Yearly Archives: 2012

Interbank Discipline

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, October 22, 2012
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This post comes to us from Kathryn Judge, an Associate Professor of Law at Columbia Law School.

In the paper Interbank Discipline, recently posted on SSRN and forthcoming in the UCLA Law Review, I examine the increasingly important role that banks play monitoring and disciplining other banks. As a result of the transformation of banking over the last three decades, today’s complex banks typically have numerous relationships with other banks. As a result of transactions ranging from short-term loans to swaps and repurchase agreements, other banks and financial institutions are often the number one source of credit exposure for complex banks. Recently released data suggest that the largest banks regularly have individual counterparty exposures at levels approaching 25% of their regulatory capital. While the transformation of banking has been widely acknowledged, the correspondent rise in interbank discipline has gone relatively unexamined. In drawing attention to this phenomenon, the paper makes two contributions—it suggests that market discipline may be far more robust than is commonly appreciated and that the effects of market discipline may be more mixed than some of its advocates acknowledge.

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Under Control

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Sunday, October 21, 2012
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Editor’s Note: Bart Chilton is a Commissioner at the U.S. Commodity Futures Trading Commission. This post is based on Commissioner Chilton’s remarks at a recent G-20 AMIS roundtable in Rome, Italy, available here.

People often complain and ask why nobody went to prison for taking a wrecking ball to the economy. Well, what was done didn’t break the law. Don’t get me wrong, there were many violations of the law, but these weren’t the actions that sent economies into the gutter. That is changing, but has not changed yet.

I am also asked frequently, if we are safer today than when the markets melted down in 2008. Sure we are, but we’ve got a long way to go. Could what happened in 2008 happen today? Unfortunately, yes, because regulators throughout the world have not approved and or implemented financial reforms to ensure that there is some control over markets.

Mario Andretti, the famous Italian racecar driver, used to say, “If everything seems under control, you just aren’t going fast enough.” Well, I do not believe we are under control in financial markets, but I do not think we are going fast enough on financial regulatory reforms. We need to move fast, fast, fast.

Let’s discuss exactly that: what we need to do and doing it faster.

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IRS Regulations Affecting Liability Management Transactions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, October 20, 2012
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The following post comes to us from Erika W. Nijenhuis, partner focusing on U.S. income tax at Cleary Gottlieb Steen & Hamilton LLP. This post is an abridged version of a Cleary Gottlieb alert memorandum by Ms. Nijenhuis and Josiah P. Child; the full publication is available here.

I. Highlights

On September 13, 2012, the U.S. Treasury Department and the Internal Revenue Service (the “IRS”) published final regulations that will affect the U.S. federal income tax treatment of debt restructurings, amend-and-extend agreements, debt exchange offers, further issuances of outstanding debt, and other liability management transactions.

  • These “publicly traded” regulations will increase the tax cost to some U.S. issuers of restructuring or amending the terms of distressed debt, particularly syndicated loans, and may increase the tax cost of such transactions for U.S. investors in illiquid distressed debt, particularly middle-market loans, whole loans, credit card and other receivables and ABS, MBS and CDO tranches with outstanding amounts of $100 million or less.
  • For issuers of bonds, however, the regulations provide increased flexibility for further issuances – in tax parlance, “reopenings” – of outstanding debt, particularly debt trading below par.
  • The new rules apply to both U.S. and foreign issuers and to U.S. investors, including U.S. investors in funds that invest in debt instruments such as hedge funds.

These rules will have different effects in different markets, in part because of the different economic characteristics of those markets and in part because of historic tax positions taken in different markets. We summarize those effects below, and then discuss the effect of the regulations on loans, structured finance and whole loan transactions, and bonds in more detail.

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Time for a Fresh Look at Equity Market Structure and Self-Regulation

Posted by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission, on
Friday, October 19, 2012
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Editor’s Note: Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement from Commissioner Gallagher, available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

In order to address the pressing market structure issues we face today, it’s important to understand not just where we are now, but also how we got here. Over the past several decades, our capital markets have undergone a series of extraordinary changes. Some of those changes have come about organically, that is, as the result of market participants innovating with new products and ideas. Other changes, however — many others — have been imposed by the SEC and Congress. Or, they were developed by market participants in order to respond to and comply with new and constantly changing laws and regulations. In short, understanding the structure of our capital markets today requires acknowledging that in recent years, changes to the structure of our equities markets have been driven as much, if not more by legislative and regulatory action than by the private sector.

As you well know, this wasn’t always the case. From the earliest days of our nation to the Great Depression, self-regulation, rather than government regulation, played the primary role in growing and shaping the markets, with little or no federal regulation and limited state regulation. Indeed, the origins of U.S. capital market self-regulation can be traced back a long time ago but not so far away — about a ten-minute walk from here to 68 Wall Street, where in 1792, 24 traders signed the famous Buttonwood Agreement. In the Agreement, those traders pledged to conduct their stock trading directly with one another, rather than through an auctioneer, and to limit their commissions to one quarter of a percent. Within three decades of those humble beginnings, the organization that grew out of the Buttonwood Agreement — then referred to as the New York Stock & Exchange Board — had in place a constitution and detailed by-laws. Our capital markets began, and then grew and flourished, on the back of self-regulation.

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The Trouble with Basic: Price Distortion after Halliburton

Posted by Jill Fisch, University of Pennsylvania, on
Friday, October 19, 2012
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Jill E. Fisch is a Professor of Law at the University of Pennsylvania Law School.

The Supreme Court’s decision in Basic, Inc. v. Levinson is widely credited with spawning a vast industry of securities fraud litigation by removing the requirement of individualized proof of reliance as an obstacle to class certification. Modern criticisms of private litigation coupled with questions about the validity of the economic premises on which Basic relied have led critics to question the legitimacy of the Court’s holding in Basic. Most recently, with the Supreme Court’s decision to grant certiorari in Amgen, commentators are again speculating that the Court may use the Amgen case as an opportunity to overrule Basic.

In my article, The Trouble with Basic: Price Distortion After Halliburton (forthcoming in Washington University Law Review), I argue that this criticism of Basic mischaracterizes the decision. Basic did not release federal securities fraud from its moorings in common law fraud and deceit. Rather, by retaining the reliance requirement in federal securities fraud litigation, Basic reflected judicial conservatism. Despite contemporaneous recognition by lower courts and commentators that a reliance requirement was anomalous in the context of impersonal transactions in the public securities markets, the Supreme Court lacked the courage to reject reliance outright. Instead, the Court constructed a complex theory of market integrity relying on the fact that, in an efficient market, fraudulent public statements distort stock prices. According to the Basic Court, the existence of this price distortion justifies a rebuttable presumption of reliance.

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Trendsetter Barometer — Business Outlook Report

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, October 19, 2012
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The following post comes to us from Ken Esch, partner in the Private Company Services of PricewaterhouseCoopers LLP. This post is based on a PwC publication, titled “Trendsetter Barometer, Business outlook report, Summer 2012;” the full document is available here.

Quarterly Highlights

PwC commissioned independent research firm BSI Global Research Inc. to interview 243 chief executive officers (CEOs/CFOs) of leading privately held US businesses in the second quarter of 2012. The interviewees were asked about their current business performance, the state of the economy, and their expectations for business growth over the next 12 months. We then compared their responses with the prior quarter’s results to see how the outlook has changed.

Key findings:

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Lessons Learned from the 2012 Proxy Season

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 18, 2012
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The following post comes to us from Stuart N. Alperin and Regina Olshan, partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden, Arps memorandum by Mr. Alperin, Ms. Olshan, Neil M. Leff, Erica Schohn, Joseph M. Yaffe and Barbara R. Mirza.

2012 Results

Having reached the conclusion of the 2012 proxy season, we can report that approximately:

  • 69 percent of say-on-pay proposals passed with more than 90 percent support;
  • 21 percent passed with between 70.1 and 90 percent support;
  • 7 percent passed with between 50 and 70 percent support; and
  • 3 percent (53 companies) obtained less than 50 percent support.

While the overall proportions generally are similar to last year’s results, it should be noted that in 2011 only 37 say on pay proposals obtained less than 50 percent support. Please note that these percentages follow the (For/(For + Against + Abstain)) formulation and have been rounded to the nearest percentage.

We have analyzed ISS reports and supplemental proxy filings throughout the 2012 season, and our reporting and analysis can be found in our four prior say-on-pay client mailings. [1]

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From Independence to Politics in Financial Regulation

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 18, 2012
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This post comes to us from Stavros Gadinis, an Assistant Professor of Law at University of California, Berkeley.

The dominant paradigm in the U.S. financial regulatory apparatus has long centered on independent agencies like the Federal Reserve, the FDIC, and the SEC. Compared to politically controlled appointees, theorists argue, independent bureaucrats offer invaluable advantages, such as greater expertise and the ability to prioritize long-term policy goals over immediate gains. Since the early 1990s, most western democracies have followed the U.S.’s lead and strengthened the independence of their financial regulators.

But after the 2007-08 crisis, this Article argues, the independent agency paradigm is under attack. To monitor financial institutions more thoroughly and address future failures more effectively, the U.S. and other industrialized nations redesigned the framework of financial regulation. Post-2008 laws allocate new powers not to independent bureaucrats, but to elected politicians and their direct appointees.

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Lawsuit Against Short Sellers Dismissed on Constitutional Grounds

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 18, 2012
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The following post comes to us from Douglass B. Maynard, partner and co-head of the New York litigation section of Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump memorandum.

On August 16, 2012, New York Supreme Court Justice Carol R. Edmead dismissed a defamation action brought by Silvercorp Metals Inc. (“Silvercorp”), a publicly-traded company, against a hedge fund and a group of other defendants who issued negative reports opining that Silvercorp might be engaging in fraud. This decision has important ramifications for professional investors and analysts who are considering publicizing their opinions regarding companies such as Silvercorp, who may retaliate with the threat of litigation.

Silvercorp, a Canadian based company, is reported to be one of the largest silver producers in China and mines other minerals in both China and Canada. Its securities are traded on both the New York and Toronto Stock Exchanges.

The reports in question, which were issued in August 2011 and September 2011, were prepared by hedge funds and investors looking into the accuracy and integrity of Silvercorp’s financials and statements concerning the quality of its mineral reserves. According to the filings in the case, the reports were disseminated anonymously through the Internet and mailings to Canadian securities regulators. The reports were issued by two different groups of defendants who were acting independently of one another. In essence, the reports reached the same conclusion: that Silvercorp was engaged in fraud. The reports were based on documents, both publicly available and privately obtained, which were disclosed with the reports. Among the documents relied on were Chinese news articles regarding an auction of a minority interest in one of Silvercorp’s most important mines, reports compiling financial data that was represented as being copied from Chinese regulatory filings, and an analysis of samples of ore that the authors believed came from a Silvercorp mine.

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Lessons from the Wet Seal Consent Solicitation

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, October 17, 2012
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Editor’s Note: Greg Taxin is managing director of Clinton Group, Inc.

On Friday, October 5, 2012, the Wet Seal (Nasdaq: WTSLA) made an unusual announcement: a majority of its board had agreed to step down and be replaced by nominees selected by a shareholder. It did so even though its board had been duly elected less than five months prior, on May 16, at the company’s annual meeting.

The board, however, recognized that it was within minutes of being defeated in a consent solicitation fight that our fund had started in September. In less than one month — outside of the usual annual and special meeting process — shareholders had successfully replaced (and, in our view, upgraded) a majority of the board.

This was a resounding victory for shareholders and an unusual exercise of their rights. Shareholders owning as much as 63% of the stock consented to the proposals, which involved removal of four of the five sitting directors and the election of four new directors in their stead. Among the consenting investors were mutual funds, institutional investors, large individual investors, former executives and hedge funds. The stock was held widely and dozens of professional investors consented to the proposals. At least one very large mutual fund was on the verge of adding their consent to the pile (which would have brought the totals into the high 60s) when we elected to deliver the consents to the company.

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