Yearly Archives: 2013

Current SEC Priorities Regarding Hedge Fund Managers

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, October 5, 2013
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The following post comes to us from Norm Champ, director of the Division of Investment Management at the U.S. Securities and Exchange Commission. This post is based on Mr. Champ’s remarks at the PLI Hedge Fund Management Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Mr. Champ and do not necessarily reflect those of the Securities and Exchange Commission, the Division of Investment Management, or the Staff.

This is truly an opportune time to examine the regulatory landscape for hedge funds and their advisers—many of you are probably returning from vacations during a summer that witnessed the third anniversary of the enactment of the Dodd-Frank Act and just in time for the effective date of some significant rulemakings relating to a private placement exemption often used by hedge funds. As you know, the Dodd-Frank Act imposed greater oversight on advisers to hedge funds, while recent changes were made to the private placement exemptions by the JOBS Act. These changes create both opportunities and challenges for those advisers managing hedge funds.

For this morning, I will begin with a discussion on what you are likely most interested in—the general solicitation and the “bad actor” rules. Afterward, I will focus on our continuing efforts to be better informed regulators. In the post-Dodd-Frank era, we are more cognizant regulators not only because of the enhanced data we receive from you regarding the size and operations of your industry, but also due to our continuous efforts to improve our ability to use that data and our heightened focus on industry awareness. After an overview of what we now know about your industry and how we intend to use it, I’ll highlight some regulatory initiatives of interest to the hedge fund industry. However, before I finish this morning, I want to briefly share some thoughts on the importance of a robust culture of compliance, which is underscored by the recent Commission actions against hedge fund managers for insider trading.

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Breaking the Glass Ceiling: Women in the Boardroom

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, October 4, 2013
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The following post comes to us from Tara K. Giunta, partner in the Litigation practice at Paul Hastings LLP, and is based on a Paul Hastings report edited by Ms. Giunta and Lianne Labossiere; the full report, including a summary of national corporate governance codes and jurisdiction-specific reviews, is available here.

Paul Hastings is pleased to present the third edition of “Breaking the Glass Ceiling: Women in the Boardroom,” a comprehensive, global survey of the way different countries address the issue of gender parity on corporate boards. This edition is a supplement to our full 2012 report, and provides updates to jurisdictions with notable developments over the past 12 months, as well as five new jurisdictions: Austria, Denmark, Finland, India, and Sweden.

Given the dynamism and evolution of this issue, we have developed an interactive website dedicated to providing the most current information and developments on the issue of diversity on corporate boards. Included are details about the legislative, regulatory, and private sector developments and trends impacting the representation of women on boards in countries around the world. In addition, there are interviews with corporate executives and directors as well as individuals who are making strides in addressing this issue—whether at their own companies, within their industries, or as a thought leader. We are honored to share the insights of three women who have been, and are today, pioneers in their own right and have lent their voices and efforts to address this issue:

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Basel Committee and IOSCO Release Framework for Uncleared Derivatives Margin

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Thursday, October 3, 2013
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Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum; the complete publication, including tables and appendices, is available here.

The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) on September 2 released their final policy framework on margin requirements for uncleared derivatives (the “Framework”). The Framework, which follows two proposals on the topic from BCBS and IOSCO (the “Proposals”), is intended to establish minimum standards for uncleared derivatives margin rules in the jurisdictions of BCBS and IOSCO’s members, which includes the United States.

The Framework is designed to provide guidance to national regulators in implementing G-20 commitments for uncleared derivatives margin requirements. In the United States, the Dodd-Frank Act, reflecting the same G-20 commitments, requires the SEC, CFTC and banking regulators to adopt initial and variation margin requirements for swap dealers and major swap participants (“MSPs”) under their supervision. [1] The U.S. regulators have proposed rules to implement these requirements (the “U.S. Proposals”), but have not yet adopted final rules, in part due to the ongoing BCBS/IOSCO efforts. The Framework is similar in concept to the U.S. Proposals, but differs in a number of significant respects. Appendix A summarizes the Framework and the three U.S. Proposals, highlighting a number of the key differences.

With the Framework finalized, we expect that U.S. regulators will work to issue final rules implementing uncleared swap margin requirements in the coming months.

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The Disciplinary Effects of Proxy Contests

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 3, 2013
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The following post comes to us from Vyacheslav Fos of the Department of Finance at the University of Illinois at Urbana-Champaign.

In the paper, The Disciplinary Effects of Proxy Contests, which was recently made publicly available on SSRN, I study the effect of potential proxy contests on corporate policies and performance. The agency problem created by separation of ownership and control in publicly traded corporations with dispersed ownership is at the heart of corporate governance literature, which focuses on mechanisms to discipline incumbents. These mechanisms range from informal “jawboning” to contests for corporate control, which are used to change management and to obtain control in publicly traded corporations. Such mechanisms play a disciplinary role if managers are more reluctant to take self-serving actions that increase the probability of shareholders’ intervention (e.g., Grossman and Hart, 1980).

In 1992, the regulatory burdens surrounding proxy fights were substantially liberalized thus reducing the cost of engaging a proxy contest. Specifically, the 1992 proxy reform reduced the costs of the proxy contest by relaxing constraints on communications among shareholders of public corporations (Bradley, Brav, Goldstein, and Jiang, 2010). As a result, the frequency of proxy contests increased significantly after 1992. The average number of proxy contests was 55 (80) per year during 1994-2008 (2006-2008) as compared to an average of 17 a year during 1979-1994. While shareholders more often rely on the proxy contest mechanism, evidence about the effectiveness of proxy contests is limited, since most of the existing literature uses pre-1992 proxy reform data and studies ex post effects only, ignoring the disciplinary effects.

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Deploying the Full Enforcement Arsenal

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on
Wednesday, October 2, 2013
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Council of Institutional Investors fall conference, which are available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is an honor to be here today [September 26, 2013]. The Council is an extremely important voice on behalf of investors and an excellent source of input for the SEC on new rules or guidance that is needed, existing rules that need to be changed and market practices that may be harming investors.

As the Chair of an agency that is focused on the needs of investors, I very much want to hear what you have to say—on everything from corporate governance to shareholders’ rights to 10b5-1 plans.

So I urge you to use your voice. We are listening. Continue to be our eyes and ears.

This morning, I will first talk briefly about some of the agency’s near-term priorities. And then I will go into more depth about how we are deploying our full enforcement arsenal for the benefit of investors. I was told that enforcement was one of the topics you would be interested in hearing about and, well, I never pass up an opportunity to talk about enforcement. But I want to start with some of the agency’s other overall priorities.

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Measurement in Financial Reporting: The Need for Concepts

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, October 2, 2013
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The following post comes to us from Mary Barth, Professor of Accounting at Stanford University.

Measurement concepts in financial reporting are sorely needed. A key role of accounting is to depict economic phenomena in numbers, i.e., to develop measurements to report in financial statements. It is shameful that neither is there a conceptual definition of accounting measurement nor are there concepts guiding standard setters’ choice of measurement base. The Framework has a glaring hole until these concepts are developed. In the paper, Measurement in Financial Reporting: The Need for Concepts, which was recently made publicly available on SSRN, I offer a starting point for developing such concepts by focusing on how the objective of financial reporting, qualitative characteristics of useful financial information, and the asset and liability definitions can be applied to measurement. The Framework should be a coherent whole and, thus, any measurement concepts should flow from, be consistent with, and embody these concepts.

To date the focus of measurement in standard setting has been on individual assets and liabilities, and the lack of concepts for these measurements is obvious. However, aggregate amounts are also fundamental to financial reporting—financial reports include key aggregate amounts such as total assets, total liabilities, and net income. Changes in measurements of assets and liabilities during the reporting period also are fundamental because they determine items of income and expense as well as comprehensive income itself. Thus, if financial reports are to achieve their objective, measurement concepts need to deal with aggregate amounts and changes in measurements, as well as the implications of the measurements for the information revealed in a set of financial statements taken together.

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Recent Amendments to the DGCL and DLLCA

Posted by James C. Morphy, Sullivan & Cromwell LLP, on
Tuesday, October 1, 2013
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James C. Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. The following post is based on a Sullivan & Cromwell publication by Mr. Morphy, Alexandra Korry, and Joseph Frumkin. The complete publication, including footnotes, is available here. 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 amendments discussed in this post were previously discussed on the Forum here.

The State of Delaware recently enacted several significant changes to the Delaware General Corporation Law (“DGCL”) and the Delaware LLC Act (“LLC Act”).

Section 251(h); Back-end Mergers. The most significant amendment to the DGCL is new Section 251(h) that, subject to certain exceptions, permits parties entering into a merger agreement to “opt in” to eliminate a target stockholder vote on a back-end merger following a tender or exchange offer in which the acquiror accumulates sufficient shares to approve the merger agreement (a majority unless the target has adopted a higher vote requirement) but less than the 90% necessary to effect a short-form merger. DGCL Section 251(h) will eliminate in many cases the time and cost associated with a stockholder vote on a back-end merger; however, where regulatory or other constraints impose significant delays, DGCL Section 251(h) is unlikely to be helpful. DGCL Section 251(h) also facilitates the financing of two-step private equity-sponsored acquisitions because the tender offer and the merger can be closed substantially concurrently (generally, on the same day). It also will eliminate the need in most cases for targets to issue “top-up” options to friendly bidders who, before DGCL Section 251(h), needed to “top-up” the number of shares they were able to purchase in the tender offer to reach the 90% target share ownership needed to effect a short-form merger. DGCL Section 251(h) does not apply to transactions in which a party to the merger agreement is an “interested stockholder” of the target under DGCL Section203(c) at the time the merger agreement is approved by the target board. In addition, there are a number of other possible limitations, outlined below, to the utilization of new DGCL Section 251(h).

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Providing Context for Executive Compensation Decisions

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Monday, September 30, 2013
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s statement at a recent open meeting of the SEC; the full text is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [September 18, 2013], the Commission takes an important step to comply with the Dodd-Frank Act’s requirements for better disclosure and accountability regarding executive compensation decisions at public companies. [1]

As required by Section 953(b) of the Dodd-Frank Act, the Commission is proposing a rule to provide for disclosure of CEO-to-worker pay multiples. Reports show that these pay multiples have risen steadily over the years. For example, an April 2013 study by Bloomberg finds that large public company CEOs were paid an average of 204 times the compensation of rank-and-file workers in their industries. By comparison, it is estimated that the average CEO was paid about 20 times the typical worker’s pay in the 1950s, with that multiple rising to 42-to-1 in 1980, and to 120-to-1 in 2000. [2]

Given this backdrop, it is not surprising that investors are asking if such a high level of CEO-pay multiples is in the interest of corporations and their shareholders. [3] As owners of public companies, shareholders have the right to know whether CEO pay multiples reflect CEO performance. Shareholders have the right to know how their company’s internal pay comparisons may impact employee morale, productivity, hiring, labor relations, succession planning, growth, and incentives for risk-taking. [4]

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SEC Settles Regulation FD Case Against Former Vice President

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, September 29, 2013
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The following post comes to us from John H. Sturc, partner and co-chair of the Securities Enforcement Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert.

On September 6, 2013, the Securities and Exchange Commission (SEC) announced that it had brought—and settled—a cease-and-desist case under Regulation Fair Disclosure (Reg. FD), which requires that public companies broadly disclose material nonpublic information to the public that their covered officers and employees intentionally or inadvertently disclose to market professionals and stockholders. The SEC charged Lawrence D. Polizzotto, a former Vice President of Investor Relations at First Solar, Inc., with selectively disclosing that the company was unlikely to receive financing under a conditional loan from the Department of Energy. Mr. Polizzotto agreed to pay a $50,000 fine to settle the charges, although he did not admit or deny the findings.

According to the SEC order, [1] Mr. Polizzotto attended a September 13, 2011 investor conference with the company’s then-CEO, who “publicly expressed confidence” that First Solar would receive three loan guarantees of $4.5 billion from the Department of Energy. Several executives, including Mr. Polizzotto, learned a couple of days later that First Solar would not get at least one of the loan guarantees. The company began discussing how and when to publicly disclose this information. However, before the company issued a public announcement, a number of analysts and stockholders began contacting the company after the House Committee on Energy and Commerce sent a letter to the Department of Energy inquiring about its loan guarantee program and the status of the guarantees that had not yet closed, including all three of First Solar’s conditional guarantees. Even though the company had not yet issued its public announcement, Mr. Polizzotto and his subordinate had phone conversations with more than 30 analysts and investors. They used talking points on the calls that “effectively signaled” First Solar would not receive one of the loan guarantees. The SEC charged that these calls violated Reg. FD, which requires simultaneous public disclosure of material nonpublic information that is intentionally disclosed by covered corporate officers and company spokespersons to market professionals and stockholders. [2] In addition to the $50,000 penalty from the settlement of these charges, Mr. Polizzotto agreed to cease and desist from violating Reg. FD and Section 13(a) of the Securities and Exchange Act of 1934.

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Preferring Foreign Depositors — The Final Rule

Posted by Bradley K. Sabel, Shearman & Sterling LLP, on
Saturday, September 28, 2013
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Bradley Sabel is partner and co-head of the Financial Institutions Advisory & Financial Regulatory practice group at Shearman & Sterling LLP. The following post is based on a Shearman & Sterling client publication.

The Federal Deposit Insurance Corporation has issued a final rule adopting with virtually no change its proposed approach to depositor preference for deposits payable at foreign offices of US banks. While the rule will provide guidance for US banks responding to international efforts to require equal treatment of local branch deposits with home-country deposits in insolvency, it does not address several outstanding issues. US banks will have to tread carefully.

The proposed rule from last April was intended to deal with international efforts, and primarily one led by the United Kingdom, to protect depositors of local branches of US banks. Those branches are not covered by the US deposit insurance scheme. [1] The FDIC was concerned that an insured bank with a London branch would cause the branch’s deposits to be equally payable at either the London branch or the US head office; these would effectively be “dual-office” deposits. The advantage of making them payable at the head office is that the deposits thereby become insured deposits under Federal law and FDIC regulations, and a US bank would not have to take costly steps such as converting its London branch into a subsidiary bank.

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