Yearly Archives: 2016

Oversight of the SEC

Posted by Mary Jo White, U.S. Securities and Exchange Commission, on

Wednesday, June 15, 2016

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks before the U.S Senate Committee on Banking, Housing, and Urban Affairs. 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.

Thank you for inviting me to testify today [June 14, 2016] regarding the current work and initiatives of the U.S. Securities and Exchange Commission (SEC or Commission). The SEC is a critical agency that serves as the bulwark safeguarding millions of investors and the most vibrant markets in the world. Thanks to the exceptional work and commitment of our superb staff, the Commission has in recent years strengthened its operations and programs across the agency—aggressively enforcing the securities laws to punish wrongdoers, adopting strong measures that protect investors and our markets, and investing in the people and technology required to ensure that our markets remain the strongest and safest in the world. These and other efforts across our extensive areas of responsibility are all in furtherance of our essential mission: to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation.

CEO Overconfidence and Financial Crisis

Posted by Chih-Yung Lin, Yuan Ze University, on

Wednesday, June 15, 2016

Bank debt, Banks, Behavioral finance, Corporate culture, Debt-equity ratio, Executive turnover, Financial crisis, Financial institutions, Leverage, Management, Managerial style, Overconfidence, Risk-taking, Russia, Shocks
More from: Chia-Wei Huang, Chih-Yung Lin, Ju-Fang Yen, Po-Hsin Ho

Chih-Yung Lin is Associate Professor of Finance at Yuan Ze University. This post is based on an article authored by Professor Lin; Po-Hsin Ho of National Taipei University; Chia-Wei Huang, Associate Professor of Finance at Yuan Ze University; and Ju-Fang Yen of the Department of Statistics at National Taipei University.

Bank financial contagion is cited as a key feature of the financial crises, as problems at specific financial institutions rapidly morphed into a crisis for the entire financial system. Shocks to bank health have played a systematic role in worsening financial stability. Yet not all financial institutions suffered during these crisis years. In our article, CEO Overconfidence and Financial Crisis: Evidence from Bank Lending and Leverage, which was recently published in the Journal of Financial Economics, we propose a new perspective that manager overconfidence could explain the substantial heterogeneity in bank risk-taking behaviors during a boom, as well as the performance of these banks during the ensuing crisis years.

Debt Restructurings and the Trust Indenture Act

Posted by Harald Halbhuber, Shearman & Sterling LLP, on

Tuesday, June 14, 2016

Bankruptcy, Bondholders, Bonds, Debt, Debtor-creditor law, Distressed companies, Foreclosures, Reorganizations, Restructurings, SEC, Securities regulation, Trust Indenture Act, U.S. federal courts
More from: Harald Halbhuber

Harald Halbhuber is counsel in the Capital Markets Group at Shearman & Sterling LLP. This post is based on a recent discussion paper by Mr. Halbhuber, available here.

In a case commonly referred to as Marblegate, a federal district court recently held that a debt restructuring by for-profit education provider EDMC violated a non-impairment provision in the Trust Indenture Act (TIA), a Depression-era statute governing bond indentures. The restructuring presented bondholders with a choice between exchanging their bonds for equity and being left with claims against an empty shell by virtue of a foreclosure by secured creditors. The decision, which is currently under review by the Court of Appeals for the Second Circuit, has attracted a lot of attention in bond markets and has affected debt restructurings across the country. According to the decision, the TIA prohibits debt restructurings outside bankruptcy that “impair” a dissenting bondholder’s recovery, even if they do not change payment terms or make the bonds payable in something other than cash. The decision relied heavily on the legislative history of the statute and concluded that transactions like the one in Marblegate were precisely what Congress intended to prohibit.

The Optimal Size of Hedge Funds

Posted by Chengdong Yin, Purdue University, on

Tuesday, June 14, 2016

Agency costs, Asset management, Behavioral finance, Conflicts of interest, Fund managers, Fund performance, Hedge funds, Incentives, Mutual funds, Peer groups
More from: Chengdong Yin

Chengdong Yin is Assistant Professor of Finance at Purdue University. This post is based on a recent article by Professor Yin.

In my article, The Optimal Size of Hedge Funds: Conflict between Investors and Fund Managers, forthcoming in the Journal of Finance, I examine whether the standard compensation contract in the hedge fund industry aligns managers’ incentives with investors’ interests. One of the important ways in which hedge funds differ from traditional investment vehicles is in the design of managers’ compensation contracts. A key difference is that, in contrast to their peers in the mutual fund industry, hedge fund managers charge an additional performance-based incentive fee. The incentive fee allows hedge fund managers to charge part of fund profits as their compensation and is intended to motivate them to maximize fund performance.
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Citigroup: Delaware Court on “Holder Claims”

Posted by Meredith Kotler, Cleary, Gottlieb, Steen & Hamilton LLP, on

Tuesday, June 14, 2016

Delaware cases, Delaware law, Derivative suits, Disclosure, Fiduciary duties, Fraud-on-the-Market, Negligence, Restatements, Securities fraud, Shareholder suits, State law, Subprime securities
More from: Meredith Kotler, Vanessa Richardson

Meredith E. Kotler is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Kotler and Vanessa C. Richardson. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently addressed the issue of whether “holder claims”—claims brought by investors seeking damages based on continuing to hold stock in reliance on a company’s alleged misstatements, rather than buying or selling—are direct or derivative in nature. In Citigroup Inc., et al. v. AHW Investment Partnership, et al., No. 641, 2015, 2016 WL 2994902 (Del. May 24, 2016), the Court held that “the holder claims are not derivative because they are personal to the stockholder and do not belong to the corporation itself.”

Tilton: Constitutional Challenge to SEC Administrative Proceedings

Posted by Jason M. Halper, Orrick, Herrington & Sutcliffe LLP, on

Monday, June 13, 2016

Fund litigation, Fund managers, Fund performance, Jurisdiction, Private equity, SEC, SEC enforcement, Securities enforcement, U.S. federal courts
More from: Bronwyn James, Jason Halper, Katherine Maco, Paul Rugani, Orrick

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper, Paul F. Rugani, Katherine L. Maco, and Bronwyn James.

On June 1, the Second Circuit in Tilton et al. v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016), echoed recent Seventh and D.C. Circuit decisions (respectively, Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015), cert. denied, 136 S. Ct. 1500 (Mar. 28, 2016), and Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015)) in finding that constitutional or other challenges to SEC proceedings cannot go forward in court until the administrative proceeding ends; review can only be sought as an appeal from a final decision by the Commission. The Second Circuit’s decision in Tilton creates unanimity among the circuit courts that have addressed the issue to date, although, as we previously reported, the Eleventh Circuit is likely to rule on the issue sometime this year in Hill v. SEC, No. 15-12831. Unless the Eleventh Circuit bucks this trend and creates a circuit split, it now looks unlikely that the Supreme Court will weigh in on this issue (particularly because the Supreme Court previously denied a petition to review the Seventh Circuit’s decision in Bebo).

Toward Better Mutual Fund Governance

Posted by Anita K. Krug, University of Washington School of Law, on

Monday, June 13, 2016

Asset management, Boards of Directors, Dodd-Frank Act, Financial regulation, Fund managers, Investment advisers, Investment Company Act, Investor protection, Mutual funds, Oversight
More from: Anita Krug

Anita K. Krug is D. Wayne and Anne Gittinger Professor of Law at University of Washington School of Law. This post is based on Professor Krug’s chapter in the forthcoming book, Handbook on the Regulation of Mutual Funds. The full chapter is available here.

The financial crisis brought substantial change to the financial services industry, thanks largely to Congress’s post-crisis passage of the Dodd-Frank Act. Subjecting swaps and hedge fund managers to regulatory oversight and reforming the rules applicable to credit rating agencies are but a small sample those changes. Dodd-Frank did not, however, bring about any significant change the regulation of mutual funds—“pooled” investment entities that are regulated under the Investment Company Act of 1940 (“ICA”).

That circumstance may seem sensible, in that mutual funds are not widely regarded as having been a substantial contributor to the onset and severity of the financial crisis. Yet, the financial crisis did, in at least one respect, change the way that mutual funds operate. In particular, it produced a new model of mutual fund governance, one that may be superior to the governance model that has dominated the mutual fund industry for decades.

When Are Weak Property Rights Optimal?’

Posted by Carmine Guerriero, University of Amsterdam, on

Monday, June 13, 2016

Financial development, Information environment, International governance, Legal systems, Market conditions, Ownership, Property rights, Social contract
More from: Carmine Guerriero

Carmine Guerriero is Assistant Professor of Economics at the University of Amsterdam. This post is based on Professor Guerriero’s recent paper, available here.

While economists have long maintained that weak property rights are detrimental for development since they discourage effort and investment (Besley and Ghatak, 2010), legal scholars have argued instead that they can be optimal whenever transaction costs prevent consensual trade (Calabresi and Melamed, 1972). In my paper Endogenous Property Rights, forthcoming at the Journal of Law and Economics, I blend these two opposing ideas and I empirically document both the general incompleteness of property rights and their positive relationships with several measures of preference heterogeneity in 126 jurisdictions.

Limiting Government’s Attempts to Expand the Scope of FIRREA

Posted by Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on

Sunday, June 12, 2016

Contracts, Corporate fraud, Fannie Mae, Financial crisis, Financial institutions, Financial regulation, FIRREA, Freddie Mac, Misconduct, Subprime securities, U.S. federal courts
More from: Brad Karp, Daniel Kramer, Jane O'Brien, Richard Rosen, Walter Rieman, Paul Weiss

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Dan Kramer, Jane O’Brien, Walter Rieman, and Richard A. Rosen.

On May 23, 2016, the United States Court of Appeals for the Second Circuit reversed a jury’s finding of liability and the district court’s imposition of a $1.27 billion civil penalty on Countrywide and related defendants (collectively, “Countrywide”) under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) for mail or wire fraud affecting a federally insured financial institution. [1] The Second Circuit held that the trial evidence was insufficient to establish fraudulent intent. But in ruling on that basis, the court avoided the controversial legal question of whether FIRREA, which authorizes civil penalties for fraud “affecting” a federally insured financial institution, applies to fraud by such an institution.

SEC Guidance and Non-GAAP Measures

Posted by Meredith B. Cross, Wilmer Cutler Pickering Hale and Dorr LLP, on

Saturday, June 11, 2016

Accounting, Accounting standards, Compliance and disclosure interpretation, Disclosure, Earnings announcements, Financial reporting, Form 8-K, Liquidity, Reporting regulation, SEC, SEC rulemaking, Taxation
More from: Jennifer Zepralka, Jonathan Wolfman, Knute Salhus, Meredith Cross, Thomas White, WilmerHale

Meredith B. Cross is a partner in the Transactional and Securities Departments at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication by Ms. Cross, Knute J. Salhus, Thomas W. White, Jonathan Wolfman, and Jennifer A. Zepralka.

On May 17, 2016, the SEC’s Division of Corporation Finance escalated the SEC’s efforts to curb perceived misuse of non-GAAP financial measures with the issuance of a revised set of Compliance and Disclosure Interpretations (CDIs). This action follows a series of speeches by SEC Chair Mary Jo White and SEC senior staff members, and an uptick in comment letter activity, all focused on what a member of the SEC staff described in one speech as a “troubling increase over the past few years in the use of, and nature of adjustments within, non-GAAP measures by companies.”

All public companies should consider and address the SEC staff’s new guidance, as well as other recent developments regarding the use of non-GAAP measures, as they prepare for their next earnings announcement. To help you work through the implications of the new guidance, we discuss below the new and revised CDIs, and offer our analysis of key takeaways and action items.

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Yearly Archives: 2016

Oversight of the SEC

CEO Overconfidence and Financial Crisis

Debt Restructurings and the Trust Indenture Act

The Optimal Size of Hedge Funds

Citigroup: Delaware Court on “Holder Claims”

Tilton: Constitutional Challenge to SEC Administrative Proceedings

Toward Better Mutual Fund Governance

Limiting Government’s Attempts to Expand the Scope of FIRREA

SEC Guidance and Non-GAAP Measures

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