel, Debevoise & Plimpton

Luke Dembosky and Jeremy Feigelson are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise & Plimpton publication by Mr. Dembosky, Mr. Feigelson, Jim Pastore, Paul M. Rodel, David M. Becker, Brett M. Novick, and Benjamin R. Pedersen.

Cybersecurity threats pose real challenges for any company, including the theft of valuable intellectual property and the reputational harm caused by losses of customer information. Attendant to the operational and financial challenges associated with cybersecurity threats, SEC reporting companies must also consider their disclosure obligations resulting from the risk or occurrence of data breaches or other cybersecurity events.

During the period from January 2013 through the third quarter 2015, there were 20 reported incidents of major data breaches or cybersecurity events at Fortune 100 companies. While this number is without doubt a fraction of the total cybersecurity events experienced at these and similar companies during that time, a survey of these cybersecurity events, and the manner in which each of the 18 affected companies responded in their SEC filings, is instructive. We have compiled a detailed database, comparing disclosure responses of these companies across a number of vectors in order to guide this complex process.

Beyond Dirks: Gratuitous Tipping and Insider Trading

Posted by Donna M. Nagy, Indiana University, on

Monday, September 26, 2016

Compliance & ethics, Duty of loyalty, Exchange Act, Fiduciary duties, Inside information, Insider trading, Liability standards, Regulation FD, Rule 10b-5, SEC enforcement, Securities enforcement, Securities fraud, Securities litigation, Securities regulation, STOCK Act, Supreme Court
More from: Donna Nagy

Donna M. Nagy is the C. Ben Dutton Professor of Law and Executive Associate Dean at Indiana University Maurer School of Law–Bloomington. This post is based on Professor Nagy’s forthcoming article, to be published at 42 Journal of Corporation Law 1 (2016). Nagy also has written an introductory essay for the Stanford Law Review Online Symposium on Salman v. United States, which will be published a few days in advance of the October 5 Supreme Court argument.

Is an investment banker who gratuitously shared confidential merger-and-acquisition information with his brother—with no expectation of receiving any tangible benefit in return—guilty of securities fraud? And is the investment banker’s brother-in-law jointly liable for trading securities on the basis of what he knew to be gratuitous tips? The Supreme Court is poised to consider these questions on October 5, when it hears argument in Salman v. United States. It has been thirty-three years since the Court decided Dirks v. Securities and Exchange Commission (1983), the precedent that established a “personal benefit” test for joint tipper-tippee liability under the federal securities laws.

Do Firms Engage in Risk-Shifting? Empirical Evidence

Posted by Erik Gilje, The Wharton School, on

Sunday, September 25, 2016

Agency costs, Bank debt, Bankruptcy, Behavioral finance, Debt-equity ratio, Decision making, Distressed companies, Incentives, Leverage, Risk, Risk-taking
More from: Erik Gilje

Erik Gilje is Assistant Professor of Finance at The Wharton School of the University of Pennsylvania. This post is based on his recent paper.

How does corporate investment risk-taking change when a firm has high leverage or approaches distress? In high-leverage states of the world, equity holders benefit from successful outcomes of high-risk projects, while losses from unsuccessful outcomes are borne by debt holders. This asymmetry between who receives the gains and losses from a project could make it optimal for equity holders to maximize the amount of risk a firm undertakes when leverage is high. This hypothesized increased risk-taking in a firm’s investments, referred to as risk-shifting or asset substitution, could result in an overall cost to the firm (Jensen and Meckling (1976)).

NYDFS Proposed Cybersecurity Regulation for Financial Services Companies

Posted by Joseph Vitale, Schulte Roth & Zabel LLP, on

Saturday, September 24, 2016

Accountability, Banks, Consumer protection, Cybersecurity, Disclosure, Financial institutions, Financial regulation, New York, Privacy, Risk, Risk management, Securities regulation, State law
More from: Joseph Vitale, Michael Yaeger, Noah Gillespie, Schulte Roth & Zabel

Joseph P. Vitale is a partner in the Regulatory & Compliance practice at Schulte Roth & Zabel LLP. This post is based on a Schulte Roth & Zabel publication by Mr. Vitale, Michael L. Yaeger, and Noah N. Gillespie.

On Sept. 13, 2016, the New York State Department of Financial Services (“NYDFS”) issued a proposed regulation that would impose new, rigorous cybersecurity requirements on banks, consumer lenders, money transmitters, insurance companies and certain other financial service providers (each, a “Covered Entity”) regulated by the NYDFS (the “Proposed Regulation”). Given New York’s importance in the financial services industry, not only would the effect of the Proposed Regulation be felt immediately across the country, other regulators may follow New York’s example.

Securities Regulation in the Interconnected, Global Marketplace

Posted by Mary Jo White, U.S. Securities and Exchange Commission, on

Friday, September 23, 2016

Anti-corruption, Asset management, Cross-border transactions, Cybersecurity, Disclosure, Exchange-traded funds, FCPA, International governance, Liquidity, Mutual funds, Oversight, SEC, SEC enforcement, Securities enforcement, Securities regulation
More from: Mary Jo White, U.S. Securities and Exchange Commission

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent keynote address to the International Bar Association Annual Conference. The complete publication, 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.

It is my pleasure to participate in this year’s International Bar Association Annual Conference at the request of your president, David Rivkin, whom I first came to highly admire from our days as very young lawyers. He is a tremendous lawyer and leader. In reviewing your conference program, I was struck by the significant overlap with issues currently on the SEC’s agenda.

As the regulator of the world’s largest securities markets, and thousands of globally-active firms, the SEC is naturally very engaged in many issues that extend beyond the U.S. border. Indeed, the first speech I gave as Chair—after only three weeks on the job—was about the SEC as an international regulator, having spent a surprising amount of time on international meetings and issues. The centrality of international issues to financial regulation and the SEC has not changed during these last three and a half years.

The Board’s Role in FCPA Compliance

Posted by David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, on

Friday, September 23, 2016

Anti-corruption, Board communication, Board leadership, Boards of Directors, Compliance & ethics, Corporate culture, Engagement, FCPA, International governance, Misconduct, Oversight, Reputation, Risk oversight, Securities regulation
More from: David Katz, Laura McIntosh, Wachtell Lipton

David A. Katz is a partner and Laura A. McIntosh is a consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh.

For directors of public companies with foreign operations, “FCPA” is a dreaded acronym. In recent years, compliance with the Foreign Corrupt Practices Act has become a key area of focus for boards and management. Enforcement of the FCPA has increased markedly since 2004, and the U.S. Securities and Exchange Commission and the Department of Justice have made it clear that they intend to prosecute individuals as well as public companies. The stakes can be enormous for companies, with penalties reaching hundreds of millions (or billions) of dollars, and they are frightening for individuals, who face the possibility of multi-year prison sentences along with substantial financial penalties.

Overseeing FCPA compliance is no easy task. It is time-consuming, expensive, challenging, and essential. As a legal matter, boards are required to create and follow procedures designed to ensure compliance with applicable laws. Directors succeed in this task by fostering a culture of high ethical standards, by prioritizing compliance oversight, and often by personally investing time and effort in the company outside the boardroom.

Weekly Roundup: September 16–September 22, 2016

Posted by HLS Forum on Corporate Governance and Financial Regulation, on

Friday, September 23, 2016

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of September 16–September 22, 2016.

PROMESA and Puerto Rico’s Pathways to Solvency

Posted by Stephen Park, University of Connecticut, and Tim Samples, University of Georgia, on Friday, September 16, 2016

Tags: Bailouts, Bankruptcy, Bondholders, Bonds, Debt, Debtor-creditor law, Engagement, Incentives, Municipal securities,PROMESA, Puerto Rico, Restructurings, Securities regulation, Sovereign debt

Equity Market Structure in 2016 and for the Future

Posted by Mary Jo White, U.S. Securities & Exchange Commission, on Friday, September 16, 2016

Tags: Algorithmic trading, Audit trail, Broker-dealers, Capital markets, Disclosure, Exchange-traded funds, Financial technology, FINRA, High-frequency trading, Investor protection, Market conditions, Market efficiency, Proprietary trading,REG SCI, SEC, Securities regulation, Transparency

A Theory of Efficient Short-Termism

Posted by Richard T. Thakor, University of Minnesota, on Saturday, September 17, 2016

Tags: Agency costs, Agency model, Decision making, Firm performance, Incentives, Long-Term value, Management,Market efficiency, Moral hazard, Risk-taking, Shareholder activism, Shareholder value, Short-termism

Outsourcing Corporate Governance

Posted by Tao Li, Warwick Business School, on Sunday, September 18, 2016

Tags: Conflicts of interest, Glass Lewis, Information asymmetries, Information environment, Institutional Investors, ISS,Proxy advisors, Proxy voting, Shareholder activism, Shareholder elections, Shareholder value

The Role of Proxy Advisory Firms

Posted by Nadya Malenko, Boston College, and Yao Shen, Baruch College, on Monday, September 19, 2016

Tags: Executive Compensation, Executive performance, Firm performance, Institutional Investors, Institutional voting, ISS,Proxy advisors, Proxy voting, Say on pay, Shareholder activism, Shareholder voting

Why Don’t General Counsels Stop Corporate Crime?

Posted by Sureyya Burcu Avci and H. Nejat Seyhun, University of Michigan Ross School of Business, onMonday, September 19, 2016

Tags: Boards of Directors, Class actions, Corporate crime, Corporate fraud, General counsel, Information asymmetries,Inside counsel, Insider trading, Management, Misconduct, Oversight, Securities enforcement, SOX

The SEC’s Whistleblower Program: The Successful Early Years

Posted by Andrew Ceresney, U.S. Securities & Exchange Commission, on Monday, September 19, 2016

Tags: Compliance & ethics, Confidentiality, Corporate fraud, Dodd-Frank Act, FCPA, Misconduct, Rule 21F-17, SEC, SEC enforcement, SEC investigations, Securities enforcement, Securities fraud, Securities regulation, Whistleblowers

Shareholder Approval in M&A

Posted by Tingting Liu, Creighton University, on Tuesday, September 20, 2016

Tags: Acquisitions, CalPERS, Engagement, Listing standards, Mergers & acquisitions, NASDAQ, NYSE, Pension funds,Shareholder voting

Federal Court’s Denial of Excessive Fee Claims on Mutual Fund “Manager of Managers” Theory

Posted by John Donovan, Ropes & Gray LLP, on Tuesday, September 20, 2016

Tags: Fiduciary duties, Fund managers, Investment advisers, Liability standards, Mutual funds, Section 36(b), Securities regulation, U.S. federal courts

Buybacks and the Board: Director Perspectives on the Share Repurchase Revolution

Posted by Richard Fields, Tapestry Networks, on Tuesday, September 20, 2016

Tags: Boards of Directors, Capital structure, Disclosure, Executive Compensation, Incentives, Long-Term value,Management, Market conditions, R&D, Repurchases, Shareholder value, Short-termism, Stock returns, Surveys

What Do Private Equity Firms Say They Do?

Posted by Vladimir Mukharlyamov, Georgetown University, on Wednesday, September 21, 2016

Tags: Asset management, Capital structure, Equity capital, Firm performance, Fund managers, Incentives, Management,Oversight, Partnerships, Private equity, Surveys

A Gadfly’s Perspective

Posted by Jonathan Kalodimos, Oregon State University College of Business, on Wednesday, September 21, 2016

Tags: Boards of Directors, Capital allocation, Engagement, Institutional Investors, Management, Proxy season, Proxy voting, Repurchases, SEC, Shareholder activism, Shareholder proposals, Shareholder value

Evaluating Monetary Policy Operational Frameworks

Posted by Simon Potter, Federal Reserve Bank of New York, on Wednesday, September 21, 2016

Tags: Banks, Central banking, Federal Reserve, Financial crisis, Financial institutions, Financial regulation, Interest,Liquidity, Market efficiency, Monetary policy, Moral hazard, Risk, Systemic risk

Being Surprised by the Unsurprising: Earnings Seasonality and Stock Returns

Posted by Tom Y. Chang, University of Southern California, on Thursday, September 22, 2016

Tags: Analyst forecasts, Analysts, Behavioral finance, Earnings announcements, Financial reporting, Forecasting,Information environment, Market efficiency, Stock mispricing, Stock returns

The Law and Brexit VI

Posted by Thomas J. Reid, Davis Polk & Wardwell LLP, on Thursday, September 22, 2016

Tags: Banks, Brexit, Clearing houses, Cross-border transactions, Derivatives, EMIR, ESMA, EU, Europe, Financial institutions, Financial regulation, International governance, MiFID, OTC derivatives, Reporting regulation, Swaps,Switzerland, UK

2016 Global Board of Directors Survey

Posted by Julie Hembrock Daum, Spencer Stuart, and Susan Stautberg, WomenCorporateDirectors Foundation, on Thursday, September 22, 2016

Tags: Board composition, Board dynamics, Board evaluation, Board performance, Board turnover, Boards of Directors,Cybersecurity, Director qualifications, Diversity, Succession, Surveys

2016 Global Board of Directors Survey

Posted by Julie Hembrock Daum, Spencer Stuart, and Susan Stautberg, WomenCorporateDirectors Foundation, on

Thursday, September 22, 2016

Board composition, Board dynamics, Board evaluation, Board performance, Board turnover, Boards of Directors, Cybersecurity, Director qualifications, Diversity, Succession, Surveys
More from: Boris Groysberg, Deborah Bell, Julie Daum, Susan Stautberg, Yo-Jud Cheng, Spencer Stuart, WCD Foundation

Julie Hembrock Daum leads the North American Board Practice at Spencer Stuart, and Susan Stautberg is the Chairman and CEO of the WomenCorporateDirectors Foundation. This post relates to the 2016 Global Board of Directors Survey, a co-publication from Spencer Stuart and the WCD Foundation authored by Ms. Daum; Ms. Stautberg; Dr. Boris Groysberg, Richard P. Chapman Professor of Business Administration at Harvard Business School; Yo-Jud Cheng, doctoral candidate at Harvard Business School; and Deborah Bell, researcher.

The growing demands on corporate boards are transforming boardrooms globally, with directors taking on a more strategic, dynamic and responsive role to help steer their companies through a hypercompetitive and volatile business environment. Economic and political uncertainties make long-term planning more difficult. The proliferation of cyber attacks—and their consequences for business in financial losses and reputational damage—increases the scope of risk oversight. A rise in institutional and activist shareholder activity requires boards to identify vulnerabilities in board renewal and performance and, in some cases, establish protocols for engagement. And all of these demands have pushed issues around board composition and diversity to the fore, as boards cannot afford to have directors around the table who aren’t delivering value.

In this context, Spencer Stuart, the WomenCorporateDirectors (WCD) Foundation, Professor Boris Groysberg and doctoral candidate Yo-Jud Cheng of Harvard Business School and researcher Deborah Bell partnered together on the 2016 Global Board of Directors Survey, one of the most comprehensive surveys of corporate directors around the world.

The Law and Brexit VI

Posted by Thomas J. Reid, Davis Polk & Wardwell LLP, on

Thursday, September 22, 2016

Thomas J. Reid is Managing Partner of Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Additional posts on the legal and financial impact of Brexit are available here.

Despite a weekend of Brexit brainstorming by the Cabinet at the Prime Minister’s country retreat, we are still no closer to understanding the Government’s preferred trading model for Brexit Britain.

Meanwhile, many Brexiteers in the Parliament and the Press have pointed to some positive economic data as proof that fears about the economic impact of Brexit were grossly exaggerated. Others point out that uncertainty about the political and regulatory impact of Brexit will eventually take its toll on key sectors of the British economy, including financial services.

In this post, we take a look at the key features of the “Swiss model” and, in particular, its implications for financial services post-Brexit. Unlike many other areas of the trading relationship, there is no specific bilateral agreement covering financial services between the EU and Switzerland; Switzerland relies almost entirely on the third-country access regimes in existing EU sectoral legislation. Nevertheless, the Swiss model serves to illustrate some of the key benefits and pitfalls of relying on third-country provisions in EU financial services legislation.

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