Yearly Archives: 2015

SEC Proposes Compensation Clawback Rules

Posted by Holly J. Gregory, Sidley Austin LLP, on

Friday, July 17, 2015

Clawbacks, Compensation disclosure, Equity-based compensation, Executive Compensation, Financial reporting, Restatements, SEC, SEC rulemaking
More from: Holly Gregory, Sidley Austin

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update. Related research from the Program on Corporate Governance includes Excess-Pay Clawbacks by Jesse Fried and Nitzan Shilon (discussed on the Forum here).

On July 1, 2015, the Securities and Exchange Commission (SEC), by a 3-2 vote, proposed long-awaited rules [1] mandated by Section 954 of the Dodd-Frank Act that would direct the national securities exchanges and associations to establish listing standards that would require any company to adopt, disclose and comply with a compensation clawback policy as a condition to listing securities on a national securities exchange or association. With the proposal of the clawback rules, the SEC has now proposed or adopted rules to implement all of the Dodd-Frank Act provisions relating to executive compensation.

The clawback policy would be required to provide that, in the event that the company is required to prepare an accounting restatement due to material noncompliance with any financial reporting requirement under the securities laws, the company would recover from any of its current or former executive officers (not just named executive officers) who received incentive-based compensation during the preceding three-year period based on the erroneous data, any such compensation in excess of what would have been paid under the accounting restatement. In addition to requiring that a company file its clawback policy as an exhibit to its annual report on Form 10-K or 20-F, as applicable, the proposed rules would require proxy statement disclosure of certain actions taken pursuant to the clawback policy.
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Revisiting the Regulatory Framework of the US Treasury Market

Posted by Luis A. Aguilar, Commissioner, United States Securities and Exchange Commission, on

Thursday, July 16, 2015

Algorithmic trading, Bonds, Financial crisis, High-frequency trading, Liquidity, Market efficiency, SEC, Securities regulation, Sovereign debt, Systemic risk, Treasury Department
More from: Luis Aguilar, U.S. Securities and Exchange Commission

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, 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.

Yesterday [July 13, 2015], staff members of the federal agencies that comprise the Interagency Working Group for Treasury Market Surveillance (“Working Group”) issued a joint report concerning the so-called “flash crash” that occurred in the U.S. Treasury market on October 15, 2014 (the “Report”). I commend the staff of all the agencies for their hard work in putting together the Report, which examined the events of that day and the broader forces that have changed the Treasury market in recent years. This was a difficult undertaking, but the report does an excellent job of discussing the known factors, while acknowledging that more work needs to be done.

The remarkable events of that day, which cannot yet be fully explained, have dispelled any lingering notion that the Treasury market is the staid marketplace it was once thought to be. The transformative changes that swept through the equities and options markets in the past decade have vastly reshaped the landscape of the Treasury market, as well. As a result, the structure, participants, and technological underpinnings of today’s Treasury market are far different than they were just a few years ago.

SEC Seeks Input on Enhanced Disclosures for Audit Committees

Posted by Michael J. Scanlon, Gibson, Dunn & Crutcher LLP, on

Thursday, July 16, 2015

Audit committee, Disclosure, External auditors, Investor protection, PCAOB, Proxy disclosure, SEC, SEC rulemaking, Securities regulation
More from: Michael Scanlon, Gibson Dunn

Michael J. Scanlon is a partner and member of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn alert.

At an open meeting held on July 1, 2015, the Securities and Exchange Commission (“SEC”) issued a concept release addressing the prospect of enhanced disclosures for audit committees. The much-publicized concept release is available here and requests comment on a number of possible changes to existing SEC disclosure requirements about the work of audit committees, focusing in particular on audit committees’ selection and oversight of independent auditors. The SEC said that it has issued the release in response to views expressed by some that current disclosures may not provide investors with sufficient information about what audit committees do and how they perform their duties. The release seeks feedback on whether certain audit committee disclosures should be added, removed or modified to provide additional meaningful disclosures to investors.

Responding to Institutional Investor Requests for Access to Independent Directors

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on

Wednesday, July 15, 2015

Board communication, Board independence, Boards of Directors, Engagement, Institutional Investors, Shareholder activism, Shareholder communications
More from: Karessa Cain, Martin Lipton, Wachtell Lipton

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Karessa L. Cain.

Recent statements by BlackRock, State Street, Vanguard and other institutional investors clearly articulate their expectation that companies should provide access to independent directors and should adopt a structure for regular investor/director communications. In responding to these requests, there is a range of approaches that companies could adopt which, in each case, should be tailored to the specific circumstances of the company. Indeed, institutional investors have specifically stated that they do not seek any particular method to ensure access to, and relationships with, directors. However, they have made it clear that it will color their attitude toward the company if the company first begins to provide access to directors only after the company has been attacked by an activist.

Custodial Bank’s Technical Failure Results in Dell Stockholders Losing Appraisal Rights

Posted by Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on

Wednesday, July 15, 2015

Appraisal rights, Arbitrage, Banks, Beneficial owners, Books and records, Delaware cases, Delaware law, Merger litigation, Mergers & acquisitions
More from: Gail Weinstein, Philip Richter, Robert Schwenkel, Steven Epstein, Fried Frank

Steven Epstein is a partner and Co-Head of the Mergers & Acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Epstein, Robert C. Schwenkel, John E. Sorkin, and Gail Weinstein. 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.

In In re Appraisal of Dell (July 13, 2015), Vice Chancellor Laster, stating that he was compelled by Delaware Supreme Court precedent, applied a “strict” interpretation of the “Continuous Holder Requirement” of the Delaware appraisal statute. The Vice Chancellor, granting summary judgment in favor of Dell, Inc., held that the funds seeking appraisal of almost one million Dell shares (acquired by them after announcement of the Dell going-private transaction) had not met the Continuous Holder Requirement and so had lost their right to appraisal.

Four Takeaways from Proxy Season 2015

Posted by Ann Yerger, EY Center for Board Matters, Ernst & Young LLP, on

Tuesday, July 14, 2015

Board composition, Boards of Directors, Corporate Social Responsibility, Engagement, Environmental disclosure, Hedge funds, Institutional Investors, Proxy access, Proxy season, Shareholder activism, Shareholder voting
More from: Ann Yerger, EY

Ann Yerger is an executive director at the EY Center for Board Matters at Ernst & Young LLP. The following post is based on a report from the EY Center for Board Matters.

As the 2015 proxy season concludes, some key developments stand out. Most significantly, a widespread investor campaign for proxy access ignited the season, making proxy access the defining governance topic of 2015.

The campaign for proxy access is closely tied to the increasing investor scrutiny of board composition and accountability, and yet—at the same time—the number of votes opposing director nominees is the lowest in recent years.

Also, the number of shareholder proposal submissions remains high, despite the fact that ongoing dialogue between large companies and their shareholders on governance topics is now mainstream. These developments are occurring against a backdrop of increased hedge fund activism, which continues to keep boards on alert.

Money Market Mutual Funds: Stress Testing & New Regulatory Requirements

Posted by Dr. Jeremy Berkowitz, NERA, on

Tuesday, July 14, 2015

FSOC, Liquidity, Money market funds, Mutual funds, SEC, SEC rulemaking, Securities regulation, Shocks, Stress tests
More from: Jeremy Berkowitz, Jordan Milev, Patrick Conroy, NERA

Jeremy Berkowitz is Vice President in NERA’s Global Securities and Finance Practice. This post is based on a NERA publication authored by Dr. Berkowitz, Patrick E. Conroy, and Jordan Milev.

In July 2014, the Securities and Exchange Commission (SEC) adopted a package of reforms to the regulatory framework governing money market mutual funds. The SEC believes the new rules will enhance the safety and soundness of the money market fund industry during periods of market distress, when redemptions in some funds may increase substantially. [1]

The new rules require institutional prime (general purpose) and institutional municipal money market mutual funds to price and transact at a “floating” net asset value (NAV), permit certain money market mutual funds to charge liquidity fees, and allow the use of redemption gates to temporarily halt withdrawals during periods of stress.
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The Next Frontier for Boards, Oversight of Risk Culture

Posted by Matteo Tonello, The Conference Board, on

Monday, July 13, 2015

Accountability, Boards of Directors, Corporate culture, FSB, Internal auditors, Internal control, International governance, Risk, Risk management, Risk oversight, UK
More from: Matteo Tonello, Parveen Gupta, Tim Leech, The Conference Board

Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Parveen P. Gupta and Tim Leech. The complete publication, including footnotes and Appendix, is available here.

Over the past 15 years expectations for board oversight have skyrocketed. In 2002 the Sarbanes-Oxley Act put the spotlight on board oversight of ﬁnancial reporting. The 2008 global ﬁnancial crisis focused regulatory attention on the need to improve board oversight of management’s risk appetite and tolerance. Most recently, in the wake of a number of high-proﬁle personal data breaches, questions are being asked about board oversight of cyber-security, the newest risk threatening companies’ long term success. This post provides a primer on the next frontier for boards: oversight of “risk culture.”

Weak “risk culture” has been diagnosed as the root cause of many large and, in the words of the Securities and Exchange Commission Chair Mary Jo White, “egregious” corporate governance failures. Deficient risk and control management processes, IT security, and unreliable financial reporting are increasingly seen as mere symptoms of a “bad” or “deficient” risk culture. The new challenge that corporate directors face is how to diagnose and oversee the company’s risk culture and what actions to take if it is found to be deficient.

Illegality and Hardball in Government’s Nationalization of AIG

Posted by Lawrence A. Cunningham, George Washington University, on

Monday, July 13, 2015

AIG, Bailouts, Bankruptcy, Distressed companies, Financial crisis, TARP, Treasury Department, Usury
More from: Lawrence Cunningham

Lawrence A. Cunningham is Henry St. George Tucker III Research Professor of Law at George Washington University Law School. This post builds on Professor Cunningham’s recent article published in The National Interest, available here. Professor Cunningham is co-author with Hank Greenberg, former chairman and CEO of American International Group (AIG), of The AIG Story.

Suppose your bank offers to lend you money to buy a home, and even if you repaid the loan, the bank would retain ownership of your home as well. Would you sign up? Would you expect a business organization to accept equivalent loan-plus-forfeiture terms? I don’t think so but that is what the U.S. government’s “bailout” of American International Group (AIG) involved and one reason a federal judge has declared it an illegal exaction in violation of the Constitution of the United States.

In the fall of 2008, Treasury Secretary Henry Paulson and New York Federal Reserve President Timothy Geithner demanded the permanent surrender of nearly an 80% stake in AIG as “security” for a usurious loan. They then fired AIG’s CEO, replaced its board members, took control of all the company’s affairs, and divested nearly half the company’s worldwide assets in a series of fire sales—all while using subterfuge and deception to avoid a shareholder vote the officials agreed was required and promised would be held.

Basel III Liquidity Framework: Final Net Stable Funding Ratio Disclosure Standards

Posted by Andrew R. Gladin, Sullivan & Cromwell LLP, on

Sunday, July 12, 2015

Banks, Basel Committee, Capital requirements, Disclosure, Financial institutions, Financial regulation, Foreign banks, Liquidity, Risk
More from: Andrea Tokheim, Andrew Gladin, Christopher Nenno, Mark Welshimer, Sullivan & Cromwell

Andrew R. Gladin is a partner in the Financial Services and Corporate and Finance Groups at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication authored by Mr. Gladin, Mark J. Welshimer, Andrea R. Tokheim, and Christopher F. Nenno.

Last week, the Basel Committee on Banking Supervision (the “Basel Committee”) published final standards (the “Final Disclosure Standards”) for the disclosure of information relating to banks’ net stable funding ratio (the “NSFR”) calculations. [1] The Final Disclosure Standards were adopted substantially as proposed in December 2014. [2]

The NSFR, which the Basel Committee adopted in final form in October 2014, [3] is one of the key standards, along with the liquidity coverage ratio (the “LCR”), [4] introduced by the Basel Committee to strengthen liquidity risk management as part of the Basel III framework. The NSFR is designed to promote more medium- and long-term funding of the assets and activities of banks over a one-year time horizon. The Final Disclosure Standards, in turn, are part of the broader so-called Pillar 3 disclosure regime (along with disclosure requirements in capital rules as well as the LCR-related disclosure framework) and are designed to “improve the transparency of regulatory funding …, enhance market discipline, and reduce uncertainty in the markets as the NSFR is implemented.” [5]

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