Monthly Archives: April 2016

Rollout of Proposed Rule on Incentive Pay

This post is based on a Sullivan & Cromwell LLP publication authored by Heather L. Coleman, Marc TrevinoGlen T. Schleyer, and Amanda K. Toy. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann; The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann; How to Fix Bankers’ Pay by Lucian Bebchuk; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried.

[On April 21, 2016], the National Credit Union Administration issued a notice of proposed rulemaking for a new interagency rule on incentive-based compensation that applies to financial institutions with consolidated assets of at least $1 billion. This new proposal replaces one originally issued 5 years ago in the first half of 2011. The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency and the Securities and Exchange Commission are all expected to propose the same new rule.


SEC Scrutiny of Secondary Market Trading

Susan S. Muck and Michael S. Dicke are partners in the Securities Litigation practice of Fenwick & West LLP. This post is based on a Fenwick publication by Ms. Muck and Mr. Dicke.

In an unprecedented one-day blitz, the Chair of the Securities and Exchange Commission was joined by the SEC Enforcement Director in events in Silicon Valley and San Francisco on March 31 focused on one message: the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors. Dubbed the “Silicon Valley Initiative,” the senior officials emphasized that although the SEC wants to encourage capital formation for innovative Bay Area companies, because they play such a critical role in our economy and our markets, the SEC expects even private companies to embrace and demonstrate sound corporate governance.


The Governance Gap in Fragmented Markets

Yesha Yadav is an Associate Professor of Law of Vanderbilt Law School. This post is based on an article authored by Professor Yadav.

The firestorm of controversy surrounding IEX’s efforts to gain recognition as a national exchange showcases the enormous economic and popular power of exchanges in the marketplace. [1] Exchanges have long offered an organized space for companies to list their securities and for traders to transact in the risk of these securities with one another, ultimately helping investors direct money towards productive, profitable businesses. Today, major exchanges like the NYSE and the NASDAQ intermediate billions of dollars in trades daily and list the securities of companies collectively valued in the tens of trillions. [2]


Key Points from the OCC’s Financial Innovation Paper

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Haskell Garfinkel, Adam Gilbert, and Armen Meyer.

The Office of the Comptroller of the Currency (OCC) released its highly anticipated white paper on financial technology innovation last week. The agency offered few details regarding its supervisory approach, but it did tip its hand regarding its areas of interest, which include banks’ risk management practices, relationships with third parties, and consumer protection and access. The OCC has historically sought to promote expansion of the banking industry through innovation and improved competitiveness, so it is no surprise that it is the first US banking regulator to formally act. [1]

Brexit: Possible Options and Impact

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds, Thomas Donegan, and James Webber. The complete publication, including footnotes and annex, is available here.

The UK is holding a referendum on 23 June 2016 to decide whether or not to remain a member of the European Union. There seems to be a disconnect between some aspects of public discourse on the vote and the actual effect of an in or out vote. A vote to leave would have numerous possible legal consequences but, if the UK rejoins the EEA, the passporting regime for financial institutions and “free movement of persons” would continue. A vote to remain would also kick off a process to change the UK’s relationship with the rest of the EU. This post discusses potential legal issues arising from a Brexit.


Dieckman v. Regency: Limited Partnerships and Fiduciary Duties

Robert C. Schwenkel is a partner in the M&A and Private Equity Practices of Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Schwenkel, Warren S. de Wied, Steven Epstein, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

In Dieckman v. Regency (March 29, 2016), the Court of Chancery again confirmed that the contractual arrangements set forth in a limited partnership agreement will define the respective rights and obligations of the partners, including with respect to the general partner’s fiduciary duties (and related duty of disclosure) in connection with affiliated transactions. The decision continues the Delaware courts’ general approach of providing the highest level of protection against limited partners’ challenges to transactions between a master limited partnership and its general partner or the general partners’ affiliates—so long as:

  • the partnership agreement clearly limits or eliminates fiduciary duties and provides a clear process for approval of the transaction (a so-called “safe harbor,” which typically involves approval by a conflicts committee of the general partner); and
  • the process established in the partnership agreement is followed.


Endogenous Legal Traditions and Economic Outcomes

Carmine Guerriero is Assistant Professor of Economics at the University of Amsterdam. This post is based on a recent article by Professor Guerriero.

The “legal origins” theory claims that the two main legal traditions or origins, civil law and common law, crucially shape lawmaking and dispute adjudication and have not been reformed after the initial exogenous transplantation by Europeans. [1] Therefore, they affect economic outcomes to date. In particular, countries that received common law enjoy today “(a) improved financial development […], (b) […] better functioning labor markets […], and (c) less formalized and more independent judicial systems” [La Porta et al. 2008, p. 298].

Recent contributions, however, have criticized the ideas that transplanted legal traditions remained intact (Roe, 2004) and can be measured through legal origins dummies (Rosenthal and Voeten, 2007). Inspired by these studies, Guerriero (2016a) documents that in a cross-section of 155 transplants, which are countries that received their legal tradition externally, 25 reformed their lawmaking institution and 95 reformed at least one among their lawmaking and adjudication institutions. To illustrate, in countries that inherited statute law, reforms towards case law have been more likely the largest preference, and in particular both ethnic and genetic, diversity is and reforms towards a pure common law tradition, which is the mix of case law and some discretion in adjudication, are found where the quality of political institutions is the lowest. Symmetrically, in countries in which case law was transplanted, reforms towards a pure civil law tradition, which is the mix of statute law and bright-line adjudication rules, are found where the quality of political institutions is the highest. This evidence is consistent with the idea that appellate judges’ offsetting biases make common law unbiased but volatile and thus more efficient than the certain civil law only when the latter is sufficiently distorted by special interests, i.e., if preferences are sufficiently heterogeneous and/or the political process sufficiently inefficient.


Weekly Roundup: April 15–April 21, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 15, 2016 to April 21, 2016.

The Sovereign-Bank Diabolic Loop and ESBies

Reallocating State Pension Liabilities to Cities and Beyond

In re EZCORP: Entire Fairness Framework and Independent Boards

Warren S. de Wied is partner and member of the mergers & acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. de Wied, Steven Epstein, Philip Richter, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

When the board of a Delaware corporation has established—and follows—specific policies and procedures for approval of related party agreements, the directors should be mindful that a related party agreement, if challenged, would nonetheless be subject to the court’s “entire fairness” framework of review.

In re EZCORP Inc. Consulting Agreement Derivative Litigation (Jan. 25, 2016) serves as a reminder that the court generally will review claims alleging fiduciary breach relating to agreements between a corporation and its controller under the “entire fairness” framework (rather than the more deferential business judgment rule). This will be the case even for agreements that relate to business transactions other than a squeeze-out merger and even when the agreements have been approved by independent and disinterested directors through a board-established process for the consideration of related party transactions. While not the subject of the decision, EZCORP also serves as a reminder that, in the context of initial public offerings and spin-offs, proper advance planning should significantly reduce or even eliminate any breach of fiduciary duty issues with respect to agreements between the newco (i.e., the corporation that will become public) and its controller.


Department of Labor’s Final Rule on “Fiduciary” Definition

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 by Ms. Nazareth, Jeffrey P. CrandallEdmond T. FitzGerald, Kyoko Takahashi LinJean M. McLoughlin, and Lanny A. Schwartz.

On April 6, 2016, the U.S. Department of Labor (the “DOL”) issued final regulations expanding the definition of a “fiduciary” with respect to pension and retirement plans, IRAs and other accounts under ERISA and the Internal Revenue Code. The regulatory package (collectively, the “Final Rule”) follows nearly one year after the DOL’s proposed regulation (the “Proposed Rule”). [1] Similar to the Proposed Rule, the Final Rule:


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