Yearly Archives: 2011

Final “Living Wills” Requirements for Large Financial Institutions

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, November 4, 2011
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Editor’s Note: Bradley Sabel is a partner at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Gregg L. Rozansky.

A major step in the prevention of future financial bailouts has been taken by Federal bank supervisors with the adoption on October 17 and September 13 of final joint regulations requiring a resolution plan (or “living will”) for the largest financial institutions active in the United States. Preparation of these plans will constitute a major undertaking for the institutions with consequences and ramifications that will continue to evolve over time. The following provides the background of the new regulations, the requirements that the regulations impose, tips for compliance, and possible difficulties to be faced as the process unfolds.

The Federal Deposit Insurance Corporation (the “FDIC”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) approved final resolution-plan regulations for the largest financial groups operating in the United States on September 13 and October 17, respectively. The FDIC also approved a final interim regulation requiring plans of FDIC-insured institutions with $50 billion or more in total assets. Both sets of requirements follow from previously issued proposals but include important clarifications and additional accommodations to the financial industry.

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2011-2012 ISS Policy Survey

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, November 3, 2011
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Editor’s Note: Carol Bowie is Head of Compensation Research Development at Institutional Shareholder Services Inc. This post is based on the key findings of the complete ISS Policy Survey, available here.

Top Governance Issues

Executive compensation continues to be an American issue for a second straight year. Only for North America, a majority of both investor (60 percent) and issuer respondents (61 percent) cite the perennial issue of executive compensation as one of the top three governance topics for the coming year, similar to last year’s survey results.

On a global basis, investor respondents focused on board independence. Across every region, board independence was identified among the three most important governance topics by approximately 40 percent of investor respondents.

Issuers focus on risk oversight in North America and Europe. For issuers, the second most commonly cited topic in North America was risk oversight. In Europe, risk oversight was commonly cited along with board competence.

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Designation of Systemically Important Nonbank Financial Companies Under Dodd-Frank

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, November 3, 2011
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Editor’s Note: H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication; the full version, including footnotes, is available here.

On October 11, 2011, the Financial Stability Oversight Council unanimously approved a second notice of proposed rulemaking and related interpretive guidance under the Dodd-Frank Act regarding the designation of systemically important “nonbank financial companies.” The new proposal, which was published in today’s Federal Register, describes the manner in which the Council proposes to apply the relevant statutory standards and the processes and procedures it intends to employ in carrying out its authority to designate systemically important nonbank financial companies. These designated companies are required to comply with enhanced prudential standards and are subject to consolidated supervision by the Board of Governors of the Federal Reserve System. Comments on the Council’s proposal are due by December 19, 2011.

Among the nonbank financial companies potentially subject to a systemically important designation by the Council are savings and loan holding companies, insurance companies, private equity firms, hedge funds, asset management companies, financial guarantors, and other U.S. and non-U.S. nonbank companies deemed to be “engaged primarily” in activities that are financial in nature.

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Leadership in the Fund Industry

Posted by Robert C. Pozen, Harvard Business School, on
Wednesday, November 2, 2011
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Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution. This post is based on an article by Mr. Pozen and Theresa Hamacher, president of NICSA, which was published in the Financial Analysts Journal. That article is based on research for The Fund Industry: How Your Money Is Managed (John Wiley & Sons, 2011).

What is the critical factor for success in the U.S. mutual fund industry? Is it top-ranked investment performance, innovative products, or pervasive distribution? In our view, it is none of these factors, despite their obvious importance. Instead, the best predictors of success in the U.S. fund business are the focus and organization of the fund sponsor. We believe that the most successful managers over the next decade will be organizations with two characteristics: dedication primarily to asset management and control by investment professionals. Our view is based on research for the book The Fund Industry: How Your Money Is Managed (Pozen and Hamacher 2011).

Dedicated asset managers—firms deriving a majority of their revenues from investment management—dominate the industry, as shown in Table 1. The table ranks U.S. fund families by assets under management in 1990, 2000, and 2010 and shows dedicated asset managers in boldface. At the end of 2010, 8 of the top 10 firms were dedicated to investment management, as were 14 of the top 25 firms. Dedicated firms have held this dominant position for the past 20 years; in 1990, 13 of the top 25 firms were dedicated to asset management, only 1 fewer than in 2010.

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Registration of Security-Based Swap Dealers and Major Participants

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Wednesday, November 2, 2011
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Editor’s Note: 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.

On October 12, 2011, the Securities and Exchange Commission (the “SEC” or the “Commission”) proposed, by a 3-1 vote, rules under the Dodd-Frank Act to provide for the registration of security-based swap dealers and major security-based swap participants (“SBS Entities”). [1] The SEC’s proposal (the “Proposal”) draws heavily upon existing SEC registration regimes and has taken into account the Commodity Futures Trading Commission’s registration requirements for swap dealers and major swap participants. Under the Proposal, market participants registered as both an SBS Entity and a broker-dealer are subject to a “similar and complementary registration regime.” To avoid unnecessary duplication, the Proposal would permit SBS Entities that are otherwise registered or registering as intermediaries with either the SEC or the Commodity Futures Trading Commission (the “CFTC”) to complete streamlined application forms.

The Proposal departs from the broker-dealer registration regime in what is likely to be its most controversial provision, requiring a “Senior Officer Certification” of the SBS Entity’s financial, operational, and compliance capabilities as part of the application for registration. [2] The Proposal does not include rules permitting registration on a “limited designation” basis, but seeks comment on this topic.

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ISS Seeks Comment on Draft Proxy Voting Policies

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, November 1, 2011
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Editor’s Note: The following post comes to us from Bimal Patel, Manager for Global Governance Policy at the ISS Governance Institute.

As a critical component of ISS’ annual policy formulation process, ISS is seeking comment from institutional investors, corporate issuers, and other governance market participants on its proxy voting policy updates while they are still in draft stage. ISS is requesting comments on both its U.S. and international policies.

In response to a number of requests from investors, issuers and market intermediaries, ISS has extended the deadline for commenting on its 2012 draft proxy voting policies through Nov. 7.

The comments received on ISS’ 2012 draft policies from all market participants are invaluable to ISS as they help ensure that ISS’ draft policies reflect the perspectives of the corporate governance community and the best practices in corporate governance. ISS gathers broad input each year from institutional clients and market constituents through policy surveys, issue-specific roundtables, and this unique open comment period. During this year’s policy survey, more than 300 respondents weighed in on issues that included executive compensation, board independence, engagement triggers, and social and environmental issues. The full results from the survey are posted on the ISS Policy Gateway.

ISS will release its final 2012 U.S. and international policy updates during the week of Nov. 14 and its Global Policy Summary and Concise Guidelines in December. To participate in ISS’ comment period and learn more about its policy formulation process, please visit the ISS Policy Gateway.

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Clearinghouse Over-Confidence

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, October 31, 2011
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is Professor Roe’s most recent op-ed in his regular column series titled “The Rules of the Game” written for the international association of newspapers Project Syndicate, which can be found here.

To reduce the chance that a financial meltdown like that of 2007-2008 will recur, regulators are now seeking to buttress institutions for the longer-run – at least when they can turn their attention from immediate crises like those of Greece’s debt, America’s ceiling on governmental borrowing, and the potential eurozone contagion from sovereign debt to bank debt. Central to their effort has been to bolster clearinghouses for derivatives – instruments that exacerbated the implosion at AIG and others in the last financial crisis. But a clearinghouse is no panacea, and its limits, although easy to miss, are far-reaching.

When a company seeks to protect itself from currency fluctuation, it can reduce its exposure to the target currency with a derivative (for example, it promises to pay its trading partner if the euro rises, but gets paid if it falls). Although the company using the derivative reduces its exposure to the risk of a failing euro, the derivative comes packaged with a new risk – counterparty risk. The company risks that if its trading partner fails – as AIG, Bear Stearns, and Lehman did – it won’t be paid if the euro falls.

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Deviation from the Target Capital Structure and Acquisition Choices

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, October 31, 2011
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The following post comes to us from Vahap Uysal of the Department of Finance at the University of Oklahoma.

In the paper, Deviation from the Target Capital Structure and Acquisition Choices, forthcoming in the Journal of Financial Economics, I explore the effects of a firm’s leverage deficit on its acquisition choices. In particular, I examine the extent to which a firm’s leverage deficit affects the likelihood of the firm making an acquisition as well as the effect of its leverage deficit on the payment method and on the premiums paid for the target firm. Because managers are likely to anticipate the constraints of overleverage on acquisition choices, I also analyze managerial decisions on capital structure in the light of potential acquisitions. Specifically, I test whether managers of overleveraged firms reduce their leverage deficits when they foresee a high likelihood of making acquisitions. Finally, I examine how capital markets react to the acquisition announcements of firms that deviate from their capital structures. Managers of overleveraged firms will face constraints on the form and level of financing and are more likely to be selective in their acquisition choices if they fail to decrease their leverage deficits substantially. Therefore, I hypothesize that managers of overleveraged firms will pursue only the most value-enhancing acquisitions, which, in turn, will foster favorable market reactions to the news of their acquisitions.

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Proxy Access: Only The Beginning

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Sunday, October 30, 2011
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Editor’s Note: Francis H. Byrd is Senior Vice President, Corporate Governance & Risk Practice Leader at Laurel Hill Advisory Group. This post is based on a Laurel Hill newsletter. Related work on proxy access by the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Bebchuk and Hirst, and the proceedings of The Harvard Law School Proxy Access Roundtable.

The recent decision by the SEC is not to seek a rehearing of the Appeals Court ruling staying process access now appears to set in motion a move toward the use of the shareholder proposal process to advance the proxy access concept.

An Access Free-for-All?

It is likely that some labor and public funds will file shareholder resolutions at specific issuers seeking access to the proxy. Also the so-called individual shareholder gadflies are expected to file proposal as well. Issuers however, should not expect a flood of these proposals in 2012. The governance advocate institutional investors will tread carefully and be quite selective in their targets – mega and large capitalization companies with poor performance or visible governance problems or scandals – while the hedge fund community, if they use this tactic at all, are more likely to target small-cap issuers.

Figuring into the equation is how ISS and Glass Lewis will treat these proposals. Each firm has essentially stated that their review will be on a case-by-case basis.

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Living Wills: FDIC Approves Final Rules

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Saturday, October 29, 2011
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Editor’s Note: The following post comes to us from Dwight C. Smith, partner focusing on bank regulatory matters at Morrison & Foerster LLP, and is based on a Morrison & Foerster Client Alert by Mr. Smith, Alexandra Steinberg Barrage, and Jeremy Mandell.

Recently, the Federal Deposit Insurance Corporation (“FDIC”) Board unanimously approved two rules regarding resolution planning: one rule for large bank holding companies and nonbank financial companies supervised by the Federal Reserve Board of Governors (“FRB”), [1] and the other rule for large banks. [2]

The first rule (the “165(d) Rule”) is a final rule required by section 165(d) of the Dodd-Frank Act. The plan required under section 165(d) is a detailed contingency plan that describes how large bank holding companies and nonbank financial companies supervised by the FRB (collectively, “Covered Companies”) that are at risk of default can be sold, broken up, or wound down quickly and effectively in a way that mitigates serious adverse effects to U.S. financial stability. Covered Companies include (i) all bank holding companies (including foreign banking organizations that are or are treated as bank holding companies) with consolidated assets of $50 billion or more and (ii) all nonbank financial companies that the Financial Stability Oversight Council designates for supervision by the FRB. [3] A total of 124 Covered Companies are currently subject to the 165(d) Rule, the same number noted in the proposed rule. As with the proposed 165(d) Rule, the vast majority of Covered Companies appear to be foreign banking organizations. [4]

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