Yearly Archives: 2009

Proxy Access Proposed Rules Published by SEC

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Tuesday, June 23, 2009
, , , , ,
More from: , , , ,

This post is by Charles Nathan, Alex Cohen, Brian Miller of Latham & Watkins LLP and Rhonda Brauer of Georgeson Inc.

On June 10, 2009, the SEC published a proxy access rule proposal for public comment. The Commission’s release, entitled “Facilitating Shareholder Director Nominations,” gives concrete form to the broad objectives the Commission outlined at its May 20, 2009 open meeting (at which it approved publication of the rule by three votes to two).

As expected, the SEC is proposing to:

· create a new Rule 14a-11 that would require companies to include shareholder nominees for directors in company proxy materials under prescribed circumstances, and

· revise existing Rule 14a-8(i)(8) to allow shareholder proposals to amend a company’s governing documents regarding nominating procedures or disclosure related to shareholder nominations, thus reversing the SEC’s 2007 prohibition on using Rule 14a-8 for shareholder proxy access proposals.

Proposed Rule 14a-11

The key features of the proposed rule are as follows:

· Companies Subject to Proxy Access: The proposed rule would apply to all Exchange Act reporting companies subject to the proxy rules, regardless of their size, including investment companies and companies that have voluntarily registered their stock (under Section 12(g)) but excluding debt-only issuers and foreign private issuers.

· Minimum Ownership: The proposed rule would set a tiered minimum-ownership requirement for shareholders seeking to nominate directors:

· 1 percent of the shares of a large accelerated filer (net assets of $700 million or more),· 3 percent of the shares of an accelerated filer (net assets of $75 million or more, but less than $700 million), and

· 5 percent of the shares of a non-accelerated filer (net assets less than $75 million).

· Minimum Holding Period: Each nominating shareholder would be required continuously to have held the requisite number of shares for at least one year prior to the date it notifies the company of its intent to nominate a director, and must intend to hold the shares at least through the date of the annual or special meeting.

· Aggregation: Unaffiliated shareholders would be permitted to aggregate their holdings to meet the minimum share ownership threshold. There is no limit on the size of a nominating group. Communications for the purpose of forming a nominating group would be exempt from the proxy rules, provided they are limited in scope, do not request or solicit actual proxies and are filed with the Commission.

· Beneficial Ownership Reporting: The formation of a nominating group holding in excess of 5 percent of an issuer’s equity securities would still be required to be reported under Regulation 13D. However, the formation of a nominating group would not affect any group member’s otherwise existing eligibility to file on Schedule 13G rather than 13D. Moreover, an amendment to Rule 13d-1 would specifically allow groups formed solely to nominate a director pursuant to Rule 14a-11 to file on Schedule 13G.

· Timing of Nomination: Nominations would need to be submitted to the company on the same time schedule as Rule 14a-8 proposals (i.e., no later than 120 days prior to the date of publication of the prior year’s proxy material), unless a company’s advance notice bylaws provided for a shorter period.

· Mandated Disclosure and Filing: Each nominating shareholder (including each shareholder within a nominating group) would be required to represent as to a number of items, including that:

· the shareholder intends to hold its shares through the date of the annual meeting, as well as its intent with respect to continued ownership following the meeting (although the proposed rule is silent as to whether and how the shareholder’s lending of its shares during this period would affect either of these statements),· the shareholder’s nominees are in compliance with applicable objective stock exchange independence requirements,

· neither the nominee nor the nominating shareholder has an agreement with the company regarding the nomination,

· the shareholder is not attempting to effect a change of control (or to gain more than a minority of directors),

· the candidate’s nomination to or initial service on the board, if elected, would not violate controlling state or federal law or applicable listing standards, and

· the shareholder or shareholder nominating group is eligible to use Rule 14a-11 in terms of the minimum share ownership requirements.

READ MORE »

A New Foundation for Financial Regulation?

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Monday, June 22, 2009
, , , ,
More from: , , , , ,

This post is by Randall D. Guynn, Annette L. Nazareth, Margaret E. Tahyar, Robert Colby, and Reena Agrawal Sahni of Davis Polk & Wardwell LLP. A summary by Gibson, Dunn & Crutcher LLP of the provisions of the White Paper, with reactions from various industry groups, is available here.

In our memorandum, available here, we describe the Obama Administration’s White Paper on Financial Regulatory Reform. The White Paper is just the beginning of what is likely to be a legislative, regulatory and ideological marathon, despite the Administration’s best efforts to achieve domestic political support before its publication. It is far less revolutionary than some either feared or hoped for and reflects an “art of the possible” approach to regulatory reform by the Obama Administration. Ultimately the White Paper reflects a compromise designed to avoid as much as possible the most difficult regulatory, state and congressional turf battles.

As a result, the plan is notable as much for what it does not do as for what it does. It is not a once-in-a-lifetime regulatory overhaul. It does not propose a CFTC-SEC merger, it does not propose an optional federal insurance charter and it does not streamline the alphabet soup of financial regulatory agencies. If anything, it adds more regulators than it eliminates. Its key innovations involve expanded power for the Federal Reserve as the sole systemic risk regulator, with the creation of a Financial Services Oversight Council to mollify those who are concerned about the aggregation of power in the Federal Reserve; the long anticipated registration of advisers to hedge funds, private equity funds and venture capital funds; the regulation of OTC derivatives; the merger of the OTS and the OCC; the creation of a Consumer Financial Protection Agency with vast new powers delineated in such a way that future jurisdictional turf wars are inevitable; and the creation of a resolution regime for bank holding companies and Tier 1 FHCs. While the White Paper is an incomplete framework, one possible benefit is that it creates the skeleton of a “twin peaks” structure, with a prudential and a business conduct regulator, into which other agencies could be merged in the future.

The Administration has set a goal of passing its reform package by the end of the year and promises that legislative text will soon be sent to the Hill. Naturally, the political reaction has already begun, with Republicans outlining their own plan and individual Senators and Congressmen proposing, or soon to propose, competing proposals and language.

Other stakeholders, both domestic and international, will also have a view and, in some cases, a voice. Indeed, the White Paper proposals are made at a time of parallel UK and European regulatory reform driven in part, as is the White Paper, by the G-20 proposals. The European Council of Ministers proposed its own plan this past week for which legislative text is expected in the fall, and the UK is expected to publish more details on its own version shortly. The era when financial regulation was purely a matter for domestic politics is over. More and more the domestic US financial regulatory agenda is being influenced by international fora, by an active EU regulatory structure which has created extraterritorial standards and imposed requirements of comparability and by the international and US domestic push for harmonization of standards across regulatory bodies.

The shifting dynamics of the regulatory reform proposals and the politics involved in any consolidation, reorganization or redistribution of regulatory responsibilities mean that it is too early to predict with certainty which proposals are likely to be enacted and in what form. In light of the many competing proposals and legislative texts, we believe that it is possible that some elements, such as the Consumer Financial Protection Agency, will be enacted separately and attached to other bills rather than as an omnibus package.

Our memorandum discusses the White Paper’s proposals from a range of perspectives, domestic and international, and sets forth how the proposals may impact a range of institutions, financial and non-financial.

The memorandum is available here.

CFO Incentives Post-SOX

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, June 22, 2009
, , , ,
More from: ,

This post comes to us from Raffi Indjejikian and Michal Matějka of the Ross School of Business at the University of Michigan.

In our forthcoming Journal of Accounting Research paper, CFO Fiduciary Responsibilities and Annual Bonus Incentives, we examine how firms evaluate and compensate their CFOs. In addition to participating in decision making much like other senior executives, CFOs also have fiduciary responsibilities for reporting firms’ financial results and safeguarding the integrity of financial reporting. Although other top executives have fiduciary responsibilities for financial reporting as well, CFOs typically have more of an expertise and capacity to determine what numbers get reported. Responsibility for financial reporting raises the question of whether it is appropriate to reward CFOs bonuses contingent on financial performance that is effectively self-reported.

To provide a framework to understand why CFO compensation is tied specifically to financial performance, our paper presents an agency model with two executives, a CEO focused on production and a CFO entrusted with dual responsibilities. Our model generates two insights that have implications for changes in CFO compensation practices in the post Sarbanes-Oxley (SOX) environment. First, we find that if CFOs personally bear greater misreporting costs, then firms offer their CFOs steeper incentives tied to financial performance. The intuition is straightforward; if CFOs are more conscientious in discharging their fiduciary duties, then firms are more comfortable offering steeper incentives since rewards for reported performance are less susceptible to unwarranted overpayments. Second, we find that as misreporting becomes more costly, firms are less willing to tolerate misreporting. Hence, firms offer their CFOs weaker incentives tied to financial performance to expressly motivate them to focus more on their fiduciary duties.

We rely on a proprietary survey of CFO performance evaluation and compensation practices of public and private firms to conduct our empirical tests. Since public firms were affected by SOX much more than private firms, the public versus private distinction allows for an identification strategy of the SOX-effect on CFO compensation that has not been feasible in prior literature. Our survey was sent to approximately 30,000 members of the American Institute of Certified Public Accountants who are CFOs, CEOs, or other executives informed about CFO and CEO compensation. We received 1,353 responses from both public and private entities.

Our data indicates that annual bonuses are by far the most common incentive component of CFO compensation plans and that, on average, about 50 percent of the CFO bonus is based on accounting-based financial performance. In addition, the extent to which CEO and CFO incentives are tied to financial performance are highly correlated. More importantly, we find that from 2003 to 2007 public entities (relative to private entities) lowered the percentage of CFO bonuses contingent on financial performance. Specifically, we compare the bonus weight on financial performance measures that is expected in 2007 with the actual bonus weight in 2003 (indicative of incentives in the pre-SOX environment) and find marked differences for public versus private entities. For example, predicted values from one of our regressions suggest that public companies (with median sample characteristics) lowered the percentage of their CFO’s bonus that depends on financial performance by about six percent while comparable private companies with similar characteristics increased the percentage by about three percent. We interpret this result as evidence that firms mitigate earnings management or other misreporting practices in part by deemphasizing CFO incentive compensation.

The full paper is available for download here.

Dutch decision has implications for global class actions

Posted by Robert J. Giuffra, Jr., Sullivan & Cromwell LLP, on
Sunday, June 21, 2009
, , ,
More from: , , , , ,

This post is by Robert J. Giuffra, Jr., Richard C. Pepperman II, Robert A. Sacks, John L. Hardiman, and Robert M. Osgood of Sullivan & Cromwell LLP.

Summary
In an important development for class action suits in the United States and internationally, the Amsterdam Court of Appeals recently upheld a settlement between Royal Dutch Shell and a group of more than 150 institutional investors from 17 European countries, Canada, and Australia. The proposed settlement originally emerged in 2007 after Royal Dutch Shell side-stepped a class action filed in U.S. District Court that sought to include claims from both U.S. and non-U.S. investors, by independently pursuing a settlement in The Netherlands with the non-U.S. claimants.

This settlement under Dutch law intersects with recent limitations on subject matter jurisdiction in U.S. courts for claims brought by “foreign-cubed” plaintiffs under U.S. securities laws. A mechanism to settle group claims in The Netherlands may influence U.S. courts to place further limits on jurisdiction for foreign plaintiffs, while also providing a way for foreign issuers at risk of jurisdiction in the U.S. to effectively settle collective claims outside of the U.S.

Background
In 2004, Royal Dutch Shell investors brought a securities fraud class action suit in the U.S. District Court for New Jersey alleging injury from Shell’s intentional overstatement of oil reserves. The suit followed Shell’s announcement in February of 2004 that it had recategorized 20 percent of its total proven reserves base, and an ensuing internal audit which uncovered an email from a Shell executive stating, “I am becoming sick and tired about lying about the extent of our reserves issues.”

In addition to U.S. shareholders, the class included “foreign-cubed plaintiffs” (foreign shareholders, suing a foreign corporation, regarding stock purchased on a foreign exchange). After the U.S. class, represented by the Bernstein Liebhard law firm, rejected a settlement offer from Shell in 2006, Shell’s attorneys approached Grant & Eisenhofer, another U.S. class action law firm, to obtain a settlement “class” of non-U.S. claimants out of the U.S. litigation. In early 2007, Shell announced a $352.6 million settlement with a group of non-U.S. shareholders comprising 150 institutional investors. The settlement provided for $47 million in legal fees.

The settlement announced in 2007 was expressly contingent on: (1) the U.S. District Court deciding not to certify the non-U.S. claimants as part of the class in the U.S., which occurred in November of 2007 when the District Court dismissed the foreign-cubed plaintiffs for lack of subject matter jurisdiction; and (2) the Amsterdam Court of Appeals approving the settlement under the Dutch Act on Collective Settlement of Mass Claims, which was just announced on May 29, 2009.

READ MORE »

Improving the Role of the Securities Regulators in a Changing Global Financial System

Posted by Mary L. Schapiro, Chairman, U.S. Securities and Exchange Commission, on
Saturday, June 20, 2009
, , , , ,
More from:

The post below by Chairman Mary Schapiro is a transcript of remarks by her at IOSCO’s 34th Annual Conference on June 11, 2009 in Tel Aviv, Israel.

Good morning. And, thank you Hans [Hoogervorst, Chairman, Authority for the Financial Markets, Netherland, and Vice Chair of the IOSCO Technical Committee] for that kind introduction.

I’m delighted to be speaking with you today — even though it’s after 2:00 in the morning here in Washington. But, the way I see it, investor protection doesn’t sleep, so I thought I’d stay up too.

I would also like to express my warmest thanks and congratulations to our hosts, Professor Zohar Goshen [Chairman of the Israel Securities Authority], and Chairman Saul Bronfeld [of the Tel Aviv Stock Exchange], as well as Dr. Stanley Fischer [Governor of the Bank of Israel], for organizing this wonderful and important event.

And, I also would like to thank the IOSCO Executive Committee Chair Jane Diplock, Emerging Markets Committee Chair Guillermo Larraín Ríos, my colleague Technical Committee Chair Kathleen Casey, and Secretary General, Greg Tanzer — for their efforts in promoting IOSCO’s goals. I was truly looking forward to seeing so many old friends and colleagues from my many years of involvement with IOSCO.

I really wish that I could have joined you in person. But, here in the U.S. we are very deep in the process of reevaluating our regulatory landscape, as I’m sure you know, and we are having significant discussions within the Administration — so I felt I needed to remain behind.

Improving the Role of the Regulator

You might say that, in the U.S., we are attempting to do exactly what this panel is slated to discuss: “Improving the Role of [a] Securities Regulator in a Changing Global Financial System.”

But for us all to be effective regulators, improvement cannot just come once every financial crisis. No. Instead, we need to be constantly improving on our effectiveness. We need to be constantly considering whether there are gaps in and between our regulatory regimes through which certain players or products can easily slip. And, we need to be constantly doing whatever it takes to keep pace with the newest financial products of the day — so we can understand those products just as well as the people selling them. We need to be constantly alert to the risks that may attend dynamic innovation in the way financial products are packaged and sold.

The fact is that we need to do those things whether or not there is a financial crisis. But, in light of the crisis, we need to do those things even better. That’s because investors want to know that we’re looking out for them. They want to know that companies are being truthful and transparent in what they say. And, they want to know that it’s OK to put their money back into the markets.

In short, it is our time to prove ourselves. Because, we can help restore the confidence that is so desperately needed for capital markets to flourish — if we all succeed at what we do. And, if we work together, we increase the scope and impact of our individual successes.

READ MORE »

My Last ExxonMobil Annual Meeting

Posted by Robert A.G. Monks, Principal, Lens Governance Advisors, on
Friday, June 19, 2009
,
More from:

This post is by Robert A.G. Monks of Lens Governance Advisors.

Walking to the Myerson Symphony Center past the various galleries, statues and plantings in the Arts District of downtown Dallas during the last week of May is a contemplative experience for me. As a Boston Irishman, I cannot but remember the fate of Jack Kennedy in this seemingly gentle, indeed beautiful, city. Living now year round on the coast of Maine where the leaves around my house are yet to flower, immersion in the foliage and scent of high spring are intoxicating. I am on my annual pilgrimage to the Annual Meeting of shareholders of the most profitable corporation in the history of the world – ExxonMobil. In times past, there was a subdued sense of violence. There was still the careful organization of crowd control barriers, uniformed and other police, the combination of horses and motorcycles, the almost robotic protest by the seemingly inevitable protesters, the politely insistent ticket issuers, takers and the possession examiners – resulting this year in the loss not only of my Blackberry but also of my small brief case except for the few pages I was allowed to retain when I protested that without props memory failure at my advanced age would not allow my presentation of the five motions – I waved the green tickets that proved my entitlement to have the floor for five times three minutes – without embarrassment to all.

Inside, all was a well organized exhibit of Exxon’s presence, together with an extremely lavish offering of coffees and various pastries. My long time friend Jamie Houghton was there for his last board meeting. He is very patient with me – our fathers were Harvard College Classmates and members of the Chapter of the National Cathedral – and we enjoy the exchange of views of civilized persons with diametrically opposed world views. I saw Rex Tillerson and tried to get close, with no success, but – to be honest – there was no visible precaution against our meeting.

Annual Meetings are one of the least commented upon contradictions in contemporary capitalism. Statutes advertise them as the time and place for management and owners to meet; for corporate executives to account for their stewardship of the investors resources; and for the shareholders to have the opportunity to hold these managers to account. The reality, alas, is otherwise – the preponderance of votes on all the business items have already been received by proxy and there is absolutely no chance that anything that occurs in the next several hours will affect the pre ordained results. That said, there is a certain charm to the choreographed process analogous to watching a theatrical performance embedded in our cultural memory – like Shakespeare or Corneille. The numerical result is not the object of the event. What needs to happen is that shareholders and managers have together to conjure up a myth of importance – something real is happening (Santa Claus will come tonight!). In the occasional interplay between management and questioners, a sense of the soul of the corporation is expressed. In the process by which the meeting is conducted a sense of the standards of decency are proclaimed. In the brief passages – presentations are limited to three minutes, and Exxon management for the second year in a row – notwithstanding my ignored letter of protest – will not permit human responsive discussion.

I asked Rex Tillerson, Chairman and CEO, whether I could modify the rules governing the presentation of shareholder proposals in order more clearly to explain a new development of general interest. I was the designated presenter for the first five proposals, and, therefore, entitled to fifteen minutes. Tillerson looked bewildered, conferred with corporate secretary Rosenbaum, and said: “We’ll see where you are after the first three minutes”. It was only later that I came to understand that Tillerson’s entire concern was to limit the “tax” of time that law imposed on Exxon’s top management requiring exposure to their owners and that his hesitation has nothing to do with the content of what I was saying. There was nothing I could say that would interest him in the least. It is sad that these fine engineers cannot conduct themselves so as to save participants in this meaningless meeting of any dignity. Exxon considers shareholder relations as a non cost effective demand on executive time. When a shareholder pointed out that as a New Jersey corporation, Exxon might consider holding meetings in that state, Tillerson pointed out “I like Texas” and, so it is – the CEO’s world.

Tillerson’s Exxon executives examined the New Jersey statute and instructed staff to do everything legally possible to limit the diversion of valuable CEO and director time. New Jersey requires an Annual Meeting, at which directors are elected. The SEC requires that Exxon include on its Annual Meeting proxy resolutions, deemed appropriate by the Commission. The company relentlessly challenges all resolutions before the Commission, requiring not insignificant legal expense for those wishing to advance their proposals. They induce law firms with fine names to opine to the SEC that even proposals like mine – plain vanilla in the world of corporate governance – are in violation of law and regulation. The SEC of years past will accede to Exxon’s experts unless I adduce comparable legal weight- and so, I do at a cost not far off $100,000. There is implicit in the SEC rules that proponents be allowed to present their resolutions to the meeting. Over the last several years, Exxon has massaged the choreography of the meeting so that all proposals are presented without any questions or interruptions beyond Tillerson’s mantra that “Management opposes this resolution, etc.” following each presentation. There then follows a random question period during which no exchange of views is possible. Tillerson doesn’t deign to answer questions, nor does he permit any of the board members to answer questions directed at them. A certain punctilio is always observed – all the company directors are present and non-participating, the company’s “performance puff piece” is aired for an hour, the Chairman and Secretary smirk and chat sometimes allowing speakers to talk through the red light signals.

Several of the proposals concerned the long time disagreement between Exxon and important shareholder constituencies who are concerned with the company’s policies towards climate change and alternate energy. This interest in climate culminated in the impassioned presentation of Father Mike who reminded Tillerson of the company’s commitment to the conclusion that man, and Exxon, in particular, were contributants to the problems of global warming. At this point, almost by magic, individuals were recognized who trashed all sentiment having to do with global warming or criticism of EM management. Father Mike rose again to ask Tillerson not simply to acquiesce in these public expressions of opinion that the company, on the record, opposed. He appealed to moral imperatives, to the obligations of leadership not to enable dissemination of false information. Tillerson was unmoved.

Essentially, Exxon’s view is that the shareholder meeting is an utter waste of time which they are legally compelled to endure. So, smirking and with time watch, they absolutely do not gave a tinker’s dam what anybody says, as it is all an imposition. I could feel this at the beginning when I actually tried to say something of importance to Exxon about the current state of governance – Tillerson could care less about anything any of us have to say as long as the time limits were observed. Sometimes my naïve optimism appalls me. For many years, I have felt it important to appear at these meetings as a “witness” to the atrocities of governance. I have now come to feel that one of the reasons I feel sick after these meetings is that I really am being an “enabler”. Appearing at this 2009 version of a show trial tends to legitimate it. Actually, the perfect epitaph for this experience is the ritual by which the Corporate Secretary casts votes for resolutions when no proponent is present – it is in that mode that I will be present in future years. The engineers will have saved three minutes!

Business Networks

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, June 19, 2009
, , ,
More from:

This post comes to us from Camelia Kuhnen of the Kellogg School of Management.

Business connections can mitigate agency conflicts by facilitating efficient information transfers, but can also be channels for inefficient favoritism. In my forthcoming Journal of Finance paper Business Networks, Corporate Governance, and Contracting in the Mutual Fund Industry, I analyze the extent to which these effects are present in the mutual fund industry, and measure their impact on the welfare of fund investors.

I construct a large and unique data set containing information about advisory contracts for all U.S. mutual funds during 1993 to 2002, as well as information about the identity of the directors of these funds during the same period. This data set tracks business relationships between mutual fund directors and advisory firms, as well as between advisory firms themselves. I identify 257 cases of funds that hired a new subadvisor between 1993 to 2002. These events are used to study which candidates (from a pool of about 1,000 firms each year) win subadvisory contracts from funds. I also study a sample of 216 open-end U.S. mutual funds newly created in 1998 to test whether the connections of potential candidate directors (3,005 individuals) influence the assignment of board seats by the primary advisors of these new funds.

I show that when mutual funds choose among candidate subadvisors, the more connected such a firm is to the directors of these funds through past business relationships, the more likely it is to win the contract. This effect holds even after controlling for the candidate’s reputation, degree of specialization in the investment objective of the fund, cost, and also for the connections between the fund’s primary advisor and the candidate. The preferential selection of connected subadvisors by directors is mirrored by the preferential hiring of connected directors by primary advisory firms when these firms create (sponsor) new funds. In contrast, I find that connections do not have an economically significant impact on investors’ bottom line.

The strong effects of business ties on reciprocal hiring by directors and managers that I document are consistent with both of the possible roles of connections – as means for efficient information exchange, or as channels for favoritism. Overall, my results suggest that the two effects of board-management connections on investor welfare – improved monitoring and increased potential for collusion – balance out in this setting.

The full paper is available for download here.

Recent GAO Report on Sovereign Wealth Funds

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Friday, June 19, 2009
, ,
More from: , ,

This post is by Eduardo Gallardo’s partner Jeffrey Trinklein.

Government investment funds, often referred to as “sovereign wealth funds,” have become increasingly visible investors in the United States, a trend that has not escaped the attention of Congress. A series of recent investments led the Senate Banking, Housing and Urban Affairs Committee to raise concerns in 2008 over national security and the possible impact on the economy of large influxes of foreign governmental investment. Accordingly, Senators Christopher Dodd of Connecticut and Richard Shelby of Alabama, the senior Democrat and Republican members on the Senate Banking Committee, asked the Government Accountability Office (GAO) to address a variety of concerns and issues. The most recent report, the second in the series, was issued in May 2009 and looks at the laws that control foreign investment into the United States and whether those laws affect sovereign wealth funds.

The report makes several recommendations to Congress with the goal of increasing compliance with existing foreign investment laws. In particular, the GAO suggests that agencies that are not currently using other governmental agencies reports, like SEC filings, and private data sources, like Bloomberg, should use these sources to monitor changes in ownership of U.S. assets. The recommendation is minor in that it seeks only to increase compliance with already existing laws, but it demonstrates the continuing interest of Congress in reviewing foreign investment generally and investment by sovereign wealth funds specifically.

Introduction

The United States generally has a policy of openness with regard to foreign investment, but some laws limit and restrict certain types of investments and the activities of foreign-controlled companies. Although federal and state laws affect sovereign wealth funds simply by placing limits on all foreign investment, no laws exist that directly address sovereign wealth funds. Some general laws can potentially affect investment in any industry, while other laws have specific industry requirements and will obviously have a greater impact on funds seeking to invest in those areas. Each of those industries has at least one governmental agency that exercises oversight to monitor compliance to the laws. According to the GAO report, the following industries are affected specifically by laws restricting foreign ownership:

• Banking, overseen by the Federal Reserve Board
• Communications, overseen by the Federal Communications Commission
• Transportation, overseen by the Department of Transportation
• Natural resources and energy including nuclear power, overseen by the Department of Energy, the Nuclear Regulatory Commission and the Department of the Interior
• Agriculture, overseen by the Department of Agriculture

Defense-related matters are also subject to restrictive investment laws, but span different industries and are not overseen by one specific government agency. Furthermore, the Department of the Treasury and the Department of Homeland Security are often involved in the oversight of foreign investment in these industries.

READ MORE »

The Rules of the Game

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, June 18, 2009
, ,
More from:

Professor Lucian Bebchuk will be writing a monthly column for Project Syndicate, an international association of 425 newspapers in 150 countries, with a total circulation of about 56 million copies. The series of columns sponsored by the association seeks to bring distinguished voices from across the world to audiences in member newspapers’ countries.

Professor Bebchuk’s series of monthly commentaries, titled “The Rules of the Game,” will focus on finance and corporate governance. His commentaries, which will be available in eight languages, can be accessed here. Others contributing a monthly column to Project Syndicate include economists Martin Feldstein, Robert Shiller, and Joseph Stiglitz, former German Foreign Minister Joschka Fischer, former French Prime Minister Michel Rocard, political scientist Joseph Nye, and Oxford University’s Chancellor Lord Chris Patten.

The Forum is planning to feature Professor Bebchuk’s monthly columns as they become available. Professor Bebchuk’s first column, “The False Promise of Global Governance Standards,” builds on his paper The Elusive Quest for Global Governance Standards, co-authored with Professor Assaf Hamdani, and recently issued by the Program on Corporate Governance.

Below is the text of the Professor Bebchuk’s column.

The False Promise of Global Governance Standards — Professor Lucian Bebchuk

In the wake of last year’s global financial meltdown, there is now widespread recognition that inadequate investor protection can significantly affect how stock markets and economies develop, as well as how individual firms perform. The increased focus on improving corporate governance has produced a demand for reliable standards for evaluating governance in publicly traded companies worldwide. World Bank officials, shareholder advisers, and financial economists have all made considerable efforts to develop such standards.

READ MORE »

Draft Obama Administration White Paper on Financial Regulatory Reform

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Wednesday, June 17, 2009
, , , ,
More from: ,

This post is by Luigi L. De Ghenghi, Randall D. Guynn, Ethan T. James, Arthur S. Long, Annette L. Nazareth, Lanny A. Schwartz, Margaret E. Tahyar, Gerard Citera, Robert Colby, Courtenay Myers, and Reena Agrawal Sahni of Davis Polk & Wardwell.

Editor’s UPDATE: The Obama Administration’s White Paper on Financial Regulatory Reform, which was released after preparation of this post, is available here.

This post, and the accompanying memorandum, summarizes the key proposals in the Obama Administration’s White Paper on Financial Regulatory Reform based on the “near final” draft White Paper posted by the Washington Post on June 16th. It has also been prepared in advance of the President’s news conference on June 17th and Secretary Geithner’s testimony on June 18th and assumes a reader that is familiar with U.S. regulatory reform. Readers are cautioned that there may be changes in the final version of the Obama White Paper. We will post a full memorandum with analysis and commentary in the coming days, but, in the meantime, we hope readers will find this factual outline helpful.

* * * * *

Executive Summary
The five areas covered in the White Paper are:

1. Supervision and regulation of financial firms, including:

• creation of a Financial Services Oversight Council,
• identification of systemically important firms, which are called “Tier 1 FHCs,”
• enhanced standards for all banks and BHCs,
• BHC status for any firm owning a thrift, ILC, credit card bank, trust company, or other non-traditional bank,
• subjecting Tier 1 FHCs and firms owning non-traditional banks to non-financial activities restrictions in the BHC Act,
• merger of the OTS and OCC into a new National Bank Supervisor,
• registration and reporting requirements for most advisers of private pools of capital including hedge funds,
• establishment of an Office of National Insurance in Treasury, but no federal insurance charter, and
• stronger requirements for money market funds and government sponsored enterprises;

2. Regulation of financial markets, including:

• skin-in-the-game and compensation requirements for originators and sponsors of asset-backed securities,
• regulation of OTC derivatives and OTC derivatives dealers,
• proposal to harmonize futures and securities regulation, and
• enhanced oversight by the Federal Reserve over systemically important payment, clearing and settlement systemsand activities of major participants;

3. Consumer and investor protection, including:

• creation of a Consumer Financial Protection Agency with rule making, supervisory and enforcement authority over credit products,
• creation of a Financial Consumer Coordinating Council to advise on gaps in consumer and investor protection and to promote best practices, and
• other initiatives to bolster the authority of the SEC, FTC and to address retirement security;

4. Resolution authority and Section 13(3) authority, including:

• giving Treasury resolution authority over BHCs and Tier 1 FHCs modeled on the FDIC’s resolution authority over insured banks and thrifts, with the FDIC (or in the case of a group that is primarily a securities firm, the SEC) acting as receiver or conservator, and
• requiring the Federal Reserve to obtain prior approval from Treasury for all lending under Section 13(3); and

5. International regulatory standards and cooperation, including:

• support for existing G-20 and other initiatives, and
• rules for determining whether a foreign financial firm is a Tier 1 FHC.

Our memorandum, available here, provides a more detailed outline of the key proposals.

Page 26 of 48
1 … 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 … 48