Yearly Archives: 2012

Effective Consolidated Audit Trail: Keeping the Door Open

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Friday, July 27, 2012
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Walter’s statement at a recent open meeting of the SEC, which is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. This post relates to the adoption of an SEC rule on consolidated audit trail; the final rule is available here.

In my remarks at the Commission’s May 26, 2010 meeting considering the CAT proposal, I quoted from a 1980 Commission report that spoke about the need for a comprehensive market oversight surveillance system. [1] Flash forward over three decades from that report, and not much has changed. We have seen enormous growth in the capital markets, and the SEC still does not have access to comprehensive market data. As a result, I have been a consistent and vocal supporter of a consolidated audit trail. [2]

It has taken over 30 years for the Commission to be poised to act on this issue. Accordingly, it is important that the Commission get it right. If the first steps in establishing this national market oversight framework are flawed, the system will not be comprehensive, and it will not serve the needs of the American public.

Unfortunately, as currently structured, today’s rule falls short of establishing the process that investors deserve. It is with great disappointment that I am not able to support today’s rule. I am concerned that the proposal fails to set appropriately specific requirements to ensure the creation of a comprehensive market surveillance system, one that will capture the whole of the capital markets – including both regulated and currently unregulated markets. Moreover, I am concerned that the rule as currently drafted will limit innovation, and will fail to achieve cost savings.

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The Final Rules for Consolidated Audit Trail

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, July 27, 2012
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Editor’s Note: Elisse B. Walter is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Walter’s statement at a recent open meeting of the SEC, which is available in full here. The views expressed in the post are those of Commissioner Walter and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. This post relates to the adoption of an SEC rule on consolidated audit trail; the final rule is available here.

I wholeheartedly and unreservedly support the creation of a consolidated audit trail. As someone who has worked at three market regulators for most of her career, I truly appreciate that there is a real need for regulators to have a robust and effective cross-market tracking system that will provide order and trading information in a timely, accurate and consistent manner.

The SEC regulates the largest capital markets in the world, and I am confident that a properly constructed audit trail will arm the Commission with needed information that we –perhaps shockingly– have not had in the past. Among other things, a consolidated audit trail will enable the agency and other regulators to reconstruct trading to determine if the market has been manipulated or if other rules have been broken. It would thus greatly enhance and expedite our examination and enforcement efforts. And, its benefits would inure to our policy efforts as well. For example, a sound, robust consolidated audit trail will enhance our speed and accuracy in determining the cause of significant market events like the May 6th flash crash. These enhanced capabilities will in turn serve to improve our policy responses and restore investor confidence to our markets.

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Initiatives to Place Women on Corporate Boards of Directors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, July 27, 2012
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The following post comes to us from Douglas Branson, W. Edward Sell Chair in Law at the University of Pittsburgh.

In the paper, Initiatives to Place Women on Corporate Boards of Directors, forthcoming in the Australian Corporate & Securities Law Review, I investigate initiatives to place women on corporate boards. In the United States, the representation of women on corporate boards of directors has been flat for 6 years now. By contrast, elsewhere around the world the topic is a hot button issue. This includes Australia where the proportion of board seats held by women has suddenly jumped from 8% in 2010 to nearly 14% today. The Australian Stock Exchange (ASX) has adopted a “comply or explain” diversity disclosure requirement (for emphasis termed an “if not, why not” disclosure requirement), which emphasizes gender diversity. The requirement is even more stringent than the London Stock Exchange (LSX) comply or explain regulation adopted after the Lord Mervyn Davies Report on women in corporate governance appeared in February 2011. The Australian Institute of Company Directors also has instituted a mentoring/sponsorship program, the first of its kind in the world, designed to obtain board seats for women. This article reviews these Australian as well as global developments, including enactment of quota laws (especially Norway and France), certificate and pledge programs (“Rooney Rules”), and hard law disclosure requirements (United States).

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Avoiding Unintended Consequences of Damage Waiver Provisions

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Thursday, July 26, 2012
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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 Robert Little and Chris Babcock.

Acquisition agreements often contain provisions that restrict or prohibit the payment of “consequential,” “special,” or “incidental” damages for breach. [1] Principals and their counsel may intend that these provisions prevent liability arising from unknown and unforeseeable future events; however, because these terms are poorly understood in the context of acquisition agreements, the exclusion of these categories of damages may have unexpected consequences for the parties to a transaction. Buyers and sellers should carefully weigh the effect of these damage-limiting provisions and consider alternative, more clearly defined provisions to limit damages under their acquisition agreements.

General Contract Damages

Before examining contract provisions limiting damages, it is important to review briefly the basic principles for recovery of damages due to breach of contract. Damages arising out of the breach of a contract are generally limited by the principles set forth in the English case of Hadley v. Baxendale. [2] Hadley created a rule with two branches: (i) a party may recover for losses that directly and naturally arise from the breach of a contract and (ii) a party may recover for losses arising from special circumstances surrounding the breach to the extent that the breaching party knew of the circumstances at the time the contract was made. [3] Consistent with Hadley, under the default rules of most jurisdictions, recoverable losses arising under a breach of contract are limited to those damages that are reasonably foreseeable to the breaching party. [4]

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Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, July 26, 2012
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The following post comes to us from Joseph Warin, partner and chair of the litigation department at the Washington D.C. office of Gibson, Dunn & Crutcher, and is based on a Gibson Dunn memorandum by Mr. Warin and Jeremy Joseph. The full memo, including footnotes and appendix, is available here.

Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”) (collectively, “agreements”) in recent years have become a primary tool of the U.S. Department of Justice (“DOJ”) for resolving allegations of corporate criminal wrongdoing. Since 2000, DOJ entities have entered into 230 reported agreements with corporate entities, extracting a total of $31.6 billion in fines, penalties, forfeitures, and related civil settlements. The U.S. Securities and Exchange Commission (“SEC”), which announced the adoption of DPAs and NPAs as part of its Cooperation Initiative in January 2010, has since entered into three NPAs without monetary penalties and one DPA, which included disgorgement. With these agreements, companies obtain finality and closure and agree not to commit further legal violations and to undertake specific cooperation and compliance obligations in exchange for DOJ or the SEC agreeing to forgo enforcement action. In the DOJ context, the two agreement types differ in one material respect: for DPAs, DOJ files a criminal information in federal court, while NPAs generally are not filed in court.

During the last 12 years, DOJ and the SEC have employed DPAs and NPAs in some of the most high-profile cases and continue to turn to them in cases where they believe criminal conduct may have occurred but for a variety of reasons, including a company’s extensive cooperation, internal management shakeups, or the grave risk of collateral consequences to the corporate entity, a conviction through a guilty plea would not be equitable. In the final analysis, DOJ’s increasing reliance on DPAs and NPAs demonstrates its recognition that they are precision instruments to resolve allegations of corporate wrongdoing. The SEC, which recently embraced DPAs and NPAs, and the United Kingdom, which appears to be in the process of doing so, recognize that these agreements can be fine-tuned to help reward cooperation and mitigate collateral consequences.

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Rulemaking on Margin Requirements for Uncleared Derivatives

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Wednesday, July 25, 2012
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Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

On July 6, the Basel Committee on Banking Supervision (the “BCBS”) and the International Organization of Securities Commissions (“IOSCO”) released a consultation paper on margin requirements for uncleared derivatives (the “BCBS/IOSCO paper”). In response, the CFTC reopened the comment period for its proposed rule on margin requirements for uncleared swaps until September 14, 2012.

The BCBS/IOSCO paper is similar in many important ways to the proposals issued by the CFTC and banking regulators under Dodd-Frank (the “U.S. regulators’ proposals”). For example, in order to decrease systemic risk and promote clearing, the BCBS/IOSCO paper and the U.S. regulators’ proposals both generally endorse subjecting uncleared transactions between financial entities to initial and variation margin requirements and would not allow initial margin amounts to be netted between the two counterparties to the transaction. However, the BCBS/IOSCO paper differs from the U.S. regulators’ proposals in a number of critical ways. For example, the BCBS/IOSCO paper:

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Reputation and Opportunistic Behavior in the VC Industry

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, July 25, 2012
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The following post comes to us from Vladimir Atanasov of the Mason School of Business at the College of William and Mary; Vladimir Ivanov of the U.S. Securities and Exchange Commission; and Kate Litvak, Professor of Law at Northwestern University.

In the paper, Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs, forthcoming in the Journal of Finance, we use a hand-collected database of lawsuits filed against U.S. venture capitalists (VCs) to examine the role of reputation in limiting opportunism in the VC industry. The lawsuits in our sample serve as a proxy for alleged opportunistic behavior by the defendant VCs. Based on the lawsuit plaintiff, we further identify whether the defendant VCs allegedly behaved opportunistically against founders, limited partners, other VCs, buyers of VC-backed startups, or other parties (angels, creditors, employees, etc.).

We choose proxies for VC reputation (or alternatively the intensity of VC relationships) with each of the four main types of plaintiffs as follows. First, the number of deals that a VCs invests in serves as proxy for the VC’s reputation with founders. Second, we use the amount of funds under management to proxy for the VC’s reputation with limited partners. Third, the VC’s network centrality, defined as the scaled number of relationships that a VC has with other VCs, serves as proxy for the VC’s reputation with other VCs. Last, we use the percentage of companies in the VC’s portfolio that go public to proxy for the VC’s reputation with buyers of VC-backed startups.

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Living Wills: Key Lessons from the First Wave

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Tuesday, July 24, 2012
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Margaret E. Tahyar is a partner in Davis Polk & Wardwell LLP’s Financial Institutions Group. This post is based on a Davis Polk publication.

The first wave filers – the largest and most complex domestic and foreign bank holding companies – have now filed their living wills and the public portions have been posted on the FDIC’s and the Federal Reserve’s websites. Based on our experience advising a number of banking institutions on their resolution plans, and based on the public portions of the plans, we believe there are lessons to be learned for second and third wave filers, even in this early stage of an iterative process. At the same time, these lessons should be drawn carefully in light of the fact that the business models and legal structures of the second wave filers are somewhat different from the first wave filers, and those of the third wave filers are very different. Any lessons learned from the first wave should also be tempered by the fact that the standard format for the living wills that the regulators required in the first wave is likely to change for second and third wave filers. With that in mind, we suggest the following key lessons from the first wave filers based on what is known immediately after their public filings.

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Gender Composition of Boards Important for Competitiveness

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, July 24, 2012
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The following post comes to us from Beth Brooke, Global Vice Chair of Public Policy at Ernst & Young, and discusses a report from the Committee for Economic Development, titled Fulfilling the Promise: How More Women on Corporate Boards Would Make America and American Companies More Competitive. A blog post about the report is available here; the full report is available here.

Corporate America often says we are facing a pipeline problem when challenged with the troubling reality that women occupy only 16 percent of Fortune 500 board seats. Yet to bump the percentage of U.S. board seats filled by women up by one percentage point, it would only take about 50 women joining the boards of these companies. There is no doubt there are far more than 50 qualified women interested in U.S. board seats right now.

Despite a professed desire by many U.S. companies for greater diversity and female representation, there has been virtually no improvement in recent years in the senior ranks. In the meantime, on goes the brain drain — as senior women are now being competitively recruited to serve on the boards of non-U.S.-based companies.

The situation is urgent. U.S.-headquartered companies are failing to meet the career needs of half their available highly skilled labor and falling behind international competitors that are taking aggressive action to increase the number of women on their boards. That is the central finding of a new report, Fulfilling the Promise: How More Women on Corporate Boards Would Make America and American Companies More Competitive, from the business-led Committee for Economic Development (CED).

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Institutional Shareholders and Their “Oversight” of Executive Compensation

Posted by Joseph E. Bachelder III, Law Offices of Joseph E. Bachelder, on
Monday, July 23, 2012
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Joseph Bachelder is founder and senior partner of the Bachelder Law Firm. This post is based on an article by Mr. Bachelder, with assistance from David T. Ling and Andy Tsang, which first appeared in the New York Law Journal.

Today’s post addresses the increasing influence of institutional shareholders on executive pay. Prior posts have examined the role of proxy advisors in giving advice on how shareholders, especially institutional shareholders, should vote on say-on-pay under Dodd-Frank Section 951. [1] Today’s discussion focuses on the institutional shareholders themselves.

While institutional shareholders own a major portion of the share value of U.S. public corporations, the “ultimate owners” are, to a large extent, millions of individuals for whose benefit the equity in these corporations is being held by the institutional shareholders. (These individuals will be referred to in the post as “ultimate owners.”)

The original setting-aside of the assets that are the source of these investments is made by the individuals themselves or by others on their behalf (such as by their employers). These assets of the ultimate owners are being held for purposes such as educating children, providing for retirement, protecting against casualty and providing health and life insurance.

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