Monthly Archives: March 2012

2012 Women on Boards Survey

The following post comes to us from Kimberly Gladman, Director of Research and Risk Analytics at GovernanceMetrics International, and is based on the executive summary of GMI Ratings’ 2012 Women on Boards survey by Ms. Gladman and Michelle Lamb, available for download here.

GMI Ratings’ 2012 Women on Boards survey includes data on over 4,300 companies in 45 countries around the globe. The results show incremental improvement in most measures of female board representation since our 2011 report. For the first time ever, women hold more than one in ten board seats globally: 10.5% of the directors in our coverage universe are now women, a 0.7 percentage point increase from last year. At the same time, the percentage of companies with no female directors at all has fallen below 40% for the first time, to 39.8% (a two percentage point decrease since last year). Moreover, the percentage of companies with at least three women — a level that some research suggests may constitute a critical mass and allow women’s leadership styles to come to the fore [1] — has risen by 1.3 percentage points, to just under one-tenth (9.8%) of companies worldwide.

However, these global statistics mask important differences, both among individual countries and between blocks of countries at different stages of economic development. For example, when the world’s industrialized economies are viewed as a group, 11.1% of directors are women, 63.3% of companies have at least one woman on the board, and 10.5% of companies have three or more female directors. For emerging markets as a group, only 7.2% of directors are women, 44.3% of companies have at least one woman on the board, and 6.3% of companies have at least three female directors. Furthermore, national statistics within each group vary widely. For example, over 36% of Norway’s directors are women, compared to less than 13% of Germany’s and just over 1% of Japan’s; South Africa has over 17% female directors, China 8.5%, and Brazil 4.5%.


CFTC Adopts Internal Business Conduct Rules

The following post comes to us from David J. Gilberg, partner at Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication from Mr. Gilberg and Kenneth M. Raisler; the full publication, including footnotes, is available here.

On February 23, 2012, the Commodity Futures Trading Commission voted to adopt final rules that regulate the internal conduct of futures commission merchants, introducing brokers, swap dealers and major swap participants. These rules impose duties and restrictions on these categories of registered entities concerning internal conflicts of interest and recordkeeping. Swap dealers, major swap participants and futures commission merchants must also designate a chief compliance officer who is charged with establishing and enforcing policies and procedures reasonably designed to ensure compliance with the Commodity Exchange Act and the regulations promulgated thereunder. The four types of registered entities must erect firewalls between clearing personnel and trading business personnel as well as between research personnel and non-research personnel. The final rules relating to recordkeeping require swap dealers and major swap participants to keep sufficient records to show general and trade-specific compliance with the Commodity Exchange Act and its regulations. The Commodity Futures Trading Commission worked closely with commenters and other regulators in drafting these rules.


Trading by Bank Insiders Before and During the Financial Crisis

The following post comes to us from Peter Cziraki of the Department of Finance at the Tilburg School of Economics and Management.

In the paper, Trading by Bank Insiders Before and During the Financial Crisis, which was recently made publicly available on SSRN, I investigate whether managers of large U.S. banks foresaw the underperformance of their own bank prior to the recent financial crisis. To shed light on this question, I analyze the trades of bank managers in their own bank’s stock. Using banks’ performance during the crisis as an ex-post measure of risk exposure, the paper examines whether the bankers that took the most risk changed their insider trading before the onset of the crisis. The paper also links trading by bank insiders to the developments in the housing market, which played a crucial role in starting the crisis.

The role of bank managers in the crisis has been subject to considerable debate both in the academic literature and in the popular press. On the one hand, Fahlenbrach and Stulz (2011) do not find strong evidence to support the notion that incentive packages contributed to the crisis. Their results indicate that CEOs were holding sizeable equity stakes even as the crisis hit, and did not reduce their ownership in 2007 or during the peak of the crisis in 2008. They conclude that CEOs believed that the risks they took before the crisis would pay off, but that this turned out not to be the case. On the other hand, Bebchuk et al. (2010) criticize the incentive structures of bank managers. They point out that the top managers of Bear Stearns and Lehman Brothers cashed out a substantial amount of options in the period prior to the crisis. Bhagat and Bolton (2011) also dispute that managers had no awareness of the large risks they were facing. They analyze the compensation structure and CEO payoffs of the 14 largest US banks and argue that managerial incentives led to excessive risk-taking. This view is supported also by Cheng et al. (2009), who find a positive relation between excess executive compensation and risk taking. Their evidence suggests that overpaying bank managers who take high risks is positively associated with the level of institutional ownership of the bank.


Congress Passes the “Jumpstart Our Business Startups Act”

James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is based on a Sullivan & Cromwell publication. Another memorandum about the JOBS Act from Latham & Watkins LLP is available here.

On Tuesday, the U.S. House of Representatives passed H.R. 3606, the “Jumpstart Our Business Startups Act” (the “JOBS Act”), in the form passed last week by the U.S. Senate. The JOBS Act:

  • removes the prohibition on general solicitation in connection with transactions effected pursuant to Rule 506 or Rule 144A under the Securities Act of 1933, provided that sales are limited to qualifying investors;
  • alters the thresholds that trigger registration of an issuer’s securities under Section 12(g) of the Securities Exchange Act of 1934, including a different threshold for banks and bank holding companies;
  • provides, to a new category of “emerging growth companies”, relief from various requirements and other restrictions applicable to IPOs and (on a transitional basis, for up to five years) from certain reporting company obligations;
  • authorizes the SEC to increase the amount permitted to be raised in a Regulation A offering to $50 million in any 12-month period; and
  • adds a “crowdfunding” exemption to the Securities Act.

Many of the JOBS Act’s provisions will be effective upon signing by the President, which is expected later this week. Others will require SEC rulemaking.


The Vickers Report and the Future of UK Banking

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication; the full publication, including footnotes, is available here.

The final report of the UK’s Independent Commission on Banking, chaired by Sir John Vickers, was published on 12 September 2011. Its recommendations include ring-fencing UK banks’ retail banking operations, higher capital requirements for UK retail banks, preferential status for insured deposits in a bank insolvency and measures to increase competition in the UK banking sector. The UK government issued its formal response on 19 December 2011 and has indicated it will implement most of the recommendations. This memorandum summarises the key recommendations and their likely impact, in light of the UK government’s response.


The Independent Commission on Banking (the “Vickers Commission”) was set up by the UK government to make recommendations for the reform of the UK banking sector, with a view to reducing systemic risk, mitigating moral hazard and reducing the likelihood and impact of firm failures. The Vickers Commission was also asked to consider competition in the UK banking sector.


The Blurring Line Between SEC Examinations and Enforcement

Mark Schonfeld is a litigation partner at Gibson, Dunn & Crutcher LLP and co-chair of the firm’s Securities Enforcement Practice Group. This post is based on a Gibson Dunn client alert by Mr. Schonfeld, available here; this alert was originally prepared for the Practising Law Institute’s “Hedge Fund Registration and Compliance 2012″ conference.

I. Introduction

The most significant impact of SEC registration on private fund advisers is that the adviser becomes subject to inspection by the SEC’s Office of Compliance Inspections and Examinations (OCIE). The greatest risk arising from an examination is that the inspection staff decides to refer finding from an inspection to the Division of Enforcement for an investigation. This article discusses the risks of an examination becoming an investigation and strategies for anticipating and mitigating those risks. [1]

II. The Risk That an Examination Results in a Referral to Enforcement

Asset managers are particularly vulnerable to collateral consequences of a government investigation. Particularly in the wake of recent cases, many investors have little tolerance for fund managers who are subject to an investigation, thus making flight of capital a real risk for advisers under investigation. Stark examples of this played out over the last year when the F.B.I. executed search warrants in November 2010 on four hedge funds. Of the four funds raided, three ceased doing business even in the absence of criminal charges. [2]


Mandatory IFRS Adoption, Accounting Information, and Executive Compensation

The following post comes to us from Neslihan Ozkan of the School of Economics, Finance, and Management at the University of Bristol, Zvi Singer of Desautels Faculty of Management at McGill University, and Haifeng You of the Department of Accounting at Hong Kong University of Science and Technology.

In the paper, Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation, forthcoming in the Journal of Accounting Research, we investigate the contracting implications of the transition to IFRS. Specifically, we examine how the mandatory adoption of IFRS affects the contractual usefulness of accounting information in executive compensation, as reflected in pay-for-performance sensitivity (PPS) and relative performance evaluation (RPE). These tests allow us to infer whether compensation committees of European companies view IFRS as leading to increased earnings quality and comparability.

The mandatory adoption of International Financial Reporting Standards (IFRS) on January 1, 2005, by the European Union (EU) and several other countries (e.g., Australia; South Africa) marks major progress toward a single set of high-quality, globally accepted accounting standards (Daske et al., [2008]). IFRS is primarily aimed at enhancing earnings quality and achieving a high degree of comparability of financial statements (Regulation (EC) No. 1606/2002 of the European Parliament and of the Council). The extant research, however, has provided mixed evidence on whether mandatory IFRS adoption has achieved these goals (e.g., Barth et al., [2008], Ahmed et al. [2010], DeFond et al. [2011], Lang et al. [2010]).


SEC Permits Exclusion of Most Common Proxy Access Proposal

James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is based on a Sullivan & Cromwell publication. Work from the Program on Corporate Governance about shareholder voting includes Private Ordering and the Proxy Access Debate by Bebchuk and Hirst; more posts about proxy access are available here.

Recently, the staff of the U.S. Securities and Exchange Commission has issued a number of no-action letters responding to company requests to exclude shareholder proxy access proposals from the proxy statement for the company’s 2012 annual meeting. The SEC staff permitted the exclusion of the most common form, a precatory 1% or 100-holder proposal based on a model issued by the United States Proxy Exchange, but did not allow exclusion of others, including the Norges Bank binding 1% proposal. These no-action letters serve as a reminder that, although changes to SEC Rule 14a-8 that took effect last year permit shareholders to propose the adoption of proxy access provisions, these proxy access proposals will not be afforded special treatment under the SEC rules and will continue to be subject to exclusion under the traditional bases set forth in Rule 14a-8.

As a result of the SEC staff’s concurrence as to the excludability of the most common form of proposal, there will be a more limited number of proxy access proposals coming to a vote in the 2012 proxy season. The terms of proxy access proposals in future years are likely to depend, to a large extent, on the level of shareholder support received by this limited group.


Impact of the FATCA Proposed Regulations on Capital Markets Transactions

The following post comes to us from Leslie B. Samuels, partner at Cleary Gottlieb Steen & Hamilton LLP and former Assistant Secretary for Tax Policy at the U.S. Treasury Department, and is based on a Cleary Gottlieb alert memorandum.

I. Background

On February 8, 2012, the United States Department of the Treasury and Internal Revenue Service released proposed regulations implementing sections 1471 through 1474 of the Internal Revenue Code (commonly called “FATCA”). [1] The proposed regulations would impose reporting and withholding obligations on “foreign financial institutions” (or “FFIs”) that enter into an “FFI agreement.” Under the proposed regulations, starting in 2014, FFIs that do not enter into an FFI agreement would be subject to a 30% withholding tax on U.S.- source interest, dividends, and other types of passive income (“FDAP income”). The proposed regulations defer imposition of a withholding tax on gross proceeds from the sale of property producing U.S.-source dividends and interest until 2015. [2]

A more detailed discussion of the proposed regulations is included in our February 15, 2012, Alert Memo “Treasury and the IRS Release Proposed Regulations under FATCA and a Joint Statement with Other Countries Regarding an Intergovernmental Approach to FATCA Implementation” (available here). This summary highlights certain provisions of the proposed regulations that are relevant to capital markets transactions.


The JOBS Act: An Investor Protection Disaster Waiting to Happen

The following post comes to us from Jack E. Herstein, president of the North American Securities Administrators Association and assistant director of the Nebraska Department of Banking & Finance, Bureau of Securities. Last week the U.S. Senate passed the JOBS Act, with some amendments from the version passed by the U.S. House of Representatives on March 8, 2012.

Congress and the White House are turning a blind eye to the unintended consequences of the Jumpstart Our Business Startups Act (H.R. 3606) by insisting on placing election-year politics over protecting the needs of both small businesses and “Main Street” investors.

The so-called JOBS Act is another example in a long history of good legislative intentions gone bad.

As Harvard Law School Professor John Coates said in his December 14, 2011 testimony before the Senate Banking Committee: “Whether the proposals will in fact increase job growth depends on how intensively they will lower offer costs, how extensively new offerings will take advantage of the new means of raising capital, how much more often fraud can be expected to occur as a result of the changes, how serious the fraud will be, and how much the reduction in information verifiability will be as a result of the changes. Thus, the proposals could not only generate front-page scandals, but reduce the very thing they are being promoted to increase: job growth.”

State securities regulators commend congressional desire to facilitate access to capital for new and small businesses. However, the version of the bill that passed the House is deeply flawed. These problems must be addressed by the Senate.


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