Monthly Archives: August 2012

Two-Year Dodd-Frank Progress Report

The following post comes to us from Margaret E. Tahyar and Gabriel D. Rosenberg of the Financial Institutions Group at Davis Polk & Wardwell LLP. This post discusses a Davis Polk report, which is available here. A post about the previous progress report is available here. Another memorandum from Morrison Foerster LLP about the two-year anniversary of the Dodd-Frank Act is available here. Other posts about the Dodd-Frank Act are available here.

This posting, the Davis Polk Two-Year Anniversary Dodd-Frank Progress Report, is one in a series of Davis Polk presentations that graphically track the rulemaking required by the Dodd-Frank Act. The Progress Reports are prepared using data from the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis.

The special Progress Report marks the two-year anniversary of Dodd-Frank. The state-of-play at the end of this second year of regulatory implementation can be described as follows:

  • As of July 18, 2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed. This is 55.5% of the 398 total rulemaking requirements, and 78.9% of the 280 rulemaking requirements with specified deadlines.
  • Of these 221 passed deadlines, 136 (61.5%) have been missed and 85 (38.5%) have been met with finalized rules. Regulators have not yet released proposals for 19 of the 136 missed rules.
  • Of the 398 total rulemaking requirements, 123 (30.9%) have been met with finalized rules and rules have been proposed that would meet 134 (33.7%) more. Rules have not yet been proposed to meet 141 (35.4%) rulemaking requirements.

To highlight the occasion, we have developed several additional features that visually describe aspects of Dodd-Frank in new ways:


Caution Needed as New Regulatory Regime Takes Shape

Editor’s Note: Troy A. Paredes is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Paredes’ statement at a recent conference of the Society of Corporate Secretaries & Governance Professionals, which is available here. The views expressed in the post are those of Commissioner Paredes and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

In considering the “shape of things to come” — the theme that focuses this conference — one thing is certain: The regime regulating our financial markets is undergoing dramatic change. The case in point is the Dodd-Frank Act, which represents a historic expansion of the federal government’s power over the economy. The hundreds of rules and regulations that Dodd-Frank demands of the SEC and other financial regulators indicate just how far the government has reached into the private sector and just how heavy the government’s hand will be. Or, stated differently, the regulatory change demonstrates the degree to which government decision making, effectuated as it is through more regulation, will displace and distort private sector decision making.

To put it more directly, I have been and remain troubled that the Dodd-Frank regulatory regime goes too far. Without question, there is a fundamental role for government, including the SEC, in regulating our financial markets and our economy more generally; and we need a regulatory framework that is resilient and that fits our increasingly interconnected and complex financial system. None of us welcomes the kind of hardship and turmoil that the financial crisis wrought. The key question, therefore, is not whether we will or should have regulation. The answer to that question is straightforward: we will and we should. The real question is, “How much?”


Corporate Integrity at a Crossroads

The following post comes to us from Jordan A. Thomas, partner at Labaton Sucharow LLP and former assistant director at the Securities and Exchange Commission. This post is based on a Labaton Sucharow report, available here.

Executive Summary

We are mindful that, as we share the results of this groundbreaking survey of financial services professionals in two of the world’s key financial markets, we approach the fourth anniversary of the collapse of Lehman Brothers, the harbinger of the global financial crisis.

In the wake of that crisis, numerous countries have examined–and some have adopted–laws and regulations aimed at creating greater stability in the financial markets. In the UK, June 2010 marked the establishment of the Independent Commission on Banking. One month later, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, the most sweeping financial reform effort since the Great Depression. Recognizing that financial regulators and law enforcement authorities cannot effectively and efficiently police the marketplace without the assistance of private individuals, one of Dodd-Frank’s key provisions required the Securities and Exchange Commission (SEC) to establish a whistleblower program that offered anonymous reporting, employment protections and monetary awards to individuals who report violations of the federal securities laws.


Divisional Managers and Internal Capital Markets

The following post comes to us from Ran Duchin of the Department of Finance at the University of Washington and Denis Sosyura of the Department of Finance at the University of Michigan.

In our paper, Divisional Managers and Internal Capital Markets, forthcoming in the Journal of Finance, we study the role of divisional managers in internal capital budgeting.

While the capital budgeting process is one of the most fundamental corporate decisions, introduced at the very beginning of virtually any finance textbook, we still know relatively little about this area of the inner workings of a firm. Our paper seeks to advance our knowledge of this corporate decision by studying the role of human capital in a firm’s capital budgeting and the involvement of managers at various levels of hierarchy. In particular, we construct a hand-collected dataset of divisional managers at the S&P 500 firms and examine the effect of managerial influence on investment decisions and firm value. We study managerial influence via both formal channels (e.g., managers’ board membership and seniority), and informal channels (e.g., managers’ social connections to the CEO via prior employment, education, and nonprofit organizations).


UK Takeover Panel Consultations

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum by John Banes, Phillip R. Mills, Simon Witty, and Dan Hirschovits.

On July 5, 2012, the Code Committee of the U.K. Takeover Panel (the “Panel”) published three Public Consultation Papers (“PCPs”) setting out proposed amendments to the U.K. Takeover Code (the “Code”). The Code sets out binding rules for proposed takeovers of companies and is focused on ensuring a non-coerced choice by shareholders without input by the incumbent board, unlike the typical U.S. approach that permits the incumbent board to act in a manner it believes can best protect shareholders.

Of particular interest are proposals to amend the rules for determining companies that are subject to the Code.  If implemented as proposed, the changes contemplated will have the effect of bringing companies that are not currently subject to the Code within its jurisdiction.

The U.K. government recently announced plans to introduce a binding, three-yearly shareholder vote on the compensation policy of U.K. incorporated, quoted (publicly traded) companies, which include companies listed on the NYSE and NASDAQ, even if not listed in the U.K. (read a recent Davis Polk blog post on this topic here). These latest proposals provide a further reminder that the U.K. applies some, and may be about to apply more, corporate governance and shareholder protection measures which resonate most in the context of publicly traded companies on the basis of location of incorporation rather than location of listing.  This approach is different from that adopted in the U.S., which focuses on the listing location and does not impose its rules on U.S.-domiciled companies not listed on a U.S. exchange, and could lead some U.K. incorporated companies to consider re-domiciling.


Common Stock Under Delaware’s Fair Value Standard

The following post comes to us from Bradley W. Voss, partner in the Commercial Litigation Practice Group of Pepper Hamilton LLP, and is based on a Pepper Hamilton publication. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Delaware courts frequently are called upon to determine the “fair value” of a company’s stock. For a company whose capital structure includes preferred stock with a liquidation preference, there is the question of how to treat that liquidation preference when determining the per-share “fair value” of the common, the preferred, or some other specific class of the company’s stock.

Two recent Delaware Court of Chancery decisions by Chancellor Leo E. Strine Jr. demonstrate that the answer depends on whether the liquidation preference actually has been triggered (or otherwise represents a non-speculative payment obligation), or whether the payout of the liquidation preference is a matter of speculation. Importantly, that determination depends on the specific rights defining the liquidation preference, as set forth in the charter or certificate of designations, and does not necessarily depend on “market realities” that might suggest a discount for common stock relative to the preferred.


Recent Federal Reserve Guidance Regarding Informal Pre-Filing Inquiries

The following post comes to us from Mark J. Menting, partner in the Mergers and Acquisitions and Financial Institutions groups at Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication.

The ability of U.S. banking organizations, as well as non-U.S. organizations that are subject to U.S. bank regulation (“banking organizations”), to obtain required U.S. bank regulatory approvals for acquisition transactions on a timely basis is absolutely critical to both buyers and sellers in such transactions. For a buyer, a failure to obtain the necessary approvals for an announced transaction can mean public embarrassment, a loss of confidence in management, shareholder ire, difficult disclosure issues, substantial unproductive expense, lost management time and even litigation with the seller or others. Depending on the nature and significance of the transaction, it can also mean the failure of a buyer’s strategic plan and result in the buyer itself becoming vulnerable to a takeover. For a seller, a failed transaction can often be even more deleterious, as it can result in the loss of a premium to the seller’s shareholders (which may not otherwise be currently available), damage the seller’s ongoing business, client relationships and employee relationships and morale, make it very difficult to continue as an independent organization, and leave the seller vulnerable to takeover in unfavorable circumstances.

To assist buyers to avoid a failed transaction, we recommend that:


UK Equity Markets and Long-term Decision Making

The following post comes to us from John Kay, a visiting Professor of Economics at the London School of Economics and a Fellow of St John’s College, Oxford.

In June 2011, the Secretary of State for Business, Innovation and Skills asked me to review activity in UK equity markets and its impact on the long-term performance and governance of UK quoted companies. The Review’s principal concern has been to ask how well equity markets are achieving their core purposes: to enhance the performance of UK companies and to enable savers to benefit from the activity of these businesses through returns to direct and indirect ownership of shares in UK companies. More detail on the background to the Review, including its terms of reference and the Interim Report, can be found at

This final report details the findings of the Review. Overall we conclude that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain. These themes of trust and incentives are central to this report. We set out principles that are designed to provide a foundation for a long-term perspective in UK equity markets and describe the directions in which regulatory policy and market practice should move. These high level statements are supported by specific recommendations that are aimed at providing the first steps towards the re-establishment of equity markets that work well for their users.


Securities Enforcement Update

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; the full version, including footnotes, is available here.

I. Overview of the First Half of 2012

The first half of 2012 has shown a continuation of the SEC’s aggressive enforcement strategy even after a record-breaking fiscal year 2011 for the U.S. Securities and Exchange Commission (the “SEC” or “Commission”), which resulted in 735 enforcement actions and over $2.8 billion in penalties and disgorgement ordered. During the first six months of 2012, the SEC filed 110 actions in federal court against a collective 308 defendants. It appears, however, that the SEC is beginning to feel the resource costs of pursuing such cases over time. Specifically, the SEC recently disclosed that it is actively litigating approximately 90 cases, which is an increase of more than 50% in the past year. This recent surge in litigation may have been influenced by many factors, including the increased complexity in cases stemming from the financial crisis and a related increase in charges being filed against individuals. Protracted litigation will place an increasing drain on the agency’s limited resources. Nevertheless, as the current administration’s first term comes to a close and as conduct related to the financial crisis becomes more distant in time, we anticipate that the SEC will sustain its aggressive strategy of filing and, if necessary, litigating cases against prominent defendants in order to bolster public confidence in a vigorous enforcement of the securities laws.

Highlights of the past six months include:


European Court Tightens Disclosure Rules

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 is based on a Gibson Dunn alert by Philip Martinius.

On June 28, 2012, the European Court of Justice (“ECJ”) issued an important judgment that will have a significant impact on the disclosure of non-public, price-sensitive information (so-called “inside information”) by public companies listed on stock exchanges in the European Union (“EU”). The decision clarifies the definition of inside information in cases where the circumstances relevant to the disclosure develop over time, potentially involving several intermediate steps. The ruling is the latest in a string of court decisions concerning the spectacular departure of Daimler’s CEO in summer 2005 and the company’s allegedly late disclosure of this event.

The issue before the ECJ was whether Daimler had met its obligation to timely disclose inside information. Under EU and German law, each issuer of securities is obliged to disclose inside information if (i) the information is sufficiently precise, (ii) relates to circumstances which are not publicly known, (iii) relates to one or more issuers of securities (or the securities themselves) and (iv) the information would likely have a significant effect on the price of the securities if it became publicly known. Future circumstances may also constitute inside information if they are sufficiently likely to occur. Issuers can temporarily delay disclosure if certain conditions are met.


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