Monthly Archives: November 2012

Enhancing Disclosure in the Municipal Securities Market: What Now?

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 recent remarks before the Bond Buyer’s California Public Finance Conference in San Francisco, California, which are available here. The views expressed in this post are those of Commissioner Walter and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

So, here we are in California — in beautiful San Francisco. For better and for worse, California municipal finance is national news.

As an SEC Commissioner, my job in general doesn’t get me involved in the specifics of the individual municipal finance debates covered in today’s news — at least not in my official capacity.

My job is to protect investors in the roughly $4 trillion municipal securities market, maintain fair, orderly and efficient markets, and facilitate capital formation.

And, as a member of the Commission that serves the public as the investor’s advocate, I want to remind everyone that, without the trust and willingness of investors, projects that are critical to our country’s infrastructure could suffer. These include vital projects such as water, schools, roads, hospitals, and many others.

I’d like to talk about the importance of better protection for muni investors and how the Commission under Chairman Schapiro’s leadership is enhancing investor protection. I’ll also share my personal observations on the “what now” question that follows the issuance of our recent Report on the Municipal Securities Market.

As I walk through this, I want to make it clear that your support in these efforts is critical — that whatever we do, it will be done better if we have your input and support.


U.S. Export Laws and Related Trade Sanctions

Stanley Keller is a partner at Edwards Wildman Palmer LLP. This post is based on an Edwards Wildman guidance note.

I. Export Laws at a Glance

Most U.S. companies are aware at least generally that U.S. export laws regulate activities such as the shipment of tangible products out of the country and that certain countries are subject to strict economic sanctions. But many companies are unaware of the actual breadth and complexity of U.S. export laws and regulations and what impact those laws have on their business — the result being that many companies do not even know that they are in a legal minefield until it is too late.

The problem that many companies run into is that, though U.S. export laws were intended to focus on the export of sensitive goods to hostile countries and keeping potentially dangerous items out of the hands of persons intent on harming the U.S., the regulations that implement these laws — the very dense and complicated Export Administration Regulations (“EAR”) enforced by the Commerce Department — cover virtually every commercial good and technology originating in the U.S. Additionally, as explained below, the EAR cover much more than the shipment of goods from the U.S. to a foreign country. Rather, the EAR cover the re-export of U.S.-origin goods from one foreign country to another, as well as the release of technology to a foreign national located in the U.S. When overlaid with dozens of stand-alone economic sanctions programs enforced by the Treasury Department, such as the U.S. embargoes of Iran and Cuba, these laws and regulations come together to form a complicated web that effects virtually every U.S. company that does business overseas or that has a product for which there is a market overseas.

When these laws and regulations are violated, the sanctions can be severe. At a minimum, goods can be returned or seized by U.S. or foreign customs officials. More ominously, huge fines (up to twice the value of the transaction) can be imposed, willful violations can result in significant jail time for individuals, and resulting internal investigations and/or government investigations can be burdensome, distracting, very expensive, and cause serious reputational harm to a company.


Dodd-Frank Principles and Provisions

Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Schapiro’s remarks at the George Washington University Center for Law, Economics and Finance Regulatory Reform Symposium, available here. The views expressed in this post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Four years ago, this nation was suffering from a near-collapse of our financial system.

While there are differences of opinion as to what was the most significant trigger, a bi-partisan Senate Committee report — known as the Levin-Coburn Report — asserted that the crisis was the result of “high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”

While this period of our history will be written and re-written over and over again, Congress and the Administration knew that the status quo was unacceptable. So together they passed landmark legislation to address many of the issues that were highlighted by that tumultuous period.

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a vital and comprehensive response to the financial crisis — an event that devastated the American economy, cost the American people trillions of dollars and millions of jobs, and undermined the confidence that our financial system requires if it is to thrive and support a growing economy.

The sweeping scope of this financial reform legislation sometimes obscures the fact that, despite its breadth, it is rooted in a handful of sound principles that should have been more firmly in place before the crisis, and whose embrace serves to make markets more stable and efficient. Simple principles like. . . .


Regulatory Capital: January 1, 2013 Deadline Eased

Dwight C. Smith is a partner at Morrison & Foerster LLP focusing on bank regulatory matters. This post is based on a Morrison & Foerster client alert by Mr. Smith.

The three federal bank regulatory agencies announced [1] that their proposed new capital rules based on Basel III (and other Basel standards) [2] would not take effect on January 1, 2013, a date previously proposed apparently in order to adhere to international consensus. The announcement was overdue. The comment period for the three proposed capital rules ended only a few weeks ago on October 22, 2012. The agencies received hundreds of comments that they will have to digest in order to finalize the rules, making implementation on January 1, 2013, a practical impossibility.

January 1, 2013, was set by international agreement as the effective date for new Basel-based rules in all countries. The United States will not be the only jurisdiction to miss this deadline. The Basel Committee on Banking Supervision (the “BCBS”) released preliminary reviews of the implementation of Basel III in the European Union, the United States, and Japan. Only Japan has new rules in place. The European Parliament is expected to take up its version of the new rules, colloquially known as CRD IV, on November 20, 2012, in plenary session. If Parliament approves CRD IV, it will go to the European Council for review. Finalization, accordingly, will take several months.

The announcement leaves two questions that the agencies did not answer.


Corporate Governance and Risk-Taking in Pension Plans

The following post comes to us from Hieu Phan of the Department of Management at the University of Massachusetts Lowell and Shantaram Hegde, Professor of Finance at the University of Connecticut.

In our paper, Corporate Governance and Risk-Taking in Pension Plans: Evidence from Defined Benefit Asset Allocations, forthcoming in the Journal of Financial and Quantitative Analysis, we examine whether good corporate governance leads to a larger allocation of pension assets to risky securities as compared to safe investments. Defined benefit (DB) plans are one of the most important private retirement schemes in corporate America. Although pension regulations require firms to establish separate trusts to manage and invest DB pension plan assets, these pension plans are owned by the sponsoring corporations and the plan asset allocations are made under the influence of, if not the direction and control of, the plan sponsors. Depending on the firm and plan characteristics as well as the market environment, firms may have different incentives in investing pension assets, namely, either risk-taking by allocating a larger share of plan assets to risky asset classes (e.g., equity) or risk management by investing heavily in safe asset classes (e.g., cash, government debt, and guaranteed insurance contracts).


Supervisory and Company-Run Stress Test Requirements

H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is an abridged version of a Sullivan & Cromwell publication by Janine Guido; the full version, including footnotes, is available here.


In October 2012, the Board of Governors of the Federal Reserve System (the “FRB”) published in the Federal Register final rules implementing the requirements of Section 165(i)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) concerning supervisory stress tests to be conducted by the FRB (the “Annual Supervisory Stress Test Rule”) and Section 165(i)(2) of Dodd-Frank regarding semi-annual company-run stress tests (the “Semi-Annual Company-Run Stress Test Rule,” and, together with the Annual Supervisory Stress Test Rule, the “Stress Test Rules”). The Stress Test Rules apply to bank holding companies (“BHCs”) with total consolidated assets of $50 billion or more (“Large BHCs”) and nonbank financial companies designated by the Financial Stability Oversight Council (“Designated SIFIs,” and together with Large BHCs, “Covered Companies”). Concurrent with the Stress Test Rules, the FRB, Office of the Comptroller of the Currency (“OCC”) and Federal Deposit Insurance Corporation (“FDIC,” and together with the FRB and OCC, the “Agencies”) published separate final rules implementing the requirements of Section 165(i)(2) of Dodd-Frank regarding annual company-run stress tests (the “Annual Company-Run Stress Test Rules”) for supervised entities (BHCs, savings and loan holding companies (“SLHCs”) and depository institutions) with average total consolidated assets greater than $10 billion other than Covered Companies (together “Covered Institutions”). The Stress Test Rules and Annual Company-Run Stress Test Rules have substantial implications for capital planning, including capital distributions.

The specific application of the rules generally depends on the type of entity involved (for example, BHC, depository institution, or SLHC), the size of the institution and its applicable regulator. In summary, the requirements of the Stress Test Rules and Annual Company-Run Stress Test Rules are as follows:


Business Roundtable and the Future of SEC Rulemaking

Jill E. Fisch is a Professor of Law at the University of Pennsylvania Law School.

The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. One of the most serious was the DC Circuit’s 2011 decision in Business Roundtable v. SEC, in which the court invalidated the SEC’s proxy access rule, Rule 14a-11, on the basis that the SEC had failed to conduct an adequate cost-benefit analysis. By imposing an onerous, and possibly insurmountable procedural burden, the decision threatens to paralyze rulemaking by the SEC and other administrative agencies. The effect is particularly troubling in light of the heavy rulemaking obligations imposed by Dodd-Frank and the JOBS Act.

In my article, The Long Road Back: Business Roundtable and the Future of SEC Rulemaking (forthcoming in Seattle University Law Review), I critically evaluate the Business Roundtable decision. Specifically, I argue that, although Rule 14a-11 suffered from a number of flaws, flaws I have noted in other work (see Fisch, The Destructive Ambiguity of Federal Proxy Access, 61 Emory L. J. 435 (2012)), the deficiencies in SEC’s rule-making that led to the adoption of Rule 14a-11 cannot accurately be ascribed to inadequate economic analysis. Nor is the demanding standard imposed by DC Circuit’s decision a product of the statutory constraints on SEC rulemaking. Rather it stems from the court’s skepticism about proxy access and the SEC’s policymaking generally.

The SEC’s inability to defend its proxy access rule against attack was, in part, a product of two important constraints on its policy formation – the notice and comment requirements of the Administrative Procedure Act and the Government in the Sunshine Act. Although commentators have defended both these requirements in terms of transparency and democratic values, they sacrifice consensus building as well as decision-making efficiency, and they allow for the increased influence of political forces and interest groups. These sacrifices are of particular concern in the context of SEC rulemaking and, I argue, were at the heart of a problematic Rule 14a-11.


Let Shareholders Know How Their Money Is Spent

Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Bebchuk served as co-chair of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition concerning political spending, discussed on the Forum here and here. Posts discussing his articles on corporate political spending, Corporate Political Speech: Who Decides?, and Shining Light on Corporate Political Spending, both co-authored with Robert Jackson, are available here.

My most recent New York Times Dealbook column, published today, focuses on the expected SEC consideration of the rulemaking petition urging adoption of rules that would require public companies to disclose information about their political spending. As Robert Jackson and I reported in a recent post, SEC officials indicated last week that the Division of Corporate Finance is currently considering the petition and looking into whether to recommend that the SEC issue such rules.

The column argues that the case for adopting such rules is very strong. In future elections, shareholders of public companies should not be left in the dark on whether and how their money is spent on politics.

The column, titled Let Shareholders Know How Their Money Is Spent, is available here.

The Expanded Role of Economists in SEC Rulemaking

Editor’s Note: The following post comes to us from Craig M. Lewis, chief economist and director of the Division of Risk, Strategy, and Financial Innovation at the U.S. Securities and Exchange Commission. This post is based on Mr. Lewis’s remarks at the SIFMA Compliance & Legal Society Luncheon, available here. The views expressed in this post are those of Mr. Lewis and do not necessarily reflect those of the Securities and Exchange Commission, the RSFI division, or the Staff.

I would like to talk about economic analysis in support of Commission rulemakings, and, in particular, the role of economists from the Division of Risk, Strategy, and Financial Innovation (or “RSFI”) and the recently issued guidance on economic analysis.

Background on the Division of Risk, Strategy, and Financial Innovation

Without going into a description of the history of RSFI — which would not take long in any event, as the Division is only three years old — it may be useful to set the stage for how, in my mind, the Division fits into the overall structure of the Commission.

First, who are we? Often referred to as the SEC’s “think tank,” RSFI consists of highly trained staff from a variety of academic disciplines with a deep knowledge of the financial industry and markets. For example, we currently have over 35 PhD financial economists on staff, and hope to hire more this fall. We also have statisticians, financial engineers, programmers, MBAs, and other experts, including individuals with decades of relevant industry experience.


Building Relationships with Your Shareholders Through Effective Communication

James D. C. Barrall is a partner at Latham & Watkins LLP and co-chair of the Benefits and Compensation Practice. This post is based on a Latham & Watkins Corporate Governance Commentary.


In recent years, shareholders of US public companies have increasingly invited dialogue with management, sometimes even demanding personal interaction with directors. This trend is part of a new paradigm in the corporate governance realm. Historically, despite some management engagement with shareholders, companies have seen little in the way of direct dialogue between shareholders and members of the board of directors. For most public companies, governance strategies have seldom included systematic engagement with shareholders beyond quarterly earnings calls, investor conferences and traditional investor relations efforts.

That was then, this is now. More than ever before, institutional shareholders are aggressively exerting their influence in the name of holding companies and management accountable. Emboldened (or pressured) by recent events — high-profile corporate governance and executive compensation controversies, the financial collapse and public criticism of pay disparities — these shareholders increasingly seek to influence board-level decisionmaking, often deploying incendiary buzzwords such as “corporate mismanagement,” “excessive risk taking,” “pay-for-failure” and the like. All told, the new paradigm represents a significant shift for most public companies.

In this Commentary, we discuss:

  • The current state of corporate governance and signposts along the way to the existing state of affairs
  • How and when public companies can benefit from shareholder engagement
  • The components of an effective shareholder engagement program


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