Yearly Archives: 2015

SEC and CFTC Turn to Swaps and Security-Based Swaps Enforcement

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Sunday, July 5, 2015
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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. This post is based on a Davis Polk client memorandum.

The week of June 15, 2015 saw two of the first publicly announced enforcement actions brought by the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) to enforce security-based swap and swap regulatory requirements under Title VII of the Dodd-Frank Act. The SEC accepted an offer of settlement from a web-based “exchange” for, among other things, offering security-based swaps to retail investors in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. In a separate action, the CFTC obtained a federal court order against a Kansas City man in a case alleging violations of the antifraud provisions of the swap dealer external business conduct rules in Part 23 of the CFTC regulations. [1] Swap dealers and security-based swap market participants may wish to consider these orders and the agencies’ approach to enforcement as firms further develop, review and update their compliance programs.

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Fed’s Volcker Relief for Foreign Funds

Posted by Dan Ryan, PricewaterhouseCoopers, on
Saturday, July 4, 2015
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Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, David Harpest, Scott Levine, and Armen Meyer.

On Friday, June 12, 2015, the Federal Reserve (Fed) began addressing the question of whether foreign funds should be considered “banking entities” under the Bank Holding Company Act (BHCA), and therefore be subject to the Volcker Rule’s proprietary trading restriction. The Fed’s guidance (provided in the form of a “Frequently Asked Question,” or FAQ) clarifies that foreign public funds (e.g., UCITS [1]) will not be considered banking entities merely due to their boards being controlled by an affiliate (i.e., an affiliate within the BHC capable of holding a majority of a fund’s director seats). [2]

However, with only weeks to go before the July 21, 2015 deadline, the FAQ does not resolve two other questions that have vexed foreign banks regarding the application of “banking entity” to foreign funds. First, the board control provision still applies to foreign private funds (i.e., foreign funds that are privately offered to institutional or high net worth investors in a manner similar to US hedge fund offerings). Second, another BHCA provision which establishes control when 25% or more of a fund’s voting shares are owned by an affiliate still applies to foreign private funds, and to a lesser extent to foreign public funds.

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SEC Proposes Rules on Mandatory Clawback Policies

Posted by Renata J. Ferrari, Ropes & Gray LLP, on
Friday, July 3, 2015
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Renata J. Ferrari is partner tax & benefits department at Ropes & Gray LLP. This post is based on a Ropes & Gray Alert.

On July 1, 2015, the Securities and Exchange Commission proposed rules to require issuers of securities listed on U.S. stock exchanges to adopt and enforce clawback policies applicable to incentive-based compensation received by current and former executives in the three-year period preceding the date the issuer is required to prepare an accounting restatement due to material noncompliance with financial reporting requirements. The proposed rules would implement the “no fault” clawback rule requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Section 10D of the Securities Exchange Act of 1934, as amended).

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Clawbacks of Erroneously Awarded Compensation

Posted by Michael S. Piwowar, Commissioner, U.S. Securities and Exchange Commission, on
Thursday, July 2, 2015
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Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at a recent open meeting of the SEC; the full text is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

A few months ago, the baseball world celebrated the 90th birthday of Yogi Berra, the legendary former catcher and manager for the New York Yankees. Yogi Berra is well-known for his witty comments, often referred to as “Yogi-isms.” [1] Several come to mind today, as we consider another rulemaking related to executive compensation.

“Pair up in threes.”

Following our earlier efforts on hedging and pay versus performance, today’s proposal is the third relating to executive compensation that we have considered in 2015. The Commission has yet again spent significant time and resources on a provision inserted into the Dodd-Frank Act that has nothing to do with the origins of the financial crisis and affects Main Street businesses that are not even part of the financial services sector. Why does the Commission continue to prioritize our agenda with these types of issues, when rulemakings that are directly related to the financial crisis remain unaddressed?

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Does the SEC’s New “Compensation Actually Paid” Help Shareholders?

Posted by Ira Kay and Blaine Martin, Pay Governance LLC, on
Thursday, July 2, 2015
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Ira Kay is a Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on a Pay Governance memorandum.

On April 29, 2015, the SEC released proposed rules on public company pay‐for‐performance disclosure mandated under the Dodd‐Frank Act. Pay Governance has analyzed the proposed rules and the implications for our clients’ proxy disclosures and pay‐for‐performance explanations to investors. We are concerned about the validity of describing a company’s pay‐for‐performance alignment using the disclosure mandated under the SEC’s proposed rules, and its implications for Say on Pay votes.

The disclosure of “compensation actually paid” (CAP) as defined by the SEC may prove helpful for investors and other outside parties to estimate the amount of compensation earned by executives, in contrast to the compensation opportunity as disclosed in the Summary Compensation Table (SCT). However, the SEC’s proposed rules are explicitly intended to compare executive compensation earned with company stock performance (TSR), per the relevant section of the Dodd‐Frank legislation. [1] If the rules are intended to help shareholders understand the linkage between executive compensation programs and stock performance, then the technical nuance of the proposed methodology may be problematic.

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Making Executive Compensation More Accountable

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Wednesday, July 1, 2015
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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 remarks at a recent open meeting of the SEC; 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. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

When it comes to compensation, Americans believe you should earn your money. They also believe, just as strongly, that you should not keep what you did not earn. It’s fundamental to our values. However, when companies have to restate their financial statements because they violated applicable reporting requirements, their executives may not be required to reimburse any incentive-based compensation that was erroneously paid. In other words, they get to keep what they never should have received in the first place.

And, quite often, we are talking about very large amounts. In today’s corporate world, many executives are earning eye-catching sums. Much of the increase in executive compensation is commonly attributed to the impact of incentive-based compensation, including equity and other performance-based compensation plans.

Incentive-based compensation plans are intended to align the interests of company managers and shareholders. However, when a company is required to issue a restatement, and when its executives have been paid compensation based on inflated financial results, this alignment disappears. In such cases, it is only fair that these erroneously awarded payments be recovered.

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Public Pension Funds’ Shareholder-Proposal Activism

Posted by James R. Copland, Manhattan Institute, on
Wednesday, July 1, 2015
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James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy. The following post is based on a report from the Proxy Monitor project; the complete publication, including footnotes, is available here.

America’s largest publicly traded companies are facing more shareholder proposals in 2015, driven principally by a “proxy access” campaign led by New York City Comptroller Scott Stringer, who oversees the city’s $160 billion pension funds for public employees. Elected in 2013, Stringer has launched a Boardroom Accountability Project seeking, in part, proxy access, which grants shareholders with a certain percentage of a company’s outstanding shares the right to list a certain number of candidates for the company’s board of directors on the company’s proxy statement. As noted in an earlier finding, Comptroller Stringer’s proxy-access campaign has won substantial shareholder support at most companies where his proposal was introduced.

Although it is too soon to assess the impact of Comptroller Stringer’s push for proxy access, we can evaluate shareholder-proposal activism by state and municipal public employee pension funds in previous years. From 2006 to the present, state and municipal pension funds have sponsored 300 shareholder proposals at Fortune 250 companies. More than two-thirds of these were introduced by the pension funds for the public employees of New York City and State.

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The Role of Chief Compliance Officers Must be Supported

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Tuesday, June 30, 2015
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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 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.

Chief Compliance Officers of Investment Advisers (CCOs) play an important and crucial role in fostering integrity in the securities industry. They are responsible for making sure that their firms comply with the rules that apply to their operations. As part of that effort, CCOs typically work with senior corporate leadership to instill a culture of compliance, nurture an environment where employees understand the value of honesty and integrity, and encourage everyone to take compliance issues seriously. CCOs of investment advisers (as with CCOs of other regulated entities) also work to prevent violations from occurring in the first place and, thus, prevent violations from causing harm to the firm, its investors, and market participants. Given the vital role that CCOs play, they need to be supported. Simply stated, the Commission needs capable and honest CCOs to help protect investors and the integrity of the capital markets.

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Some Lessons from BlackRock, Vanguard and DuPont

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, June 30, 2015
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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. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

Recent statements by the CEOs of BlackRock and Vanguard rejecting activism and supporting investment for long-term value creation and their support of DuPont in its proxy fight with Trian, prompt the thought that activism is moving in-house at these and other major investors and a new paradigm for corporate governance and portfolio oversight is emerging.

An instructive statement by the investors is that they view a company’s directors as their agents; that they want to know the directors and have access to the directors; that they want their opinions heard; and that their relations with the company and their support for its management and board will depend on appropriate discussion of, and response to, their opinions.

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Amendments to the DGCL

Posted by Gregory P. Williams, Richards, Layton & Finger, on
Tuesday, June 30, 2015
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Gregory P. Williams is chair of the Corporate Department at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and 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.

Senate Bill 75, which contains several important amendments to the General Corporation Law of the State of Delaware (the “DGCL”), was signed by Delaware Governor Jack Markell on June 24, 2015. As described in this post, the 2015 legislation includes, among other things:

  • Prohibition on Fee Shifting. The legislation amends Sections 102 and 109 to prohibit “fee shifting” provisions in certificates of incorporation and bylaws of stock corporations.
  • Authorization of Delaware Forum Selection Clauses. The legislation adds new Section 115 to validate provisions in certificates of incorporation and bylaws that select the Delaware courts as the exclusive forum for “internal corporate claims.”
  • Flexibility in Stock and Option Issuances. The legislation amends Section 152 to provide greater flexibility in stock issuances, and makes corresponding amendments to Section 157 in respect of the authorization of rights and options to purchase stock.
  • Ratification of Defective Corporate Acts and Stock. The legislation amends Sections 204 and 205 to clarify and streamline the procedures for ratifying defective corporate acts and stock.
  • Public Benefit Corporations. The legislation amends Section 363 to loosen the restrictions on (x) an existing corporation becoming a “public benefit corporation” and (y) a public benefit corporation ceasing to be a public benefit corporation. It also adds a “market out” exception to the appraisal rights provided in Section 363(b) in connection with a corporation becoming a public benefit corporation.

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