Yearly Archives: 2018

SEC Enforcement for Social Media Violation

Posted by Jessica Forbes, Stacey Song, and Joanna Rosenberg, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Thursday, July 26, 2018
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Jessica Forbes and Stacey Song are partners and Joanna Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum.

On July 10, 2018, the Securities and Exchange Commission (the “SEC”) announced five settlements (the “Advertising Rule Settlements”) in connection with violations of Section 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”) and Rule 206(4)-1(a)(1) thereunder. [1] Each of the Advertising Rule Settlements involves the improper use of testimonials on social media.

Section 206(4) generally prohibits investment advisers from engaging in fraudulent, deceptive or manipulative conduct, and Rule 206(4)-1 (the “Advertising Rule”) prohibits registered investment advisers from using false or misleading advertisements. Testimonials in advertisements are deemed per se misleading and the Advertising Rule prohibits registered investment advisers from including them in advertisements. [2] The term “testimonial” is not defined in the Advertising Rule, but the staff has consistently interpreted that term to include a “statement of a client’s experience with, or endorsement of, an investment adviser.” [3]

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Enhancing Director Performance and Impact

Posted by Rusty O'Kelley III and Susanne Suhonen, Russell Reynolds Associates, on
Wednesday, July 25, 2018
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Rusty O’Kelley III is the Global Head of the Board Consulting and Effectiveness Practice and Susanne Suhonen is Global Knowledge Leader at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley and Ms. Suhonen.

Boards are increasingly seeking to diversify their membership and draw on expertise from a wider variety of sources. As a result, they find themselves with an exceptional number of new—and often first-time—directors. While the need to acclimate new directors may occur only sporadically, getting it right can be essential to the effectiveness of a board. In a past Russell Reynolds Associates research project, we interviewed new directors based in the UK and learned that it takes them about six board meetings to come up to speed. Given that UK boards typically meet relatively frequently, for US-based companies that translates into more than a year of lost time before new directors are contributing at the level they should.

In response to numerous inquiries from corporate boards about how to effectively integrate new board directors, we launched a research project to learn more about director onboarding practices across Fortune 500 companies. With responses from more than 160 directors representing over 100 Fortune 500 companies, the research shows that many boards are not investing heavily enough in integrating their new members. [1] Few companies tailor their onboarding process, despite the wide range of experiences and tenures new directors bring. Just 24 percent of directors said they had experienced customized onboarding, compared to 58 percent who went through a standardized program.

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Bank Resolution and the Structure of Global Banks

Posted by Patrick Bolton (Columbia University) and Martin Oehmke (London School of Economics), on
Wednesday, July 25, 2018
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Patrick Bolton is Barbara and David Zalaznick Professor of Business at Columbia Business School, and Martin Oehmke is Associate Professor of Finance at the London School of Economics and Political Science. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes The Resolution of Distressed Financial Conglomerates by Howell E. Jackson and Stephanie Massman; and Containing Systemic Risk by Taxing Banks Properly by Mark J. Roe and Michael Troege.

How should prudential regulators deal with global banks that are too big to fail? Many see bank resolution as the key element in dealing with this challenge. The main idea is that global systemically important banks (G-SIBs) are required to issue a sufficient amount of “total loss absorbing capital” (TLAC) in the form of subordinated long-term debt or equity. These securities are issued for the purpose of absorbing losses and recapitalizing the institution in resolution, with minimal disruption to the bank’s operations and without public support.

But what should these resolution frameworks look like and, most importantly, will they work? Much hinges on this question, given that there are currently around thirty G-SIBs, with total exposures equal to more than 75% of global GDP in 2014.

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Development in Insider Trading Liability

Posted by Martine Beamon, Denis McInerney and Linda Chatman Thomsen, Davis Polk & Wardwell LLP, on
Wednesday, July 25, 2018
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Martine Beamon, Denis McInerney, and Linda Chatman Thomsen are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Beamon, Mr. McInerney, and Ms. Chatman Thomsen.

Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

On June 25, 2018, a divided panel of the U.S. Court of Appeals for the Second Circuit issued an amended decision in United States v. Martoma. In its initial decision, the Second Circuit expressly overturned a key requirement for insider trading liability set out by its previous decision in United States v. Newman. [1] Under Newman, the government was required to prove a “meaningfully close personal relationship” between an individual with material non-public information (tipper) and an individual who is told and ultimately trades on that information (tippee) in order to establish the “personal benefit” element under the “gift theory” of insider trading liability. The initial Martoma decision held that the “meaningfully close personal relationship” requirement was no longer tenable in light of the recent Supreme Court decision in Salman v. United States. [2]

The Court’s amended decision relies on the Supreme Court’s decision in Dirks v. SEC [3] to find that a “personal benefit” to the tipper may be established either by examining the relationship between the tipper and tippee or by determining that the tipper intended to benefit the tippee. A “meaningfully close personal relationship” or a relationship “that suggests a quid pro quo” is sufficient to establish a personal benefit to the tipper. Evidence that the tipper intended to benefit the tippee is independently sufficient to establish a personal benefit. The amended decision remains a victory for prosecutors and leaves open the potential to expand insider trading liability; the continued split decision remains a potential avenue for the Second Circuit to reconsider the issue en banc.

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The Investment Stewardship Ecosystem

Posted by Barbara Novick, Michelle Edkins, and Tom Clark, BlackRock, Inc., on
Tuesday, July 24, 2018
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Barbara Novick is Vice Chairman, Michelle Edkins is Global Head of Investment Stewardship, and Tom Clark is Head of Global Public Policy, Americas, at BlackRock, Inc. This post is based on a BlackRock memorandum by Ms. Novick, Ms. Edkins, Mr. Clark, and Alexis Rosenblum.

Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends –from slow wage growth to rising automation to climate change –affect your potential for growth.
—Larry Fink, BlackRock, Annual Letter to CEOs, January 2018

Investors are increasingly turning to convenient, low-cost investment solutions such as index funds to help save for retirement and other important financial goals. This trend has fueled the growth of the asset management industry and led to questions around what impact, if any, asset managers should have on the companies they invest in. How do asset managers approach investment stewardship and to what degree do they factor in environmental, social, and governance (ESG) considerations?

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Corporate Disobedience

Posted by Elizabeth Pollman (Loyola Law School), on
Tuesday, July 24, 2018
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Elizabeth Pollman is Professor of Law at Loyola Law School. This post is based on an article by Professor Pollman, forthcoming in the Duke Law Journal.

From Uber to “legalized” marijuana businesses, examples of companies pushing or even transgressing legal boundaries are ubiquitous. Corporate law takes a dim view of law breaking, enabling the chartering of corporations only for a lawful purpose and denying business judgment rule protection for knowing violations of the law. The legal literature has not been as uniformly opposed or clear in disaffirming unlawful activity, but it has focused primarily on two issues: whether corporations can use a cost-benefit approach to law breaking and how to fit intentional violations of law into the framework of fiduciary duties.

In a forthcoming article, I aim to enrich this account by examining varied instances in which corporations subvert, transgress, challenge, dissent from and refuse to comply with the law—all, broadly construed, as forms of disobedience.

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Shareholder Rejection of Chair-CEO Separation

Posted by Joseph Kieffer, Equilar Inc., on
Tuesday, July 24, 2018
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Joseph Kieffer is a Research Analyst at Equilar. This post is based on an Equilar memorandum by Mr. Kieffer.

Since the introduction of Say on Pay, shareholders have maintained a larger degree of influence over CEO compensation. The ability to vote in an advisory capacity on CEO compensation strengthened the voice of shareholders. However, a particularly interesting case arises when the CEO occupies the position of the chair of the board. Potentially, this could create a conflict of interest between the board and management, where the CEO-chair has significant leverage over compensation decisions. It is partly for this reason, in combination with the board’s desire for independent oversight of management, that shareholders often take an active stance in making decisions about CEO-chairs.

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Back in the Groove

Posted by Josh Black, Activist Insight, on
Monday, July 23, 2018
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Josh Black is Editor-in-chief of Activist Insight. This post is  based on an excerpt from the Activist Insight Monthly Half-Year Review 2018, published in association with Olshan Frome Wolosky and authored by Mr. Black, Husein Bektic, Dan Davis, Iuri Struta, and Elana Duré.

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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Merger madness, flush balance sheets and the integration of environmental, social, and governance (ESG) issues into mainstream activism in the first half of the year mean 2018 should be set for record levels of activism.

Note: All data as of June 30.

Activism looks poised for another record year in 2018. By the end of June, 610 companies worldwide had been publicly subjected to activist demands year-to-date, driven by record activity in North America. Indeed, the U.S. may be on course for over 500 companies to face financial or governance demands from shareholders by the end of 2018, while Canadian basic materials activism has returned with a vengeance.

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Brexit Update: Keeping Track of the Moving Pieces

Posted by Mark Bergman and David Lakhdhir, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Monday, July 23, 2018
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Mark Bergman and David Lakhdhir are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Bergman and Mr. Lakhdhir. Additional posts on the legal and financial impact of Brexit are available here.

The second anniversary of the Brexit referendum is upon us, an entirely inconclusive meeting between Prime Minister Theresa May and her fellow members of the European Council has just ended, and the proverbial clock continues to count down to the October deadline for an exit deal and the March 2019 exit date. Yet, if anything the situation has become more, not less, complicated and unclear. No definitive deal is in sight. The possibility that the UK may crash out of the EU with no deal appears increasingly—and to business frighteningly—real. And each potential path out of the present morass appears fraught with political landmines.

While Brexit falls further down the list of priorities for the EU27, as member states grapple with a host of other issues, ranging from existential negotiations over migration into the EU to trade issues and reform of the Eurozone, and member states such as Germany and Italy remain more focused on their domestic political dynamics, the British government continues to be at war with itself.

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Successful CFIUS Monitorships

Posted by Randall H. Cook, Mona Banerji, and Steve Klemencic, Ankura Consulting Group, on
Monday, July 23, 2018
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Randall H. Cook is Senior Managing Director, Mona Banerji is a Director, and Steve Klemencic is Managing Director at Ankura Consulting Group. This post is based on an Ankura memorandum by Mr. Cook, Ms. Banerji, and Mr. Klemencic.

This post describes critical considerations for a successful monitorship of mitigating controls required by the Committee on Foreign Investments in the United States (“CFIUS” or the “Committee”). CFIUS is an interagency US Government committee that reviews Foreign Direct Investment (“FDI”) into the United States to identify and address any consequent national security risks. Growing concern with the impact of foreign countries acquiring national security-critical technologies and other strategic advantages through investment activity has prompted CFIUS to become more active and assertive. Moreover, legislation is pending in both houses of Congress that will significantly expand CFIUS’s jurisdiction to review FDI and require mandatory declaration of specified investment types.

When CFIUS identifies possible national security risks arising from a reviewed transaction, the Committee may make implementation of mitigating control measures a condition of allowing the deal to go forward. In order to assure the effectiveness and persistence of such measures, CFIUS often requires the concurrent appointment of an independent third-party monitor (“TPM”) to oversee and periodically report on these controls. Indeed, given the increasing demands on scarce CFIUS resources consequent to the policy trends described above, both the Committee and industry are increasingly looking to TPMs to play a critical facilitating role to enable valuable transactions to proceed while addressing national security concerns.

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