Monthly Archives: September 2016

Political Connections and the Informativeness of Insider Trades

David F. Larcker is Professor of Accounting at Stanford Graduate School of Business (Corresponding Author); Daniel J. Taylor is Harold C. Stott Assistant Professor of Accounting at The Wharton School of the University of Pennsylvania. This post is based on a recent paper authored by Professor Larcker; Professor Taylor; Alan D. Jagolinzer, Associate Professor of Accounting at University of Colorado Leeds School of Business; and Gaizka Ormazabal, Assistant Professor of Accounting and Control at University of Navarra, IESE Business School.

Our paper examines the relation between political connections and informed trading by corporate insiders within the context of the 2007-2009 Financial Crisis. The unprecedented magnitude of government intervention during the Financial Crisis, the substantial impact of the intervention on firm value, and the political nature of the intervention provide a powerful setting to examine the relation between political connections and informed trading. It is now well known that deliberations on government intervention largely took place in private meetings between government officials and insiders at leading financial institutions; details regarding the application and qualification process for funds from the Troubled Asset Relief Program (TARP) were not publicly disclosed; and political connections appear to have played a role in the allocation of these funds (e.g., Duchin and Sosyura, 2012). Thus, politically connected insiders at leading financial institutions were in a position to be disproportionately privately informed about the scope of government intervention, how this intervention would affect their firm, and details of any forthcoming TARP monies.


The Regulation of Proxy Advisory Firms

Ken Bertsch is Executive Director of the Council of Institutional Investors. This post is based on a letter sent by the Council of Institutional Investors to the United States Senate Committee on Banking, Housing, and Urban Affairs, regarding the legislation of H.R. 5311, the Corporate Governance Reform and Transparency Act of 2016.

September 6, 2016

The Honorable Richard C. Shelby
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, DC 20510

The Honorable Sherrod Brown
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
Washington, DC 20510

Re:       Proposed Legislation Relating to Proxy Advisory Firms

Dear Mr. Chairman and Ranking Member Brown:

I am writing on behalf of the Council of Institutional Investors (CII), a nonpartisan, nonprofit association of employee benefit plans, foundations and endowments with combined assets under management exceeding $3 trillion. Our member funds include major long-term shareowners with a duty to protect the retirement savings of millions of workers and their families. Our associate members include a range of asset managers with more than $20 trillion in assets under management. [1]


How to Disclose a Cybersecurity Event: Recent Fortune 100 Experience

Luke Dembosky and Jeremy Feigelson are partners at Debevoise & Plimpton LLP. This post is based on a Debevoise & Plimpton publication by Mr. Dembosky, Mr. Feigelson, Jim PastorePaul M. RodelDavid M. BeckerBrett M. Novick, and Benjamin R. Pedersen.

Cybersecurity threats pose real challenges for any company, including the theft of valuable intellectual property and the reputational harm caused by losses of customer information. Attendant to the operational and financial challenges associated with cybersecurity threats, SEC reporting companies must also consider their disclosure obligations resulting from the risk or occurrence of data breaches or other cybersecurity events.

During the period from January 2013 through the third quarter 2015, there were 20 reported incidents of major data breaches or cybersecurity events at Fortune 100 companies. While this number is without doubt a fraction of the total cybersecurity events experienced at these and similar companies during that time, a survey of these cybersecurity events, and the manner in which each of the 18 affected companies responded in their SEC filings, is instructive. We have compiled a detailed database, comparing disclosure responses of these companies across a number of vectors in order to guide this complex process.


Beyond Dirks: Gratuitous Tipping and Insider Trading

Donna M. Nagy is the C. Ben Dutton Professor of Law and Executive Associate Dean at Indiana University Maurer School of Law–Bloomington. This post is based on Professor Nagy’s forthcoming article, to be published at 42 Journal of Corporation Law 1 (2016). Nagy also has written an introductory essay for the Stanford Law Review Online Symposium on Salman v. United States, which will be published a few days in advance of the October 5 Supreme Court argument.

Is an investment banker who gratuitously shared confidential merger-and-acquisition information with his brother—with no expectation of receiving any tangible benefit in return—guilty of securities fraud? And is the investment banker’s brother-in-law jointly liable for trading securities on the basis of what he knew to be gratuitous tips? The Supreme Court is poised to consider these questions on October 5, when it hears argument in Salman v. United States. It has been thirty-three years since the Court decided Dirks v. Securities and Exchange Commission (1983), the precedent that established a “personal benefit” test for joint tipper-tippee liability under the federal securities laws.


Do Firms Engage in Risk-Shifting? Empirical Evidence

Erik Gilje is Assistant Professor of Finance at The Wharton School of the University of Pennsylvania. This post is based on his recent paper.

How does corporate investment risk-taking change when a firm has high leverage or approaches distress? In high-leverage states of the world, equity holders benefit from successful outcomes of high-risk projects, while losses from unsuccessful outcomes are borne by debt holders. This asymmetry between who receives the gains and losses from a project could make it optimal for equity holders to maximize the amount of risk a firm undertakes when leverage is high. This hypothesized increased risk-taking in a firm’s investments, referred to as risk-shifting or asset substitution, could result in an overall cost to the firm (Jensen and Meckling (1976)).


NYDFS Proposed Cybersecurity Regulation for Financial Services Companies

Joseph P. Vitale is a partner in the Regulatory & Compliance practice at Schulte Roth & Zabel LLP. This post is based on a Schulte Roth & Zabel publication by Mr. Vitale, Michael L. Yaeger, and Noah N. Gillespie.

On Sept. 13, 2016, the New York State Department of Financial Services (“NYDFS”) issued a proposed regulation that would impose new, rigorous cybersecurity requirements on banks, consumer lenders, money transmitters, insurance companies and certain other financial service providers (each, a “Covered Entity”) regulated by the NYDFS (the “Proposed Regulation”). Given New York’s importance in the financial services industry, not only would the effect of the Proposed Regulation be felt immediately across the country, other regulators may follow New York’s example.


Securities Regulation in the Interconnected, Global Marketplace

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent keynote address to the International Bar Association Annual Conference. The complete publication, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is my pleasure to participate in this year’s International Bar Association Annual Conference at the request of your president, David Rivkin, whom I first came to highly admire from our days as very young lawyers. He is a tremendous lawyer and leader. In reviewing your conference program, I was struck by the significant overlap with issues currently on the SEC’s agenda.

As the regulator of the world’s largest securities markets, and thousands of globally-active firms, the SEC is naturally very engaged in many issues that extend beyond the U.S. border. Indeed, the first speech I gave as Chair—after only three weeks on the job—was about the SEC as an international regulator, having spent a surprising amount of time on international meetings and issues. The centrality of international issues to financial regulation and the SEC has not changed during these last three and a half years.


The Board’s Role in FCPA Compliance

David A. Katz is a partner and Laura A. McIntosh is a consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh.

For directors of public companies with foreign operations, “FCPA” is a dreaded acronym. In recent years, compliance with the Foreign Corrupt Practices Act has become a key area of focus for boards and management. Enforcement of the FCPA has increased markedly since 2004, and the U.S. Securities and Exchange Commission and the Department of Justice have made it clear that they intend to prosecute individuals as well as public companies. The stakes can be enormous for companies, with penalties reaching hundreds of millions (or billions) of dollars, and they are frightening for individuals, who face the possibility of multi-year prison sentences along with substantial financial penalties.

Overseeing FCPA compliance is no easy task. It is time-consuming, expensive, challenging, and essential. As a legal matter, boards are required to create and follow procedures designed to ensure compliance with applicable laws. Directors succeed in this task by fostering a culture of high ethical standards, by prioritizing compliance oversight, and often by personally investing time and effort in the company outside the boardroom.


Weekly Roundup: September 16–September 22, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 16–September 22, 2016.

PROMESA and Puerto Rico’s Pathways to Solvency

Why Don’t General Counsels Stop Corporate Crime?

Shareholder Approval in M&A

A Gadfly’s Perspective

2016 Global Board of Directors Survey

2016 Global Board of Directors Survey

Julie Hembrock Daum leads the North American Board Practice at Spencer Stuart, and Susan Stautberg is the Chairman and CEO of the WomenCorporateDirectors Foundation. This post relates to the 2016 Global Board of Directors Survey, a co-publication from Spencer Stuart and the WCD Foundation authored by Ms. Daum; Ms. Stautberg; Dr. Boris Groysberg, Richard P. Chapman Professor of Business Administration at Harvard Business School; Yo-Jud Cheng, doctoral candidate at Harvard Business School; and Deborah Bell, researcher.

The growing demands on corporate boards are transforming boardrooms globally, with directors taking on a more strategic, dynamic and responsive role to help steer their companies through a hypercompetitive and volatile business environment. Economic and political uncertainties make long-term planning more difficult. The proliferation of cyber attacks—and their consequences for business in financial losses and reputational damage—increases the scope of risk oversight. A rise in institutional and activist shareholder activity requires boards to identify vulnerabilities in board renewal and performance and, in some cases, establish protocols for engagement. And all of these demands have pushed issues around board composition and diversity to the fore, as boards cannot afford to have directors around the table who aren’t delivering value.

In this context, Spencer Stuart, the WomenCorporateDirectors (WCD) Foundation, Professor Boris Groysberg and doctoral candidate Yo-Jud Cheng of Harvard Business School and researcher Deborah Bell partnered together on the 2016 Global Board of Directors Survey, one of the most comprehensive surveys of corporate directors around the world.


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