Monthly Archives: December 2016

The American Prosperity Project

This post is a policy statement issued by the Aspen Institute’s American Prosperity Project, a nonpartisan framework for policy action, and signed by thirty signatories including CEOs, directors of large business enterprises, and prominent legal and management advisors. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

America’s economic health depends on sustained, long-term investment to support our families and communities and to reinvigorate the economic engine that creates jobs and prosperity. There is no viable model under which either business or government can or should shoulder the responsibility for long-term investment alone; both are required.

The time is right for a national conversation about long-term investment in infrastructure, basic science, education and training for workers who feel the brunt of globalization and technology. We need to focus on the critical levers for economic growth along with sources of revenue to help pay for it, as well as ways to overcome the short-term thinking currently baked into government policy and business protocols.

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Ten Strategic Building Blocks for Shareholder Activism Preparedness

Merritt Moran is a Business Analyst at FTI Consulting. This post is based on an FTI publication by Ms. Moran, Jason Frankl, John Huber, and Steven Balet. 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 Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Shareholder activism is a powerful term. It conjures the image of a white knight, which is ironic because these investors were called “corporate raiders” in the 1980s. A corporate raider conjures a much different image. As much as that change in terminology may seem like semantics, it is critical to understanding how to deal with proxy fights or hostile takeovers. The way someone is described and the language used are crucial to how that person is perceived. The perception of these so-called shareholder activists has changed so dramatically that, even though most companies’ goals are still the same, the playbook for dealing with activists is different than the playbook for corporate raiders. As such, a corresponding increase in the number of activist encounters has made that playbook required reading for all public company officers and directors. In fact, there have been more than 200 campaigns at U.S. public companies with market capitalizations greater than $1 billion in the last 10 quarters alone. [1]

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Smoothing the Pathway to Use of Tender Offers in Private Equity Acquisitions

Neil R. Markel is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Markel, and is part of the Delaware law series; links to other posts in the series are available here.

Several amendments were made to Section 251(h) of the Delaware General Corporation Law that became effective for merger agreements entered into on or after August 1, 2016. Section 251(h) permits acquisitions of publicly listed Delaware corporations to be accomplished via a tender offer without the need to approve the second-step “squeeze-out” merger at a stockholder meeting if certain conditions are met, including that the acquiror of the tendered shares and its affiliates would be able to unilaterally approve the second-step merger if a meeting were to be held.

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Director Connections in the Mutual Fund Industry

Paul Calluzzo is assistant professor of finance at Queen’s University Smith School of Business. This post is based on his recent paper.

Over the past two decades, there has been a push by the Securities and Exchanges Commission towards more independent mutual fund boards with the intent of improving fund governance. This movement is supported by research that associates independent mutual fund boards with fewer scandals and lower shareholder fees. The industry has heeded the call: from 1996 to 2008, the percentage of fund boards with more than 75% of their seats held by independent directors increased from 46% to 88%.

At the same time, little attention has been paid to the identity of these independent directors and what impact their backgrounds may have on the funds they monitor. In our study, we manually collect the employment history of independent mutual fund directors and find that these directors often hold high-ranking positions at publicly-traded firms. As mutual funds often invest in the stock of director-connected firms, the presence of these directors thus raises the possibility that the influence they exert on the fund extends beyond their fiduciary monitoring responsibilities.

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A New Administration: Change and Continuity in Securities Regulation

William McLucas and Harry Weiss are partners at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication. Additional posts addressing legal and financial implications of the incoming Trump administration are available here.

The election of Donald Trump as the next President and the continued Republican control of Congress raise questions as to what changes may be expected at the Securities and Exchange Commission (SEC or Commission) and what may stay the same. Although Mr. Trump has called for a repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act), he has provided few specifics about changes to the federal securities laws and what role he expects the SEC to play, what type of SEC Chair or other Commissioners he is likely to nominate, or how the financial markets would be policed.

Current SEC Chair Mary Jo White already has announced that she will be stepping down at the end of the Obama Administration, leaving three Commissioner openings for the Trump Administration. The President-elect’s transition team for the independent financial agencies is being led by Paul Atkins, a former SEC Commissioner with a deregulatory focus. He will provide recommendations regarding financial regulation policies and personnel. In addition, Sharon Brown-Hruska, who is a former Commissioner and acting Chair of the Commodity Futures Trading Commission, has been named to Mr. Trump’s landing team for the SEC.

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The Year in Review: SEC Enforcement Actions Against Investment Advisers

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.

The Securities and Exchange Commission’s enforcement program is highly focused on investment advisers for an obvious reason: they manage more than $67 trillion in assets for approximately 30 million clients. In addition, because the SEC examines a far smaller percentage of investment advisers than broker-dealers, and there is no self-regulatory organization, like the Financial Industry Regulatory Authority, that also regulates investment advisers, enforcement plays a prominent role in sending a message to the investment management industry about the areas of concern to the Commission.

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The Wells Fargo Cross-Selling Scandal

Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here); and How to Fix Bankers’ Pay by Lucian Bebchuk (discussed on the Forum here).

In recent years, more attention has been paid to corporate culture and “tone at the top,” and the impact that these have on organizational outcomes. While corporate leaders and outside observers contend that culture is a critical contributor to employee engagement, motivation, and performance, the nature of this relationship and the mechanisms for instilling the desired values in employee conduct is not well understood.

For example, a survey by Deloitte finds that 94 percent of executives believe that workplace culture is important to business success, and 62 percent believe that “clearly defined and communicated core values and beliefs” are important.

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CFPB Guidance for Oversight Over Sales and Other Incentives

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Karp, Roberto J. Gonzalez, Elizabeth M. Sacksteder, and Jessica Morton.

On November 28, 2016, the Consumer Financial Protection Bureau issued a compliance bulletin entitled “Detecting and Preventing Consumer Harm from Production Incentives.” [1] The bulletin describes the risk of “significant” harm to consumers posed by incentive programs for employees or service providers that tie compensation to various benchmarks. These benchmarks can include the following:

  • sales goals, including “cross-selling” products or services to existing customers;
  • sales at higher prices where pricing discretion exists;
  • quotas of customer calls; and
  • collections benchmarks.

As CFPB Director Richard Cordray stated in an accompanying press release, “Tying bonuses and job security to business goals that are unrealistic or not properly monitored can lead to illegal practices like unauthorized account openings and deceptive sales tactics.” [2]

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EU Proposed Intermediate Holding Company Requirements for Non-EU Banks and Broker-Dealers

Derek M. Bush and Michael H. Krimminger are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication.

On 23 November 2016, the European Commission published proposals [1] for widespread revisions to the EU prudential regulatory framework for banks and investment banks. The proposal includes (among other global and EU-specific reforms):

  • Requirements for certain non-EU financial institutions to establish an EU intermediate holding company (an EU IHC) where they have two or more banks or investment firms in the EU;
  • Minimum external total loss-absorbing capacity (TLAC) requirements for EU global systemically important banks (G-SIBs), referred to as global systemically important institutions (G-SIIs) under EU law;
  • Minimum internal TLAC requirements for EU IHCs with material subsidiaries of non-EU G-SIBs which are not resolution entities, which require the internal TLAC to be issued to a parent outside the EU;
  • Implementation of various changes to the EU bank resolution framework, including changes to the minimum requirement for eligible liabilities (MREL), to insolvency priority and to the requirement to obtain contractual recognition of bail-in in non-EU law-governed contracts under Article 55 of the BRRD; and
  • Implementation of various Basel standards including the leverage ratio, net stable funding ratio and fundamental review of the trading book.

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Protecting Financial Cyberspace

Sarah Bloom Raskin is Deputy Secretary of the U.S. Department of the Treasury. This post is based on her recent remarks at the Public Company Accounting Oversight Board International Institute on Audit Regulation.

Good morning. Thank you Steve, for that kind introduction, and thank you to the Public Company Accounting Oversight Board for inviting me to speak at your tenth International Institute on Audit Regulation. The PCAOB has been instrumental in protecting investors by enhancing audit quality, and is a shining example of the benefits of audit regulation. I am pleased to be here with you [December 14, 2016] to describe what we have been doing in the financial sector to deal with a significant threat to financial stability—and that is the threat from cyber incidents.

The Institute’s annual forum is perfect for this discussion. You just completed a panel on the impact of technology, data analytics, and continuous monitoring on audits of the future. Later today another panel will continue the discussion of cybersecurity. I hope to add to your agenda by describing how to protect the international financial system in cyberspace. And that is: Combining peacetime norms with a shared risk-based approach to cyber defenses, which includes—as probably most relevant to this group—a consistent and credible assurance process. Together cyber norms and defenses have the potential to move the needle on cybersecurity and resiliency for the financial sector and beyond.

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