Monthly Archives: April 2010

SEC Proposes Limits on Options Market Access Fees

Margaret E. Tahyar is a partner and member of the New York Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Annette L. Nazareth, Lanny A. Schwartz, Gerard Citera, and Robert L.D. Colby.

In an action that potentially affects the business models of the U.S. options exchanges and major option market participants, the Securities and Exchange Commission (the “SEC”) recently issued a proposal that would cap exchange “access fees” for listed options and also prohibit exchanges from imposing unfairly discriminatory terms that inhibit access to quotations in listed options. [1] These proposals would extend to listed options two provisions of Regulation NMS that currently apply only to listed stocks.

If the proposal is adopted, it may yield a number of options market structure benefits, including: limiting the extent to which exchange fees cause actual execution costs for listed options to differ from the exchanges’ published quotations; rationalizing the operation of inter-market “trade through” requirements; reducing the practical issues with banning “flash orders” in the options market, as proposed by the SEC; and preventing an exchange from imposing unreasonably discriminatory fees on nonmembers seeking indirect access to the exchange’s published quotations through a member. However, the proposal would diminish the effectiveness of a common market model (a “Maker/Taker Model”), in which some exchanges attract aggressively priced limit orders by paying rebates for posting quotations that are ultimately executed against, and finance those rebates through access fees. Ironically, this likely would encourage markets to compete for customer orders through exchange-sponsored payment for order flow programs, which many have criticized on public policy grounds.

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Lying and Getting Caught

This paper comes to us from Lynn Bai, Assistant Professor Law at the University of Cincinnati, James Cox, Professor of Law at Duke University, and Randall Thomas, Professor of Law and Business at Vanderbilt University.

In our paper, Lying and Getting Caught: An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms [Lynn Bai, James D. Cox & Randall S. Thomas, Lying and Getting Caught:  An Empirical Study of the Effect of Securities Class Action Settlements on Targeted Firms, 158 U. Pa. L. Rev. (forthcoming July 2010)], we examine the effect of securities class action settlements on targeted firms. Private suits have long been championed as a necessary mechanism not only to compensate investors for harms they suffer from financial frauds but also to enhance the deterrence of wrongdoing. But many critics have claimed that there a hidden dark side to the successful prosecution of a securities class action. In this paper, we shed light on these issues by examining whether the revelation of earlier misstatements, the initiation of private suit, and the payment of a substantial settlement, weaken the defendant firm so that the firm is permanently worse off as a consequence of the settlement.

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SEC Proposes Large Trader Reporting System

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Ms. Nazareth, John G. Crowley, Lanny A. Schwartz, Gerard Citera and Robert L.D. Colby.

On April 14, 2010, the Securities and Exchange Commission (the “SEC”) proposed a new rule to establish a large trader reporting system. [1] The rule would require large traders of exchange-listed stocks and options (“NMS securities”) to register with the SEC and obtain a unique large trader identification number, which they would provide to their registered broker-dealers with every order.

The SEC would use the large trader identification numbers to collect information about the orders and transactions of large traders across broker-dealers, analyze their activity and monitor the impact of their trades on the markets. This information would also be used for enforcement purposes and to reconstruct trading activity following periods of unusual market volatility.

Registered broker-dealers would be required to keep records of large traders’ transactions, report this information to the SEC by close of business on the day of a request and monitor for compliance by putative large traders with the registration requirements. The information submitted to the SEC would be confidential and not subject to public reporting.

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UK Passes Strict New Bribery Act

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton client memorandum by Mr. Savarese, Ralph M. Levene and David B. Anders.

Earlier this year, we noted that other countries, in addition to the United States, are increasing their efforts to combat international bribery and corruption. (See “Increasing International Cooperation and Other Key Trends in Anti-Corruption Investigations“). In a further reflection of this trend, on April 8, 2010, the United Kingdom passed the Bribery Act 2010 (read the act here). The Act is in many respects even broader in scope than the U.S. Foreign Corrupt Practices Act, including in its extraterritorial application. Thus, every company with ties to the U.K. should become familiar with the Bribery Act’s provisions.

The Bribery Act criminalizes several different types of domestic and foreign bribery including: (i) offering, promising or giving a bribe (section 1); (ii) requesting, agreeing to receive or accepting a bribe (section 2); and (iii) bribing a foreign public official (section 6).However, section 7, which sanctions any failure by commercial organizations to prevent bribery,may be the most significant provision. Under that section, a corporation will be liable when a person “associated” with that company (defined in section 8 as a person who “performs services for or on behalf” of the company) pays a bribe for the purpose of obtaining or retaining business or to obtain or retain a business advantage. The company can defend itself only if it can establish that it “had in place adequate procedures designed to prevent persons associated with [the company]from undertaking such conduct.” Thus, unlike in the U.S., where prosecutors apply their discretion in evaluating a company’s compliance policies and procedures in the context of weighing charging decisions and potential leniency, the statute establishes strict liability in the case of a bribe being paid for companies that failed to implement adequate compliance policies and procedures.

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The New Enhanced Proxy Disclosure Rules – Ready, Set, Change and NOW

Charles Nathan is Of Counsel at Latham & Watkins LLP and is co-chair of the firm’s Corporate Governance Task Force. This post is based on an article by Laurie Smilan, a senior partner at Latham & Watkins and an adjunct Professor of Law at Georgetown University Law School. An earlier post regarding the new enhanced proxy disclosure rules appeared here. A revised version of the complete article by Ms. Smilan, including footnotes and an appendix, is available here.

The SEC’s new enhanced proxy disclosure rules, requiring disclosure concerning (1) board leadership structure and qualifications, (2) risk and risk oversight and (3) compensation issues, were adopted in response to “investors’ . . . increasing[] focus[] on corporate accountability” in the wake of the financial crisis. But almost as important as the substance of the rules, well documented elsewhere, are the underpinnings of the new requirements – the SEC’s un- or understated objectives in promulgating the new rules. In order to assure compliance with both the letter and the spirit of the rules, practitioners should be mindful of the repeatedly denied but fairly obvious governance “best practices” agenda that animates the rule making. Moreover, although the disclosures may not be required until your next proxy statement, the disclosure requirements assume that a process has occurred which can then be described. Accordingly, reassessment and reaffirmance and/or change of the targeted governance policies and practices cannot start too soon.

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Court Protects Insurance Brokers’ Communications If Used To Render Legal Advice

Edward Greene is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on corporate law matters. This post is based on a Cleary Gottlieb Alert Memo.

On April 5, 2010, the Southern District of Texas issued a decision in In re Tetra Technologies, Inc., No. 4:08-cv-0965, 2010 WL 1335431 (S.D.Tex. April 5, 2010), on the question of whether communications between a company’s employees, its counsel and its insurance brokers were protected as attorney-client communications. The District Court held that as long as the communications were made “for the purpose of facilitating the rendition of professional legal services of the client,” they would be protected as privileged.

I. Background and Decision

In this securities class action filed by Tetra shareholders, the plaintiffs alleged that Tetra misrepresented its likely insurance reimbursements for hurricane-related repairs. The plaintiffs moved to compel discovery of certain communications between Tetra employees and Tetra’s insurance brokers that were identified on a privilege log.

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Goldman Sachs: Being “Legal” Doesn’t Make It “Right”


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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that first appeared in the online edition of the Washington Post.

Great companies have to distinguish between what is legal and what is right.

An important cause of Goldman’s problems — a problem shared by the financial services industry — is that they fail energetically and rigorously to make this distinction in their communications with regulators and the public.

Whether Goldman’s past behavior was “legal” — either in the particular matter being pursued by the SEC or its pattern and practice in the mortgage market under scrutiny by the Congress — is judged under at least three related standards:

  • Did the behavior conform to specific legislative or regulatory rules (i.e. proper disclosure of role of “shorts” or of its receipt of a Wells notice from the SEC)?
  • Did it conform to broad precepts of law, like its fiduciary duties, that may be created by judges in evolving series of cases (and then, at times, incorporated into regulatory regimes)?
  • Did it comport with “common industry practices” of the time which were not then illegal?

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Paying for Long-Term Performance

Lucian Bebchuk is the William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance at Harvard Law School. Jesse Fried is a Professor of Law at Harvard Law School.

How should equity-based plans be designed to tie executive payoffs to long-term performance? This question has been receiving much attention from firms, investors, and regulators. We seek to answer this question in a study, Paying for Long-Term Performance, which is available here.

In our 2004 book Pay without Performance, we warned that standard executive pay arrangements were leading executives to focus excessively on the short term, creating perverse incentives to boost short-term results at the expense of long-term value. Following the financial crisis, there is now widespread agreement about that importance of avoiding such persevere incentives and of tying compensation to long-term results. There is much less agreement, however, on how this should be done. Building on ideas put forward in Pay without Performance, our study provides a detailed blueprint for structuring equity based compensation, the primary component of modern executive pay schemes, to tighten the link between pay and long-term results.

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New SSRN e-journal on Disclosure, Internal Control & Risk-Management


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This post is part of a series introducing journals published by SSRN’s new Corporate Governance Network (CGN). CGN publishes and distributes electronic journals covering the full range of areas in corporate governance. It seeks to provide its readers with full exposure to new corporate governance research placed on SSRN irrespective of the author’s discipline. CGN’s director is Lucian Bebchuk, Director of the Program on Corporate Governance at Harvard Law School.

The Corporate Governance Network (CGN) of SSRN recently launched a new e-journal on Disclosure, Internal Control & Risk-Management. This journal distributes abstracts of, and links to, selected recent working papers that deal with disclosure and accounting decisions, internal control systems, risk management including hedging and derivatives, and similar topics.

The journal collects abstracts on these topics from all new submissions to the entire SSRN database irrespective of discipline. It brings together contributions from accounting, economics, finance, law, management, sociology and psychology. Thus, this e-journal attempts to provide its readers with full exposure to all new papers related to its subject matter placed on SSRN.

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Bank Lending During the Financial Crisis of 2008

Victoria Ivashina is an Assistant Professor of Finance at Harvard Business School.

In the paper, Bank Lending during the Financial Crisis of 2008, forthcoming in the Journal of Financial Economics, my co-author, David Scharfstein, and I examine the effect of the banking panic of late 2008 on the supply of credit to the corporate sector. The paper documents that new loans to large U.S. borrowers fell by 47% during the peak period of the financial crisis (fourth quarter of 2008) relative to the prior quarter and by 79% relative to the peak of the credit boom (second quarter of 2007). New lending for real investment (such as working capital and capital expenditures) fell by only 14% in the last quarter of 2008, but contracted nearly as much as new lending for restructuring (LBOs, M&A, share repurchases) relative to the peak of the credit boom.

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