Monthly Archives: October 2010

Volcker Rule Continues to Garner Outsized Attention

This post comes to us from Bradley K. Sabel, a partner at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication.

The “Volcker Rule” continues to receive attention as one of the most forceful provisions adopted by Congress in its recent enactment of financial reform legislation. The Volcker Rule is far-reaching and covers both U.S. banking groups and non-U.S. banking groups with U.S. banking operations. Although the contours of the rule have now been established, the rule has become even more complex; substantial questions remain as to how the rule will be implemented, which we discuss below. As highlighted in this publication, Congress has given regulators little time to resolve these important issues. [1]

The push for adoption of the Volcker Rule [2] was fueled by a nostalgic call to return to a more basic model of commercial banking that many associate with Glass-Steagall Act restrictions that were repealed in 1999. Indeed, the adoption of the Volcker Rule marks a partial reversal of a decades-long trend towards a more expansive view of the lines of business in which institutions may engage under the commercial banking and bank holding company model. Like Glass-Steagall, the rule is premised on a need to eliminate real and potential conflicts of interest between a banking entity and its customers. Congress’ yearning for a simpler time, however, will impose increasingly complex rules on banking groups and will force them to change, if not abandon, practices that predate Glass-Steagall. Unlike many other parts of Dodd-Frank, Congress has given the regulators broad authority to interpret and modify the rule. [3] As rules are proposed and adopted, there will be greater clarity on the extent to which covered activities will need to be transferred, terminated or wound down.


UK Takeover Panel Publishes Review of Takeover Rules

Andrew J. Nussbaum is a member of the Wachtell, Lipton, Rosen & Katz Corporate Department. This post is based on a Wachtell Lipton firm memorandum by Mr. Nussbaum, Adam O. Emmerich, David A. Katz and Steven A. Cohen.

The UK Panel on Takeovers and Mergers yesterday published the conclusions of its review, commenced in June 2010, regarding possible amendments to the UK Takeover Code, which governs the conduct of takeover bids involving UK listed companies.  The review, conducted by the Code Committee of the Takeover Panel, was prompted by Panel, investor and governmental criticism of certain takeover practices in recent years, including in a number of highly publicized and controversial takeover situations in the UK market.


Investment Bankers’ Culture of Ownership?

The following post comes to us from Sanjai Bhagat, Professor of Finance at the University of Colorado at Boulder, and Brian Bolton of the Finance Department at the University of New Hampshire.

In the paper Investment Bankers’ Culture of Ownership? which was recently made publicly available on SSRN, we study the executive compensation structure in the largest 14 U.S. financial institutions during 2000-2008. Our results are mostly consistent with and supportive of the findings of Bebchuk, Cohen and Spamann (2010), that is, managerial incentives matter. Incentives generated by executive compensation programs led to excessive risk-taking by banks leading to the current financial crisis. Our results are generally not supportive of the conclusions of Fahlenbrach and Stulz (2009) that the poor performance of banks during the crisis was the result of unforeseen risk.


Proxy Access Litigation and Next Steps

Editor’s Note: Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memo by Ms. Goodman, John F. Olson, Ronald O. Mueller and Elizabeth Ising. Ms. Goodman and the other authors from Gibson Dunn are representing the Business Roundtable and the U.S. Chamber of Commerce, who are the petitioners in the case discussed below.

On Friday, October 8, 2010, the SEC and the petitioners jointly filed a proposed briefing schedule for the case before the Court of Appeals. In the filing, the SEC confirmed that it does not expect proxy access to be available for the 2011 proxy season, and instead seeks a court ruling by the summer of 2011, so that if the rules are upheld, they may be used in the 2012 proxy season. The motion stated that the stay “necessarily means that the Commission’s rule changes will not be available for use by shareholders during the 2010-2011 proxy season.”A copy of the motion is available here.

In their joint motion, the parties proposed to the court that the case be briefed in November through February, with the petitioners’ brief due on November 30, 2010 and the SEC’s brief due on January 19, 2011. Oral argument would be expected in March or April under this schedule, with a decision by the summer. The schedule is subject to approval by the Court of Appeals.


Regulatory Sanctions and Reputational Damage in Financial Markets

John Armour is the Lovells Professor of Law and Finance at the University of Oxford.

In the paper Regulatory Sanctions and Reputational Damage in Financial Markets, recently made publicly available on SSRN, my co-authors (Colin Mayer and Andrea Polo, both at the Said Business School in Oxford) and I study the impact of the announcement of enforcement of financial and securities regulation by the UK’s Financial Services Authority and London Stock Exchange on the market price of penalized firms. A primary function of regulation of financial markets is to uncover and discipline misconduct. In the absence of effective monitoring and enforcement of rules of conduct, financial markets are particularly prone to abuse. The imposition of penalties on firms is an important part of the armoury available to regulators and, following the financial crisis, regulatory authorities have shown a greater willingness to employ them. Our paper reveals that they are only one—and a surprisingly small—component of the overall sanctions available to regulators. We show that reputational sanctions are, for some categories of misconduct, far more potent than direct penalties.


The Perils of Implied Messages for Reg FD

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 Michael Kaplan, William M. Kelly, Linda Chatman Thomsen and Janice Brunner.

The SEC recently announced settled Reg FD charges against Office Depot and its CEO and former CFO related to “signals” that Office Depot made in one-on-one conversations with analysts implying that it would not meet future earnings expectations. The Office Depot settlement, which is the SEC’s third Reg FD action in a little over a year after an approximately four-year hiatus, is distinctive because the challenged statements appear to have been crafted—unsuccessfully, as it turned out—to walk the FD compliance line by avoiding express references to changes in the company’s business.


Promoting Speculation

The following post comes to us from Lin Nan of the Accounting Department at Carnegie Mellon University.

In the forthcoming Journal of Management Accounting Research paper, An Unintended Consequence of SFAS 133: Promoting Speculation, I focus on the agency problem created by the Statement of Financial Accounting Standards No.133 (SFAS 133)and examine how this policy influences firms’ hedging/speculating decisions through agents’ compensation. SFAS 133 allows firms to apply hedge accounting only to qualified hedges that pass effectiveness tests. Unqualified hedges (speculations) are required to be marked to market, and the unrealized gains/losses are to be recognized in earnings immediately. The purpose of SFAS 133 is to improve the timeliness of the information about financial derivatives risk.


SEC Amendment Governing Rating Agency Disclosure Will Have Little Impact

Andrew J. Nussbaum is a member of the Wachtell, Lipton, Rosen & Katz Corporate Department. This post is based on a Wachtell Lipton firm memorandum by Mr. Nussbaum, Eric S. Robinson, and David A. Katz.

Late last month the SEC issued a final rule amending Regulation FD to eliminate the exemption for disclosures made to credit rating agencies. (Exchange Act Release No. 63003) The amendment, which becomes effective upon publication in the Federal Register, was specifically required by the Dodd-Frank Act. We do not view this as a material development as some have suggested.

Companies routinely disclose material, nonpublic information to credit rating agencies for the purpose of developing a credit rating, including in advance of merger announcements or in connection with significant changes in capital structures. While some commentators have suggested the amendment will require issuers to make public disclosures of material nonpublic information that they disclose to credit rating agencies, the effect of the amendment is less than it seems. The public disclosure requirements triggered by Regulation FD are limited to disclosures by the issuer, or persons acting on its behalf, to certain enumerated persons, generally securities market professionals, investment advisers and holders of the company’s securities under circumstances where it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information. In 2006, the Investment Advisers Act was amended to exclude from the definition of investment adviser any nationally recognized statistical rating organization unless it engages in issuing recommendations as to purchasing, selling or holding securities or in managing assets (including securities) on behalf of others.


Court Reinstates Insider Trading Claim Against Mark Cuban

This post comes to us from Todd Cosenza of Willkie Farr & Gallagher LLP, and is based on a Willkie Farr & Gallagher client memorandum by Mr. Cosenza and Tariq Mundiya. This post discusses the recent opinion by the U.S. Court of Appeals for the Fifth Circuit in S.E.C. v. Cuban, which is available here.

On September 21, 2010, in S.E.C. v. Cuban, 2010 WL 3633059, No. 09-10996 (5th Cir.), a federal appeals court vacated a lower court decision that had dismissed the SEC’s well-publicized insider trading lawsuit against Mark Cuban.  The Fifth Circuit held that it was at least “plausible,” based on the SEC’s allegations, that Cuban had violated a duty not to trade on material, nonpublic information and remanded the case for further proceedings.

Factual and Procedural Background

In November 2008, the SEC brought a civil enforcement action against Mark Cuban, the owner of the NBA’s Dallas Mavericks franchise.  The action arose from Cuban’s June 2004 sale of his entire 6.3 percent ownership interest (600,000 shares) in Inc. (now Copernic, Inc.), a Canadian internet search company.  According to the SEC’s complaint, during the spring of 2004,’s executives decided to initiate a private investment in public equity (“PIPE”) offering to raise additional capital.  Because such offerings tend to dilute the value of existing shares, the company expected Cuban, its largest known shareholder at the time, to be unhappy.  The company’s CEO telephoned Cuban, informing him of the PIPE offering.  Cuban orally agreed to keep the information regarding the PIPE offering confidential, but allegedly ended his call with the CEO by saying, “Well, now I’m screwed.  I can’t sell.”  Nevertheless, following this telephone conversation and another discussion with the investment bank conducting the PIPE offering, Cuban instructed his broker to sell his entire stake in  The next day, the company publicly announced the PIPE offering, and the stock price of declined.  By selling on the nonpublic information, Cuban avoided over $750,000 in losses.


When is Disclosure of Adviser Conflicts Enough?

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn Client Alert.

Investment advisers have a duty to disclose material conflicts of interest to clients.  The more difficult question is: “how much disclosure is enough?”  In a recent settled enforcement action, the SEC suggests that disclosure of material facts alone may not be sufficient, and that more explicit disclosure is needed when investment advice may result in additional compensation to the adviser.  The case is Matter of Valentine Capital Asset Management.

The SEC’s administrative order found that the adviser “fail[ed] to fully and adequately disclose a material conflict of interest” by not informing its clients that the adviser would receive an additional commission if its clients accepted its recommendation to switch from one series of a managed fund to another series in that same fund.  The SEC reached this conclusion despite the fact that the adviser fully disclosed all commission costs to its clients.


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