Monthly Archives: January 2011

Financial Crisis Inquiry Commission: The Private Sector Failed

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 article originally appeared in The Atlantic.

After the Congressionally appointed Financial Crisis Inquiry Commission issued its report last week, there was a virtually unanimous, critical reaction. The report said little new. Its analysis was undermined by sharp partisan division because the six Democratic members differed with the four Republicans about the role of regulation. And its impact would be limited because it appeared after Congress enacted major financial services reform (Dodd-Frank).

But these assessments ignored a fundamental agreement among nine of the 10 members — a source of the report’s continuing importance. The bipartisan commissioners emphatically concluded that one of the primary causes of the meltdown was massive failure of private sector decision-making, especially in major financial institutions.


Law Professors Submit Amicus Brief in Proxy Access Case

Editor’s Note: This post relates to a brief submitted by 36 law professors, including Professor Coates and Professor Victor Brudney, in the case of Business Roundtable and Chamber Of Commerce v. SEC. Boston College Law Professor Kent Greenfield led the organization of the group, and the brief was written by Jay Eisenhofer, Michael Barry and Ananda Chaudhuri of Grant & Eisenhofer P.A. The amicus brief is available here. The brief relies on the recent Harvard Law Review article by Lucian Bebchuk and Robert Jackson, Jr, “Corporate Political Speech: Who Decides?” which is described on the Forum here.

For seven years, the SEC deliberated whether to give shareholders direct access to the proxy statements mandated by federal law. After the Business Roundtable and others raised doubts about the SEC’s authority to adopt proxy access, Congress considered for nearly a year whether to intervene and mandate it by statute. In the end, Congress simply elected in the Dodd-Frank law to remove any doubt as to the SEC’s authority in the area. At long last, the SEC in September adopted Rule 14a-11, which requires public companies to distribute information about candidates nominated by shareholders that have held 3+% of the voting stock for 3+ years.


The Sarbanes-Oxley Act and Exit Strategies of Private Firms

The following post comes to us from Francesco Bova, Miguel Minutti-Meza and Gordon Richardson of the Accounting Department at the University of Toronto; and Dushyantkumar Vyas of the Accounting Department at the University of Minnesota.

In the paper, The Sarbanes-Oxley Act and Exit Strategies of Private Firms, which was recently made publicly available on SSRN, we examine the costs of SOX compliance for private firms wanting to exit the private market via either an acquisition by a public firm or an IPO. The costs and benefits of the Sarbanes-Oxley Act of 2002 (SOX) have been oft-debated since the inception of the Act. However, much of the extant literature has assessed the costs and benefits of SOX to publicly-traded companies.


Reform of the European Markets in Financial Instruments Directive

Edward F. 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, and relates to a European Commission consultation paper, available here.

On December 8, 2010, the European Commission published a public consultation (the “Consultation”) [1] on the review of the Markets in Financial Instruments Directive (“MiFID”). [2] The Consultation follows technical advice published in July 2010 and October 2010 [3] by the Committee of European Securities Regulators (“CESR”) relating to a number of potential MiFID reforms.

MiFID came into force in the European Economic Area (“EEA”) in November 2007 and sought to establish a single market for investment services and activities, harmonize conduct of business rules and provide to authorized firms a right to “passport” a branch or services, cross border, into other EEA Member States. MiFID also sets out parallel regimes for regulated markets, multilateral trading facilities (“MTF”), and “systematic internalizers.” [4]

The Consultation will be open until February 2, 2011. The Commission expects to issue formal legislative proposals in Spring 2011, but the Consultation already indicates the direction these proposals are likely to take. The Consultation proposes numerous reforms that would significantly change the operation of the EU securities and derivatives markets, including a new regime for access by third-country firms to EU markets, increased regulation of derivatives and regulation of currently exempt organized trading venues such as broker crossing systems.

This memorandum summarizes key aspects of the Consultation.


UK and European Remuneration Reform: Year in Review

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 by Selina Sagayam, Nicholas Aleksander, James Cox, Daniel Pollard and Eleanor Shanks.

In the past three years, international regulatory focus on remuneration has gripped the globe. The heart of the debate which arose in the context of remuneration structures in investment banking and their contribution to global financial crisis has extended past this into remuneration across a broad range of industries. This past year has seen a number of developments which have intensified in both the UK and Europe as we draw close to the year end. We look back at the year and consider where regulation and industry guidelines have emerged in the context of pay structures and recent developments in the area of transparency and taxation. We also provide a comprehensive review of the hugely anticipated new remuneration code [1] the final version of which was published by the Financial Services Authority last Friday.


Private Equity in the 21st Century

The following post comes to us from David Robinson, Professor of Finance at Duke University, and Berk Sensoy of the Department of Finance at Ohio State University.

In the paper, Private Equity in the 21st Century: Cash Flows, Performance, and Contract Terms from 1984-2010, which was recently made publicly available on SSRN, we use a large, proprietary database of private equity cash flows and management contract terms over the period 1984-2010, comprising close to 40% of the U.S. Venture Economics universe, to provide new evidence on the determinants of private equity performance, cash flow behavior, and contract terms. The data are the first available for academic research to include cash flow information for a large sample of private equity funds extending beyond 2003, to include information on general partner capital commitments, and to combine cash flow information with the terms of the management contracts.

Our analysis is centered around two interrelated themes. First, we investigate the impact of broader market conditions on private equity markets. While it is well known that public and private equity markets are correlated through time, with shared periods of boom and bust, the implications of this correlation for private equity investors and managers are not well understood.


The Financial Crisis Inquiry Commission Report

Editor’s Note: Byron Georgiou, a member of the Program on Corporate Governance’s Advisory Board, is one of ten members nationally appointed to serve on the Financial Crisis Inquiry Commission.

After a year’s work reviewing millions of documents, interviewing over 700 witnesses, and conducting 19 days of hearings throughout America, the Financial Crisis Inquiry Commission issued its report on January 27, 2011. The Commission concluded that the 2008 Financial Crisis was an avoidable disaster caused by both private and public sector failings, including corporate mismanagement and excessive risk-taking on Wall Street and widespread failures in government regulation designed to preserve the safety and soundness of our financial system.

The mission of the Commission was to ask and answer this central question: how did it come to pass that in 2008 our nation was forced to choose between two stark alternatives–either risk the total collapse of our financial system and economy – or inject trillions of taxpayer dollars into the system and into private companies – even as millions of Americans still lost their jobs, their savings, and their homes.
To see how the Commission answered this question, review the report at or pick up a copy at your favorite bookstore.

FSOC Study on Implementing the Volcker Rule: Missed Opportunities and Some Surprises

Bradley Sabel is a partner at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Sabel and Donald Lamson. Other posts about the Volcker Rule are available here.

On January 18, 2011, the Financial Stability Oversight Council (“FSOC”) issued its long-awaited report on a key provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act known as the “Volcker Rule,” which generally prohibits banking entities from engaging in proprietary trading and from investing in or sponsoring hedge funds and private equity funds. [1] The Act required that the FSOC conduct a study on how the Volcker Rule could best be implemented by the five federal regulatory agencies [2] that are required to adopt rules to implement the Volcker Rule, which must be issued in final form within nine months of the Study’s publication, or October 18, 2011.


Camouflaged Earnings Management

The following post comes to us from Itay Kama, Assistant Professor of Accounting at Tel Aviv University and Nahum Melumad, Professor of Accounting and Business Law at Columbia University.

In the paper, Camouflaged Earnings Management, which was recently made publicly available on SSRN, we argue that cash management (in particular one that converts accruals into cash or vice versa) may reduce the transparency of possible earnings management. In recent years, there has been increased scrutiny of financial reporting and greater analysts and investors attention to indicators of potential earnings management, in particular, to cash and accruals relative to earnings and revenues. We assert that, in response, firms have increased their focus on cash management aimed at aligning these variables, which has resulted in camouflaged earnings management.


Extraterritorial Application of Section 10(b) to Security-Based Swap Agreements

Robert Giuffra is a partner in Sullivan & Cromwell’s Litigation Group. Mr. Giuffra was part of the Sullivan & Cromwell team that represented Porsche in successfully briefing and arguing the motion discussed below.

On December 30, 2010, Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York granted a motion dismissing with prejudice six complaints seeking more than $2.5 billion in damages against Porsche Automobil Holding SE (“Porsche”) and two of its former executives. In so doing, the Court held in a question of first impression that, in light of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010), Section 10(b) of the U.S. Securities Exchange Act of 1934 (“Exchange Act”) does not apply to security-based swap agreements referencing shares traded on foreign exchanges merely because plaintiffs allege that they signed confirmations in the United States. The Court ruled that the swap agreements at issue in the case are the “functional equivalent” of trading the underlying shares on a foreign exchange, and, therefore, the “economic reality” is that such agreements are “essentially transactions conducted upon foreign exchanges and markets, and not domestic transactions that merit the protection of § 10(b).”


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