Monthly Archives: April 2013

SEC Responds to Rule 15a-6 and Foreign Broker-Dealer FAQs

Russell Sacks is a partner at Shearman & Sterling in the Financial Institutions Advisory & Financial Regulatory Group. The following post is based on a Shearman & Sterling publication.

On March 21, 2013, the staff of the Division of Trading and Markets (the “Staff”) of the US Securities and Exchange Commission (the “SEC”) released responses reflecting the Staff’s views on frequently asked questions (the “FAQs”) relating to Rule 15a-6 (“Rule 15a-6” or the “Rule”) under the US Securities Exchange Act of 1934, as amended (the “Exchange Act”). The FAQs affirm, among other things, the SEC’s broad interpretation of Rule 15a-6 confirming the applicability of both the “Seven Firms” and “Nine Firms” to foreign broker-dealers, including those that use unaffiliated US-registered broker-dealers to intermediate transactions in accordance with Rule 15a-6(a)(3). This memorandum provides a brief background of Rule 15a-6 and highlights the important points included in the FAQs.


Broker-dealers [1] located outside the United States that conduct securities transactions with persons in the United States (including solicitation of those transactions) are required to register with the SEC, unless an exemption from registration is available. Rule 15a-6 under the Exchange Act, which the SEC adopted in 1989, currently provides a conditional exemption from broker-dealer registration for a non-US broker-dealer falling under the definition of “foreign broker or dealer” [2] that engages in certain activities involving certain US investors. Since the adoption of Rule 15a-6, the Staff has expanded its scope through “no action” and other interpretive guidance. [3] In 2008, the SEC proposed changes to update and expand the scope of the rule, but that proposal has yet to be adopted.


Board Oversight of Risk Management: Valuable Guidelines from JPMorgan Chase

The following post comes to us from Michael W. Peregrine, partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

The current public controversy notwithstanding, valuable governance lessons arise from JPMorgan Chase’s internal analysis of the highly public 2012 losses in its synthetic credit portfolio; the saga of the so-called “London Whale”. The internal JPMorgan analysis should not be confused with the March 15 report on the “Whale Trades” issued by the Senate Permanent Subcommittee on Investigations. [1] Neither should its credibility be undermined by the Subcommittee’s critical report.

JPMorgan’s primary findings were contained in an exhaustive report of the trading strategies and management activities that led to these losses, prepared by a management task force. [2] Additional findings and recommendations were included within a much shorter companion report prepared by the board’s Review Committee. This companion report concentrated on the board’s risk oversight practices. [3] To a certain extent, the “sizzle” was contained in the lengthier management task force report, with its focus on what happened, why it happened, and who was to blame for it happening. But from a governance perspective, the lessons for corporate America are in the companion report, with its focus on improving the process by which risk information is reported to the board. These governance recommendations are highly relevant today, because the broader fiduciary landscape has been dominated of late by concerns about the quality of board oversight of risk.


Responding to Objections to Shining Light on Corporate Political Spending (1): The Claim of Immateriality

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law and Milton Handler Fellow at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Corporate Political Speech: Who Decides? and Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal. This post is the first in a series of posts, based on the Shining Light article, in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending; the full series of posts is available here.

A committee of academics that we co-chaired has submitted a rulemaking petition urging that the SEC develop rules requiring disclosure of corporate political spending. Our petition has attracted more than 490,000 comment letters, the overwhelming majority of which support the petition. The petition has also attracted opponents, including prominent members of Congress, the Wall Street Journal editorial page, legal academics, and intermediaries that facilitate undisclosed corporate political spending such as the U.S. Chamber of Commerce. And the SEC has indicated that the agency plans to address the petition’s request for rules in this area during 2013.

Given the expected SEC consideration of the subject, we have written an article, Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal, that puts forward a comprehensive case for the rulemaking we advocated in the petition and responds to each of the ten objections that opponents have raised in comment letters filed with the SEC or elsewhere. We show in this article that these objections, either individually or collectively, provide no basis for opposing rules requiring public companies to disclose political spending to their investors.


Proposed Amendments to Delaware Law Would Facilitate Tender Offer Structures

Igor Kirman is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on mergers and acquisitions, corporate governance, and general corporate and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Kirman, Victor Goldfeld, and Edward J. Lee. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals. The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding shares, unless the company’s charter provides a higher threshold).


Inefficient Results in the Market for Corporate Control

The following post comes to us from Robert T. Miller, Professor of Law and F. Arnold Daum Fellow in Corporate Law at University of Iowa College of Law.

In my article on Inefficient Results in the Market for Corporate Control: Highest Bidders, Highest-Value Users and Socially-Optimal Owners, I argue that, unlike in most other markets, in the market for corporate control allocating resources to the highest bidder will often not produce an efficient result. That is, because of unusual features of that market, the party willing to pay the highest price to acquire the target (the highest bidder), the party who would derive the greatest private benefit from owning the target relative to the status quo (the highest-value user), and the party whose ownership of the target produces the greatest net social benefit (the socially-optimal owner) need not be, and often will not be, the same party. Consequently, allocating the target to the highest bidder will often produce an inefficient result.

The argument begins from the observation that, for most target companies, there are multiple potential strategic acquirers. In general, such parties are willing to pay to acquire the target because ownership of the target’s assets will confer on them a competitive advantage in their product markets and thus increase their future profits. Each such bidder will thus value the target at the present value of the incremental future profits that it expects to earn if it acquires the target, with the bidder having the highest such valuation being the highest-value user of the target.


36 Declassification Proposals Going to a Vote in April and May

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 Counsel at the SRP. 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.

As a result of the work of the Shareholder Rights Project (SRP) and SRP-represented investors, declassification proposals will be voted on in April and May 2013 at the annual meetings of 36 S&P 500 and Fortune 500 companies:

  • At 28 companies, agreed-upon management proposals to declassify will be brought to a shareholder vote of approval pursuant to agreements entered into with SRP-represented investors;
  • At 8 companies, where such agreements have not been reached, precatory proposals that the SRP has submitted on behalf of SRP-represented investors will go to a vote.

These 36 proposals are in addition to 9 proposals that already went to a vote and were approved at annual meetings of S&P 500 and Fortune 500 companies in 2013 (3 management proposals and 6 precatory proposals), as well as the many additional declassification proposals (both agreed-upon management proposals and precatory proposals) that will go to a vote at subsequent annual meetings.


Bank Corporate Governance and the New Supervisory Framework

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. The following post is based on a Gibson Dunn memorandum by Arthur S. Long, Cantwell F. Muckenfuss III, Alex Acree, Kimble Cannon, and Colin Richard.

Having transformed U.S. bank regulation, Dodd-Frank implementation is now reshaping bank corporate governance. Recent rulemakings and proposals by the Board of Governors of the Federal Reserve System (Federal Reserve) point to a far more prescriptive approach to corporate governance for significant bank holding companies and significant foreign banking organizations with U.S. operations (FBOs) than traditionally has been the case. This approach should also be expected to apply to systemically significant nonbank financial companies (Nonbank SIFIs) designated by the Financial Stability Oversight Council.

In addition, Dodd-Frank has allowed regulators to expand their toolkit for dealing with perceived corporate governance failings, and so non-compliance with the new governance requirements may lead to greater supervisory consequences.

Below, we describe the principal new responsibilities that boards of directors and senior management should expect under the Federal Reserve’s new supervisory regime, as well as the increased penalties that may be imposed if those responsibilities are not met.


Better Governance of Financial Institutions

The following post comes to us from Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg and was advisor inter alia for the European Commission, the German legislator and the Ministries of Finance and of Justice.

Banks are special, so is corporate governance of banks. It differs considerably from general corporate governance. Specific corporate governance needs exist also for insurance companies and other financial institutions. This article, Better Governance of Financial Institutions, analyzes the economic, legal and comparative research on governance of financial institutions and covers the reforms by the European Commission, the European Banking Authority, CDR IV and Solvency II up to the end of 2012. External corporate governance, in particular by the market of corporate control (takeovers), is more important for firms than for banks, at least under continental European practice.

For financial institutions, the scope of corporate governance goes beyond the shareholders (equity governance) to include debtholders, insurance policy holders and other creditors (debt governance). Some include the state as stakeholder, but the role of the state is better understood as setting the rules of the game in a regulated industry. From the perspective of supervision debt governance is the primary governance concern. Equity governance and debt governance face partly parallel and partly divergent interests of management, shareholders, debtholders and other creditors, and supervisors. Economic theory and practice show that management tends to be risk-averse for lack of diversification but may be more risk-prone because of equity-based compensation in end games and under similar circumstances. Shareholders are risk-prone and interested in corporate governance. Debtholders are risk-averse and interested in debt governance. Supervisors are risk-averse and interested in maintaining financial stability and in particular in preventing systemic crises.


JOBS Act Quick Start

David M. Lynn is a partner and co-chair of the Global Public Companies and Securities practice at Morrison & Foerster LLP, and Anna T. Pinedo is a partner focusing on securities and derivatives also at Morrison & Foerster. This post is based on a book by Mr. Lynn, Ms. Pinedo, and Nilene R Evans, titled ” JOBS Act Quick Start;” the book may be downloaded for free here.

In our recently published book, JOBS Act Quick Start (published by the International Financial Law Review), we provide readers with a context for understanding the significance of the Jumpstart Our Business Startups (JOBS) Act as both a recognition of the changes in capital markets over the last decade and catalyst for a broader dialogue regarding financing alternatives.


The Effect of Managers’ Professional Experience on Corporate Cash Holdings

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

In our paper, Looking in the Rear View Mirror: The Effect of Managers’ Professional Experience on Corporate Cash Holdings, which was recently made publicly available on SSRN, we study the role of managers’ professional experience in financial decision making, focusing on one of the most debated corporate policies in recent years – cash savings.

We focus our analysis on corporate cash policies because firms hold unprecedented, increasing levels of cash. In 1980, firms held $234.6 billion (in 2011 dollars) in cash, amounting to 12% of assets. By 2011, the amount of cash grew to $1,500 billion, or 22% of assets. The predominant approach to understanding corporate cash holdings is the precautionary savings motive. According to this motive, firms hold liquid assets to hedge against future states of nature in which adverse cash flow shocks, coupled with external finance frictions, may lead to underinvestment or default. While prior research shows that the precautionary savings motive explains much of the cash policy of firms, some suggest that managers are overly conservative in their decision to hold high levels of cash.

Motivated by psychological evidence, which shows that past experience affects individual decision-making, we argue that managers may behave conservatively because they experienced financial difficulties in their professional career. To test this hypothesis, we collect detailed data on managers’ employment histories and construct four measures of experience at firms that faced financial difficulties. These measures capture financial constraints and adverse shocks to cash flows and stock returns. To separate firm and CEO effects, the measures are based on prior employment at other firms.


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