Monthly Archives: July 2016

NYS Banking Regulator’s Requirements for Transaction Monitoring and Filtering

Reena Agrawal Sahni is a partner in the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling publication.

On June 30, 2016, the New York State Department of Financial Services (“NYSDFS”) adopted a final regulation outlining the attributes of a risk-based transaction monitoring and filtering program that certain New York State-licensed institutions will be required to maintain (the “Final Rule”). [1] The Final Rule includes several notable departures from the proposal that was issued by the NYSDFS on December 1, 2015 (the “Proposed Rule”). The Final Rule, which is the first significant rulemaking to be finalized under the direction of the new Superintendent of Financial Services, Maria T. Vullo, is another example of the NYSDFS asserting its role in establishing standards for compliance by banks with anti-money laundering, terrorist financing and sanctions laws.


The Value of Creditor Control in Corporate Bonds

Oğuzhan Karakaş is an Assistant Professor of Finance at Boston College. This post is based on an article authored by Professor Karakaş; Peter Feldhütter, Assistant Professor of Finance at London Business School; and Edith Hotchkiss, Associate Professor of Finance at Boston College.

In our article, The Value of Creditor Control in Corporate Bonds, recently published in the Journal of Financial Economics, we introduce a measure that captures the premium in bond prices that is due to the value of creditor control. We estimate the premium as the difference in the bond price and an equivalent synthetic bond without control rights that is constructed using credit default swaps (CDS) contracts. The main insight for the methodology is that CDS prices reflect the cash flows of the underlying bonds, but not the control rights. The premium we introduce captures the marginal value of control in a bond until the bond matures or—in the case of a payment default or bankruptcy—until the CDS contracts for that issuer settle, and hence is a lower bound for the control premium.


SEC Proposed Rule on Continuity Planning by Registered Investment Advisers

Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on a Weil publication by Mr. Ferrillo, David Wohl, Venera Ziegler, and Gregory Denis.

On June 28, 2016, the Securities and Exchange Commission (the SEC) proposed Rule 206(4)-4 under the Investment Advisers Act of 1940 that would require each SEC-registered investment adviser to adopt, implement and annually review a written business continuity and transition plan to address risks related to potential significant disruptions in, or termination of, the adviser’s business. The SEC noted in its release that as part of their fiduciary duty, advisers are obligated to take steps to protect client interests from being placed at risk as a result of the adviser’s inability to provide advisory services. The proposed rule illustrates the SEC’s continued focus on cybersecurity and systems issues following its adoption in 2014 of Regulation SCI, which requires stock and options exchanges, clearing agencies, other securities market participants and certain self-regulatory organizations to establish written policies and procedures reasonably designed to ensure that their systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets.


2016 Mid-Year Securities Litigation Update

Monica K. Loseman is a partner at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Ms. Loseman, Jonathan C. Dickey, and Mark A. Perry and is part of the Delaware law series; links to other posts in the series are available here.

The first half of 2016 yielded several important developments in securities litigation, including federal appellate decisions applying Omnicare and Halliburton II, as well as Delaware court opinions regarding the application of collateral estoppel to parallel cases previously dismissed based on demand futility, a price-increase for dissenting stockholders in a management-led buyout, and yet further developments on disclosure-only settlements. This post highlights what you most need to know in securities litigation developments and trends for the first half of 2016:


Refreshing the Board

Steven B. Stokdyk and Joel H. Trotter are global Co-Chairs of the Public Company Representation Practice Group at Latham & Watkins LLP. This post is based on an article originally featured in the NACD Directorship magazine by Mr. Stokdyk, Mr. Trotter, and Catherine Bellah Keller.

Recent press coverage and updated proxy voting guidelines suggest that board refreshment is a topic on fire. It’s a subject that inspires strong feelings and competing perspectives on director tenure or board diversity—or both. Yet, these incendiary dialogues scarcely help a board in considering what is best for its company and shareholders. We suggest boards step back and review their composition in light of the company’s goals and needs in three areas.

Board Self-Assessments

As part of their regular self-assessment process, public company boards should consider their current composition and the unique contributions of each current or prospective director. For example, boards may try to recruit directors with specialized experience, such as in technology or international operations, as well as directors whose experience is not represented or is underrepresented on the board. Indeed, Securities and Exchange Commission regulations require companies to disclose diversity considerations in the director nomination process. Mixing new and longer-tenured directors with different skill sets may add valuable perspectives and knowledge to a board.


Creditors’ Incentives to Monitor: The Impact of CEO Compensation Structure

Francesco Vallascas is Chair in Banking at Leeds University Business School. This post is based on a recent paper by Professor Vallascas; Borja Amor-Tapia, Professor at Universidad de León; Paula Castro, Professor at Universidad de León; Kevin Keasey, Head of the Accounting and Finance Department at Leeds University Business School; and Maria T. Tascón at Universidad de León.

The presence of equity-based incentives in executive pay, by linking the value of compensation to stock return volatility and to stock price, are seen as aligning the interests of managers with those of shareholders (Brockman et al. [2010]; Coles et al. [2006]; Dow and Raposo [2005]; Lo [2003]).

Another effect of these incentives is, however, the potential increase in the agency costs of debt related to asset substitution problems, with managers being tempted to replace safe activities with riskier ones, thus transferring wealth from debtholders to shareholders. Nevertheless, creditors understand the risk-taking incentives in executive pay and the related potential negative effects for their wealth. In this regard, Brockman et al. [2010] show that the debt maturity shortens when the risk-taking incentives in CEO pay are larger.


Weekly Roundup: July 22–July 28, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 22–July 28, 2016.

Bail-in and Market Stabilization

Is Your Company at Risk for an Activist Attack?

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop and Aaron Gilcreast. 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), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The numbers are sobering: nine of the Fortune-100 and 38 of the Fortune-500 companies dealt with an activist campaign in 2015. [1] And of the latter group, four were targeted more than once. [2] But hedge fund activism is not confined to only the largest public companies—all businesses, along with every industry and part of the world have become fair game.

Activists’ reach is growing wider, they’re getting bolder, and they are wielding even greater war chests. With $173 billion in assets under their management (AUM), [3] hedge fund activists are constantly looking for opportunities to profit from your blind spots.


Are Public Companies Spending Too Little on Law Firms?

Elisabeth de Fontenay is an Associate Professor at Duke University School of Law. This post is based on a recent article authored by Professor de Fontenay.

For at least the past decade, U.S. companies have been keenly focused on reducing their expenditures on outside counsel. Many have taken innovative and drastic actions to that end, such as negotiating alternative fee arrangements or making law firms compete for legal work in electronic auctions. Indeed, the conventional view remains that corporate clients are overpaying for legal services. But is that actually the case? One option for reducing legal expenditures is simply to engage a less expensive law firm. Yet surprisingly, there has been little research on whether corporate clients’ choice of law firms is value-maximizing.

In a recent article, Agency Costs in Law-Firm Selection: Are Companies Under-Spending on Counsel? (forthcoming in the Capital Markets Law Journal), I provide evidence suggesting that U.S. public companies may be selecting lower-quality counsel for their transactional work than is warranted. Specifically, using a large sample of syndicated loans, I find that public-company borrowers tend to engage lower-quality law firms than do private equity firms, for the very same types of financing transactions and controlling for key deal characteristics. Admittedly, some of this discrepancy in law-firm choice is likely attributable to value-maximizing behavior by both private equity firms and public companies. Yet it also raises the possibility that agency and other information problems within public companies are distorting their choice of counsel.

The Operational Consequences of Private Equity Buyouts

Shai Bernstein is Assistant Professor of Finance at Stanford University. This post is based on an article authored by Professor Bernstein and Albert Sheen, Assistant Professor of Finance at the University of Oregon.

The private equity asset class has grown tremendously over the last thirty years, reaching $1.6 trillion in global transaction value between the years 2005 to 2007. At the same time, private equity (“PE”) firms generate much controversy. Critics argue that PE transactions are largely financial engineering schemes, burdening portfolio companies with high leverage and an excessive focus on short-term financial goals and cost cutting, which may adversely affect customers, employees, and long-term firm viability. In contrast, proponents argue that leveraged buyouts provide a superior governance form leading to better managed companies by mitigating management agency problems through the disciplinary role of debt, concentrated and active ownership, and high-powered managerial incentives which can lead to improved operations.


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