Yearly Archives: 2012

Treasury Issues FX Swap and FX Forward Exemption

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Tuesday, December 4, 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 November 16, 2012, the Secretary of the Treasury issued a much awaited determination that foreign exchange (“FX”) swaps and FX forwards should not be regulated as swaps under the Commodity Exchange Act for most purposes, including registration, mandatory clearing and trade execution, and margin. As was the case in the proposed determination, FX derivatives other than FX swaps and forwards, such as FX options, currency swaps and non-deliverable forwards, are not covered by the exemption and would be regulated as swaps.

FX swaps and forwards will be subject to swap data repository trade reporting requirements applicable to swaps and to historical swaps. They will not be subject to “real-time” trade reporting requirements, however. Furthermore, the Commodity Futures Trading Commission’s enhanced anti-evasion authority will apply to FX swaps and forwards. In addition, swap dealers and major swap participants transacting in FX swaps and forwards must comply with “business conduct standards” contained in Section 4s(h) of the Commodity Exchange Act and implementing regulations. [1] These include the external business conduct rules, which impose on swap dealers and major swap participants various due diligence, fair dealing and disclosure obligations, certain heightened obligations when dealing with “special entities” and, in the case of swap dealers recommending swaps or swap trading strategies, suitability obligations. They also include the CFTC’s internal business conduct rules relating to diligent supervision. Finally, in discussing enhanced business conduct standards applicable to FX swaps and forwards, the final determination cites to the CFTC’s recently finalized rules on swap confirmation, portfolio reconciliation, portfolio compression and trading relationship documentation, which were adopted in part pursuant to Section 4s(h).

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Fed Begins 2013 CCAR Capital Planning Process for Large Banks

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, December 3, 2012
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The following post comes to us from Luigi L. De Ghenghi and Andrew S. Fei, attorneys in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. De Ghenghi, Mr. Fei, and other Davis Polk attorneys; the full version, including footnotes and appendix, is available here.

The Federal Reserve launched the 2013 capital planning and stress testing process for large bank holding companies (“BHCs”) with the publication, on November 9, 2012, of two sets of instructions: one set for the 19 BHCs that participated in the 2011 Comprehensive Capital Analysis and Review (“CCAR”) process (“CCAR BHCs”) and another set for the 11 other U.S.-domiciled, top-tier BHCs with total consolidated assets of $50 billion or more that did not participate in the 2011 CCAR process (“non-CCAR BHCs”). On the same day, the Federal Reserve joined with other U.S. banking agencies to announce that recent proposals to implement Basel III in the United States will not become effective on January 1, 2013.

The Federal Reserve’s instructions for the CCAR BHCs, which reveal how the Dodd-Frank Act’s stress testing requirements will be integrated with the Federal Reserve’s capital planning requirements, are instructive for the non-CCAR BHCs that will become subject to Dodd-Frank stress-testing requirements in the 2014 capital planning cycle. Similarly, nonbank financial companies designated by the Financial Stability Oversight Council (“FSOC”) for supervision by the Federal Reserve will be subject to Dodd-Frank stress-testing requirements and, under a proposal by the Federal Reserve, would also be required to submit annual capital plans to the Federal Reserve.

For the CCAR BHCs, the two most significant changes from the 2012 process are:

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Financial Globalization and the Rise of IPOs Outside the U.S.

Posted by René Stulz, Ohio State University Fisher College of Business, on
Monday, December 3, 2012
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René Stulz is Professor Finance at Ohio State University.

In the paper, Financial Globalization and the Rise of IPOs Outside the U.S., which was recently made publicly available on SSRN, my co-authors (Craige Doidge and George Karolyi) and I document dramatic changes in the IPO landscape around the world over the past two decades. U.S. IPOs have become less important and IPOs in other countries have become more important, whether one looks at counts or at proceeds. In fact, U.S. IPO activity has generally not kept pace with the economic importance of the U.S. We show that financial globalization plays a critical role in facilitating the increasing importance of IPOs by non-U.S. Firms.

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UK and EU Corporate Governance Developments — Update

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Sunday, December 2, 2012
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John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post updates a Gibson Dunn alert by Selina S. Sagayam; the previous post, titled “From the Shareholders’ Spring to the Autumn of Activism,” is available here.

We promised to keep you updated on the legal and regulatory developments which we identified as pending developments in our Alert “From the Shareholders’ Spring to the Autumn of Activism . . . Power without Accountability — A look at the latest developments in activism and related regulations in the UK and EU” dated 10 August 2012. [1] Since that time there have been a few new developments as summarised below:

1. Institute of Chartered Secretaries and Administrators (ICSA): New Guidance for Shareholder Engagement — Issue of Consultation Paper (October 2012) [2]

In July 2012, ICSA announced that it would partner with the Investor Stewardship Working Party to develop a good practice guide to supplement (not replace) the guidance in the UK Stewardship Code (see 3 below).

Together the groups concluded that in addition to improving the process of holding engagement meetings with shareholders, the very tone of conversation between companies and their investors should change.

ICSA published its consultation paper on 12 October seeking views on:

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PCAOB Regulatory Initiatives

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Saturday, December 1, 2012
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Editor’s Note: James R. Doty is chairman of the Public Company Accounting Oversight Board. This post is based on Chairman Doty’s remarks at the Practising Law Institute’s 44th Annual Securities Regulation Conference, available here. The views expressed in this post are those of Chairman Doty and do not necessarily reflect the view of the PCAOB as a whole or any other Board members or staff.

I am here to talk about the regulatory initiatives of the Public Company Accounting Oversight Board. The PCAOB is deeply engaged in examining ways to enhance the relevance, credibility and transparency of the audit to better serve investors.

The auditing profession has developed a highly skilled body of experts capable of analyzing accounts in a way that draws out truths and insights and sheds light on confused or misleading claims. It plays an indispensable role in making our capital markets fair and strong.

But I believe we are in a high risk period that merits more attention to the audit, not less. When companies make lay-offs, as we’ve seen recently, they often affect the internal audit and compliance staff — the first line of defense for fraud and other corporate malfeasance. This should be a concern to the legal community.

Although we have never needed it more, the audit too has, in the minds of some, become a commodity to be contained with other compliance costs.

In the United States, large audit firms’ revenues from consulting are growing 15 percent a year. Audit fees have stagnated at, basically, the inflation rate. Thus audit practices have shrunk in comparison to audit firms’ other client service lines.

This can weaken the strength of the audit practice in the firm overall. The problem is compounded when audit firms turn their talents to other endeavors that may further damage public views on the relevance and value of audit.

To be relevant, the auditor must speak to and for investors. Fair or not, that is in question today.

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Harvard’s Shareholder Rights Project is Still Wrong

Posted by Martin Lipton and Daniel Neff, Wachtell, Lipton, Rosen & Katz, on
Friday, November 30, 2012
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. Daniel A. Neff is co-chairman of the Executive Committee and partner at Wachtell Lipton. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Neff, Andrew R. Brownstein, Adam O. Emmerich, David A. Katz, and Trevor S. Norwitz. This post discusses the 2012/2013 activities of the Shareholder Rights Project, which are described in an earlier post here.

A small but influential alliance of activist investor groups, academics and trade unions continues — successfully it must be said — to seek to overhaul corporate governance in America to suit their particular agendas and predilections. We believe that this exercise in corporate deconstruction is detrimental to the economy and society at large. We continue to oppose it.

The Shareholder Rights Project, Harvard Law School’s misguided “clinical program” which we have previously criticized, today issued joint press releases with eight institutional investors, principally state and municipal pension funds, trumpeting their recent successes in eliminating staggered boards and advertising their “hit list” of 74 more companies to be targeted in the upcoming proxy season. Coupled with the new ISS standard for punishing directors who do not immediately accede to shareholder proposals garnering a majority of votes cast (even if they do not attract enough support to be passed) — which we also recently criticized — this is designed to accelerate the extinction of the staggered board.

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Effective Small Business Capital Formation

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Friday, November 30, 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 Aguilar’s remarks at the SEC Government-Business Forum on Small Business Capital Formation in Washington, D.C., available here. The views expressed in this post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Small business is a powerful engine for economic growth. Independent businesses with fewer than 500 employees account for half of all private sector jobs and more than half of nonfarm private GDP. [1] Growth in small business helps fuel the U.S. economy, generating opportunity, competition, and demand. Small businesses are essential to sustaining a strong economy, strong communities, and a strong middle class.

Today’s Forum reflects the Commission’s continuing interest in capital formation issues for small businesses. Indeed, the Commission has had a long-term focus on small business, and has utilized multiple avenues to regularly and consistently seek input from small business stakeholders. For example:

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Advancing Board Declassification in the 2013 Proxy Season

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, November 29, 2012
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Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), a clinical program at Harvard Law School, and Scott Hirst is the SRP’s Associate Director. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here

In joint press releases issued earlier this week, the Shareholder Rights Project (SRP) and each of eight institutional investors it represents announced their collaboration for the 2013 proxy season to encourage 74 S&P 500 and Fortune 500 public companies to move to annual elections. The SRP has submitted shareholder proposals on behalf of the eight SRP-represented investors for a vote at the 2013 annual meetings of 74 S&P 500 and Fortune 500 companies. A list of the 74 companies that received proposals is available here. The proposals urge repeal of the companies’ staggered boards and a move to annual elections.

The SRP and SRP-represented investors have already begun to engage with companies receiving shareholder declassification proposals, and some of the companies receiving shareholder proposals have already agreed to take steps necessary to declassify their boards. It is expected that, as occurred during the 2012 proxy season, the engagement by the SRP and SRP-represented investors will result in negotiated outcomes and moves to annual elections at a large proportion of the 74 companies receiving proposals.

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Mandatory Clawback Provisions, Information Disclosure, and the Regulation of Securities Market

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, November 29, 2012
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The following post comes to us from Diane Denis, Professor of Finance at the University of Pittsburgh.

In the paper, Mandatory Clawback Provisions, Information Disclosure, and the Regulation of Securities Markets, forthcoming in the Journal of Accounting and Economics, I discuss the potential pitfalls of mandating that compensation be recouped from the executives of firms that are found to have engaged in material accounting misstatements. My discussion is motivated by recent evidence in the literature that the voluntary adoption of such clawback provisions by firms is followed by a reduced incidence of accounting restatements, lower auditing fees and a reduced auditing lag, and stronger earnings response coefficients. It is tempting to conclude from this evidence that government attempts to mandate such provisions, most recently through Section 954 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, will increase the accuracy of information disclosure by firms and thereby enhance the integrity of the capital market. I argue that such a conclusion is premature at best.

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DOJ and SEC Issue FCPA Guidance

Posted by Marc Rosenberg, Cravath Swaine & Moore LLP, on
Wednesday, November 28, 2012
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Marc S. Rosenberg is a partner and co‑chair of the Corporate Governance and Board Advisory practice at Cravath, Swaine & Moore LLP. This post is based on a Cravath memorandum.

Last week, the Criminal Division of the Department of Justice and the Enforcement Division of the Securities and Exchange Commission released their long-awaited guidance on the application and enforcement of the U.S. Foreign Corrupt Practices Act. The release—a 120-page “Resource Guide”—confirms that FCPA enforcement remains a central priority of the U.S. government while simultaneously and most importantly identifying the circumstances when the government may decline to pursue an enforcement action. It is available at http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.

Compliance Program Guidance

While much of the guidance reaffirms statutory interpretations that practitioners have gathered from published government settlements and opinion releases, it also provides a useful tool for companies seeking to develop FCPA compliance programs that will minimize the risk of enforcement action or severe penalties in the event those systems fail to prevent a violation. Having such a compliance program in place is particularly important given the SEC’s announcement last week that it received more than 3,000 whistleblower complaints in the first year of the new whistleblower program implemented under the Dodd-Frank Act.

The Guide identifies the hallmarks of strong compliance programs generally and addresses the elements of effective FCPA controls, reiterating that there is no “one-size-fits-all” program; an effective FCPA compliance program addresses corruption risks specific to the organization and includes meaningful unique controls to mitigate those risks. Some possible risk-based compliance controls that the Guide suggests are:

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