Monthly Archives: September 2016

AML Obligations of Broker-Dealers

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg, Stephen G. Topetzes, Vincente L. Martinez and Joseph A. Valenti.

Since 2002, as part of their anti-money laundering (“AML”) responsibilities, broker/dealers have had a gatekeeper-like obligation to monitor customers for “suspicious” activities and to report those activities to the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). In the words of the Financial Industry Regulatory Authority (“FINRA”), “Just as firms have a primary responsibility to supervise their associated persons and ensure that they are not involved in fraudulent schemes, firms must also be vigilant regarding their customers.” [1]


A Unified Theory of Insider Trading Law

Zachary J. Gubler is Professor of Law at the Sandra Day O’Connor College of Law, Arizona State University. This post is based on a forthcoming article by Professor Gubler.

In the United States, insider trading law is premised on an anti-fraud statute—Section 10(b) of the Securities Exchange Act of 1934—and therefore liability turns on theories about why insider trading is fraudulent. For nearly forty years, courts have relied on the “classical theory” to explain the classic case of insider trading, where a corporate insider uses information derived from his corporate position to trade in his own corporation’s stock. Drawing on the common law of fraudulent non-disclosure, the classical theory provides that insider trading is fraudulent when the trader owes fiduciary duties to the party on the other side of the trade. In A Unified Theory of Insider Trading Law, forthcoming in the Georgetown Law Journal, I argue that the classical theory of insider trading has outworn its usefulness because it fails to do what a theory must, which is explain settled law and provide answers to unsettled law that are intuitively appealing. Instead, courts should replace the classical theory with an alternative, the misappropriation theory, which courts currently limit to cases involving insider trading by “outsiders”—non-employees of the corporation whose securities form the basis of the trade. The result would be a single, unified theory of insider trading law that both explains what courts do and yields intuitively compelling results.


Weekly Roundup: September 23–September 29, 2016

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This roundup contains a collection of the posts published on the Forum during the week of September 23–September 29, 2016

Preparing for the 2017 US Proxy and Annual Reporting Season

Laura D. Richman is counsel and Michael L. Hermsen is partner at Mayer Brown LLP. This post is based on a Mayer Brown publication.

With autumn just beginning, the proxy and annual reporting season may seem a long way off. However, in light of the amount of work and planning that goes into the proxy statement, annual report and annual meeting of shareholders, this is the ideal time to begin preparations. This post provides an overview of key issues that companies should consider as they get ready for the upcoming 2017 proxy and annual reporting season.


90 Cents of Every “Pay-for-Performance” Dollar are Paid for Luck

Moshe Levy is a professor at the Hebrew University of Jerusalem, Jerusalem School of Business Administration. This post is based on a recent paper by Professor Levy. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

It is well-known that CEOs are sometimes rewarded for luck. The classic example is that of oil company CEOs whose compensations increase with the price of oil (Bertrand and Mullainathan 2001). This has been show to hold for other factors that are both outside the control of the manager, and observable to the boards who grant compensation, yet rarely adjust it for these factors. My paper is an attempt to estimate the magnitude of the pay-for-luck component in option-based compensation. How much of the “pay-for-performance” compensation is actually paid for luck?


21st Century Markets Need 21st Century Regulation

J. Christopher Giancarlo is a Commissioner at the U.S. Commodity Futures Trading Commission (CFTC). This post is based upon Commissioner Giancarlo’s recent address to the American Enterprise Institute; the complete publication, including footnotes, is available here. The views expressed in this post are those of Mr. Giancarlo and do not necessarily reflect those of the CFTC, his fellow CFTC commissioners, or the CFTC staff.

Today [September 21, 2016], I want to talk about the ongoing transformation of the world’s trading markets from analog to digital, from human to algorithmic trading and from stand-alone centers to seamless trading webs. I will describe how market regulation by the CFTC, particularly, and other agencies, generally, has not kept pace with this transformation and why that curtails its effectiveness in overseeing the safety and soundness of contemporary markets. I will outline a forward-looking agenda for the CFTC and other market regulators that supports America’s vital national interest in maintaining the world’s deepest, most durable and most vibrant capital and risk transfer markets in the algorithmic, digital world of the 21st century.


Do Heterogeneous Firms Select Their Right “Size” of Corporate Governance Arrangements?

Michal Barzuza is Caddell & Chapman Professor of Law at University of Virginia School of Law. This post is based on her recent paper.

One-size-does-not-fit-all in corporate law and governance. But do firms really choose their right “size” of governance as conventional wisdom holds? That one-size-does-not-fit-all is frequently used to object mandatory corporate law and other sorts of intervention, such as proxy advisory firms’ voting recommendations, which presumably interfere with firms’ tailoring governance arrangements to their specific needs. Surprisingly, this assumption has not been systematically assessed against available evidence, incorporated rigorously to corporate law theory, or thought through carefully.

My paper argues that not only that firms do not always choose their right size, but firms that need governance the most are frequently less likely to self-constraint (Resisting Firms). The need for governance arises when alternative constrains, such as disciplining market forces, are weak. The lack of alternative constraints, however, could be the very reason why managers might be reluctant to voluntarily adopt these terms. Furthermore, if differences among firms are not observable by outsiders, IPO pricing might not provide sufficient incentives either. Governance terms should add high premium to firms that face weak market forces. If, however, managers have more information than investors on the particular constraints they face, investors would pay only an average value for governance terms. As a result, due to adverse selection at the IPO, firms that could benefit most from governance constraints might not adopt them. This paper’s first contribution thus is to develop a comprehensive theory of corporate law and heterogeneity.


Hostile Resistance to Hedge Fund Activism

Nicole M. Boyson is Associate Professor of Finance and Pegaret Pichler is Assistant Professor of Finance at Northeastern University’s D’Amore-McKim School of Business. This post is based on a recent paper by Professors Boyson and Pichler. 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 Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Numerous academic studies present evidence that hedge fund activism campaigns can lead to both short- and long-run improvements in the values of target firms. Despite this evidence, managers of target firms do not typically embrace the appearance of an activist, perhaps because dealing with activists is time consuming and can lead to disruptive operating changes or even takeovers. In our paper, Hostile Resistance to Hedge Fund Activism, available on SSRN, we examine defensive actions that target firms take in response to activism. We find that most actions taken to resist hedge fund activists, such as poison pill adoption, are identical to actions firms take in response to takeover threats. A poison pill states that if any shareholder, or group of shareholders, acquires more than a specified trigger percent of shares (typically 10 to 20%), all shareholders, excluding the triggering shareholders, may buy deeply discounted shares. Poison pills were originally designed to force prospective acquirers to negotiate with the board of a firm, rather than conduct a hostile takeover. A perhaps less well known aspect of the poison pill is that it also inhibits communication between large shareholders, since the stakes of individual shareholders who are perceived by the firm to be working together as a group can be aggregated for the purposes of determining whether the pill will be triggered. Other resistance measures taken by target firms, such as making it harder for shareholders to act by written consent and harder to call special meetings, also interfere with activists’ ability to coordinate with other shareholders to accomplish activism objectives.


The Federal Reserve’s De-Risking of Merchant Banking and Commodities Activities

Arthur S. Long is a partner and James O. Springer is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Long and Mr. Springer.

On September 8, 2016, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued the joint report (Report) on bank activities and investments required by Section 620 of the Dodd-Frank Act. The purpose of the Section 620 Report is to identify bank activities and investments that could pose a threat to the safety and soundness of banking entities and the U.S financial system.

In the Federal Reserve’s part of the Report, it made two shocking recommendations—that Congress repeal two sections of the Bank Holding Company Act of 1956 (BHC Act) added by the Gramm-Leach-Bliley Act:

  • the Merchant Banking Authority contained in Section 4(k)(4)(H) of the BHC Act, and
  • the commodity activity grandfather provision contained in Section 4(o) of the BHC Act.


Costs and Benefits of Concentrated Ownership and Control

Albert H. Choi is Albert C. BeVier Research Professor and Professor of Law at the University of Virginia Law School and Visiting Professor of Law at Columbia Law School. This post is based on a recent paper by Professor Choi.

Corporate ownership structure with a controlling shareholder is prevalent throughout the world. According to one study, more than two-thirds of all publicly-traded companies in East Asia have a controlling shareholder. Even in the US, not only do some of the largest public companies, such as Walmart, Ford, and Berkshire Hathaway, have controlling shareholders, concentrated ownership using dual class stock has become popular recently, as evidenced by the successful initial public offerings of companies, such as Google and Facebook. Corporate law and finance scholars have typically treated the presence of a controlling shareholder as the source of bad corporate governance and the result of bad corporate law. Controlling shareholders are known to abuse their power and extract “private benefits of control” at the expense of the minority shareholders. Examples include entering into conflicts-of-interest transactions, misusing corporate resources for personal ends, expropriating corporate opportunities, pursuing pet projects, and building a conglomerate empire. Not surprisingly, much of the existing scholarship espouses the goal of curbing the extraction of private benefits and protecting the minority shareholders. Particularly with respect to legal instruments that enhance a controller’s power, such as dual class stock, stock pyramids, and cross ownership, proposals have been made to ban them altogether or substantially limit their use.


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