Yearly Archives: 2013

IOSCO Requirements for Distribution of Complex Financial Products

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 15, 2013
, , ,
More from: , ,

The following post comes to us from Jeremy Jennings-Mares, partner in the Capital Markets practice at Morrison & Foerster LLP, and is based on a recent Morrison & Foerster client alert by Bradley Berman.

On January 21, 2013, the International Organization of Securities Commissions (IOSCO), of which the Financial Industry Regulatory Authority, Inc. is an affiliate member, published its final report on Suitability Requirements With Respect to the Distribution of Complex Financial Products. The report can be found at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD400.pdf.

The report sets forth nine principles relating to the distribution of complex products by “intermediaries” (defined below), and, for each of the principles, “means of implementation,” which include suggested regulatory changes and detailed guidance for intermediaries. The purpose of the principles is to “promote robust customer protection in connection with the distribution of complex financial products by intermediaries,” including providing guidance on how the applicable suitability requirements should be implemented. The principles are intended to address concerns raised by regulatory authorities and others about sales of structured products, particularly to retail investors. The focus is on not only the point of sale but also on the intermediary’s internal procedures related to suitability determinations.

Many of the themes raised in the report have also been discussed by U.S. regulatory authorities in the past year, including suitability and sales practices. The report suggests that regulators should have the power to impose outright bans on sales of some complex financial products in certain situations. Of course, each jurisdiction has a different legal and regulatory regime and, as a result, the report contains certain general statements that would not be uniformly applicable.

READ MORE »

CEO Wage Dynamics

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 15, 2013
, ,
More from:

The following post comes to us from Lucian Taylor of the Department of Finance at the University of Pennsylvania.

There is considerable debate over the level of executive pay. On one side, Bebchuk and Fried (2004) and others argue that weak governance allows executives to effectively set their own pay while disregarding market forces and shareholder value. On the other side, Gabaix and Landier (2008) and others argue that executive pay is determined in a competitive labor market, so executives have limited influence on their own pay.

In the paper, CEO Wage Dynamics: Estimates from a Learning Model, forthcoming in the Journal of Financial Economics, I use CEO wage dynamics as a laboratory for exploring this debate. Specifically, I examine how learning about a CEO’s ability affects the level of his or her pay. For example, suppose that after a year of high profits we update our beliefs about a CEO’s ability, and as a result the CEO’s perceived contribution to next year’s profits increases by $10 million. If the CEO obtains a $5 million raise for the following year, then the CEO captures half of the $10 million surplus and shareholders pocket the rest.

READ MORE »

Directors and Information Technology Oversight

Posted by Mary Ann Cloyd, PricewaterhouseCoopers LLP, on
Thursday, February 14, 2013
,
More from: ,

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. This post is based on a publication from PwC. The full text, including footnotes, is available here.

The “IT confidence gap”

Overseeing a company’s information technology activities is a significant challenge for directors. The pace of change in this area is rapid, the subject matter is complicated, and the highly technical language used to describe emerging technologies and evolving risks makes this a challenging area. And many companies are relying more and more on technology to get ahead, often prompting substantial changes in how they operate. All of these factors can make the board’s IT oversight responsibility appear harder than it is.

Our research, which included surveying 860 public company directors, indicates many board members are uncomfortable with overseeing their company’s IT. Although many directors want to better comprehend the risks and opportunities related to IT, they sometimes don’t have an adequate understanding of the subject to be truly effective in their oversight roles. In addition, boards often lack a well-defined process that satisfies their needs in this area. On the whole, this confluence of factors creates an “IT confidence gap” for many board members. Consider the following:

READ MORE »

SEC Enforcement in the Second Term of the Obama Administration

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, February 14, 2013
,
More from: , ,

This post comes to us from Erich T. Schwartz and Colleen P. Mahoney, partners at Skadden, Arps, Slate, Meagher & Flom, and is based on a Skadden memorandum by Mr. Schwartz.

At the beginning of the first Obama administration, the United States Securities and Exchange Commission (SEC or the Commission) was an agency on the ropes, with some knowledgeable observers even speculating that it might not survive the revision to the financial regulatory apparatus that was anticipated in the wake of the financial crisis. Although the agency has been the subject of fierce criticism and controversy regarding a variety of issues during the last four years, it has indeed survived and, by many measures, been reinvigorated. It announced that last year it brought 734 enforcement actions, nearly equaling the record number of 735 in 2011, and that it obtained more than $3 billion in financial remedies.

As the second term of the Obama administration begins, the SEC is experiencing a profound leadership transition, with the departures of agency Chair Mary Schapiro; Director of Enforcement Robert Khuzami; its general counsel; the director of Corporation Finance; and the director of Trading and Markets. Such widespread turnover at the Commission and among its senior staff will have a significant impact on the priorities and direction of the agency. Although eventually a new chair may be named to the Commission, for now Elisse Walter, who was elevated from commissioner to chair on Ms. Schapiro’s departure, is moving forward to grapple with the pressing issues on the Commission’s agenda. She also is re-populating the senior staff ranks, having recently named a new general counsel.

At this moment of transition, we assess several of the initiatives that marked Director Khuzami’s tenure at the SEC and that are likely to continue to influence enforcement activity. We also reflect on several pressing issues that may be prominent on the SEC’s enforcement agenda during the second Obama term.

READ MORE »

Large-Scale Governance Reforms in S&P 500 Companies

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, February 13, 2013
, , , , , , , , , , ,
More from: , , ,
Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is the SRP’s Counsel. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. 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 its 2012 Annual Report released today, and in joint press releases issued today with institutional investors it represents, the Shareholder Rights Project (SRP) provided detailed information about the outcomes of its work with SRP-represented investors during 2012, the SRP’s first full year of operations.

As discussed below, major results obtained during 2012 include the following (for complete details on all outcomes see the Annual Report):

  • 48 S&P 500 companies (listed here) entering into agreements to move toward declassification;
  • 38 successful precatory proposals (listed here), with average support of 82% of votes cast;
  • Over 60% of successful precatory proposals by public pension funds and over 30% of all successful precatory proposals; and
  • 42 board declassifications (listed here), reducing the number of classified boards among S&P 500 companies by one-third.

Expected Impact by End of 2013: As a result of these outcomes and the ongoing work of the SRP and SRP-represented investors, it is estimated that a majority of the 126 S&P 500 companies that had classified boards at the beginning of 2012 will have moved toward annual elections by the end of 2013.

READ MORE »

ISS Governance QuickScore: Back to the Future

Posted by Andrew R. Brownstein, Wachtell, Lipton, Rosen & Katz, on
Wednesday, February 13, 2013
, , , ,
More from: , , , , ,

Andrew R. Brownstein is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Brownstein, Adam O. Emmerich, David A. Katz, Trevor S. Norwitz and S. Iliana Ongun.

ISS, the dominant proxy advisory firm, recently unveiled its new ISS Governance QuickScore product, which will replace its Governance Risk Indicators (“GRId”) next month. ISS asserts that QuickScore is an improvement on the GRId product because it is “quantitatively driven” (with a “secondary policy-based overlay”). Using an algorithm purportedly derived from correlations between governance factors and financial metrics, QuickScore will rank companies in deciles within each of ISS’ existing four pillars—Audit, Board Structure, Compensation and Shareholder Rights – and provide an overall governance rating to “provide a quick understanding of a company’s relative governance risk to an index or region.” While one can understand, as a business matter, ISS’ desire to continually reinvent and “improve” its products, the constant shifting of goalposts creates uncertainty and inefficiency. More important, QuickScore will likely provide a no more complete or accurate assessment of corporate governance practices than its predecessors, and it may be worse.

When ISS adopted its GRId product three years ago, we cautiously noted that it offered greater transparency and granularity than the blunt one-dimensional CGQ ratings that it replaced. Unfortunately, in our view, going back to a system of opaque quantified ratings is a move in the wrong direction. After a substantial investment of management time and effort, companies have familiarity with the GRId “level of concern” approach, which at least helps them understand and address any legitimate issues or explain any divergences from ISS’ “best practices.” While ISS retains GRId’s formulaic approach, to the extent that it does not share the weightings it assigns to the various governance factors, it reduces transparency as companies would not be able to compute their own QuickScores.

READ MORE »

Investor Horizons and Corporate Policies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 13, 2013
, ,
More from: , ,

The following post comes to us from François Derrien, Professor of Finance at HEC Paris, Ambrus Kecskés of the Department of Finance at Virginia Tech, and David Thesmar, Professor of Finance at HEC Paris.

In our paper, Investor Horizons and Corporate Policies, forthcoming in the Journal of Financial and Quantitative Analysis, we study the effect of investor horizons on corporate behavior. Institutional ownership of U.S. firms has increased dramatically during the last fifty years, and institutional investors today own the great majority of U.S. firms. However, institutional investors are far from homogenous. One of the dimensions along which they differ is the horizon of their investments. Their investment horizons can differ because the maturities of their liabilities differ. For example, pension funds have long-term liabilities and thus long investment horizons, whereas mutual funds are subject to large short-term redemptions and thus their investment horizons are also short-term. Investors also differ in their investment strategies: some, like Stevie Cohen, turn their portfolios over with lightning speed while others, like Warren Buffett, hold their portfolios forever. Surprisingly, however, there is little research on the effect of investor horizons on corporate policies. This paper aims to fill this void.

READ MORE »

Litigation of Investor Claims: State v. Federal Court

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Tuesday, February 12, 2013
, ,
More from: , , , ,

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz, Eric M. Roth, William Savitt, and Warren R. Stern.

The Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research recently released their analysis of securities class action filings in 2012. They report that 152 new securities class actions were filed last year, a 19 percent decline from the 188 new filings in 2011.

Of particular interest is the observation that only thirteen cases arising from merger and acquisition transactions were filed in federal courts in 2012, as compared to 43 in 2011 and 40 in 2010. “Evidence indicates,” the report states, that merger and acquisition litigation is “now being pursued almost exclusively in state courts after the unusual jump in federal M&A filings in 2010 and 2011.” Though such litigation typically arises under state law, plaintiffs often have the option to frame their claims as violations of the federal securities laws or bring them in federal court by invoking diversity jurisdiction.

READ MORE »

FINRA Proposes Disclosure of Recruitment Practices

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, February 12, 2013
, , , ,
More from: ,

The following post comes to us from Russell Sacks, partner at Shearman & Sterling in the Financial Institutions Advisory & Financial Regulatory Group, and is based on a Shearman & Sterling publication; the full text, including appendix, is available here.

On January 4, 2013, FINRA published Regulatory Notice 13-02, proposing a new FINRA rule (the “proposed rule”) in connection with the recruitment compensation practices of member firms. [1]

Introduction

In short, the proposed rule would:

READ MORE »

Risk Modeling at the SEC: The Accounting Quality Model

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, February 12, 2013
, , ,
More from:
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 & Exchange Commission. This post is based on Mr. Lewis’s remarks at the Financial Executives International Committee on Finance and Information Technology, 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.

The Division of Risk, Strategy and Financial Innovation, or “RSFI”, was formed, in part, to integrate rigorous data analytics into the core mission of the SEC. Often referred to as the SEC’s “think tank,” RSFI consists of highly trained staff from a variety of backgrounds with a deep knowledge of the financial industry and markets. We are involved in a wide variety of projects across all Divisions and Offices within the SEC and I believe we approach regulatory issues with a uniquely broad perspective.

Because my Division has a slightly cumbersome name – which is why you might hear us colloquially called “RiskFin” (though I prefer the more inclusive and accurate “RSFI,” as you can see) – today in my remarks I thought I’d focus on one word in our magisterial title: “Risk.” Risk, particularly as relates to the financial markets, can be a capacious term, and my Division certainly touches on many of those various meanings. But we are particularly focused on developing cutting-edge ways to integrate data analysis into risk monitoring.

READ MORE »

Page 59 of 67
1 … 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67