Monthly Archives: May 2018

The Evolving Market for Retail Investment Services and Forward-Looking Regulation Adding Clarity and Investor Protection while Ensuring Access and Choice

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s remarks at Temple University, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good afternoon.

It is wonderful to be in Philadelphia.

It is wonderful to be at Temple University. It is very kind of Temple to host this event. I will speak for about 30 minutes and then take questions. [1]

Before I move to today’s topic—the relationship between Main Street investors and investment professionals—I ask for your indulgence because I want to elaborate on Pennsylvania, Philadelphia and Temple University.

Pennsylvania is my home state. [2] My brothers and I were fortunate to experience much of the best of Pennsylvania growing up. Through the sixth grade, we lived in what many people would call “rural” Pennsylvania. Our address was “RD-1”. We loved it. Climbing coal piles, playing in barns, swimming in streams and quarries—what could be better?

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Corporate Purpose: ESG, CSR, PRI and Sustainable Long-Term Investment

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton.

In The New Paradigm for corporate governance and investor stewardship (discussed on the Forum here), I, together with a Wachtell Lipton team, created for the International Business Council of the World Economic Forum, deliberately conflated ESG (environmental, social and governance), CSR (corporate social responsibility), PRI (the UN’s principles for responsible investment) and sustainability because they are all essential elements of long-term investment strategies designed to create increasing profits and value for shareholders.

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Weekly Roundup: April 27-May 3, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of April 27-May 3, 2018.

The Middle-Market IPO Tax


Which Antitakover Provisions Matter?


Indications of Corporate Control



Cybersecurity Risk Management Oversight


The Life-Cycle of Dual Class Firms




Department of Labor Cautionary Tone on ESG-Related Activities


The Supreme Court’s Cyan Decision and What Happens Next


SEC’s Proposed Standard of Conduct for Investment Advisors


Open Letter Regarding Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes

Barbara Novick is Co-founder and Vice Chairman, and Manish Mehta is Managing Director and Global Head of iShares Markets & Investments at BlackRock, Inc. This post is based on an open letter from BlackRock to Baer Pettit, President of MSCI, Inc. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

Mr. Baer Pettit President MSCI, Inc.
Ten Bishops Square, Ninth Floor
London E1 6EG United Kingdom

Re: Open Letter Regarding Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes

Dear Mr. Pettit:

BlackRock, Inc. (together with its affiliates, “BlackRock”) appreciates the opportunity to comment on MSCI’s Consultation on the Treatment of Unequal Voting Structures in the MSCI Equity Indexes. [1] As one of the world’s leading asset management firms, BlackRock manages assets on behalf of institutional and individual clients worldwide, across equity, fixed income, liquidity, real estate, alternatives, and multi-asset strategies. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world.

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SEC’s Proposed Standard of Conduct for Investment Advisors

David Tittsworth is counsel and Adam Lovell is an associate at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Tittsworth, Mr. Lovell, Jason Brown, George Raine, and Joel Wattenbarger.

On April 18, 2018, the SEC issued a release (the “Release”), entitled, “Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers” (the “Adviser Conduct Proposal”), along with a request for comment on “Enhancing Investment Adviser Regulations.” The Release was issued in connection with two proposed rules that came out the same day: (1) the proposed “Regulation Best Interest” under the Securities Exchange Act of 1934 for broker-dealers, and (2) a proposed Form Client Relationship Summary for retail clients of both investment advisers and broker-dealers.

All investment advisers subject to the Advisers Act, including wealth managers, institutional shops, and private fund advisers, should take notice of the Adviser Conduct Proposal, as it seeks to consolidate in one place the salient attributes of the federal fiduciary standard applicable to investment advisers.

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The Supreme Court’s Cyan Decision and What Happens Next

Michael S. Flynn, Paul S. Mishkin, and Edmund Polubinski III are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Flynn, Mr. Mishkin, and Mr. Polubinski.

On March 20, 2018, the Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund [1] (“Cyan”), ruling unanimously that, under the Securities Litigation Uniform Standards Act (“SLUSA”), class actions under the Securities Act of 1933 (“’33 Act”) (1) may be brought in state court, and (2) are not removable to federal court. The decision swings the doors of state courts wide open to actions asserting ’33 Act claims against issuers, officers, directors, underwriters, and others involved in the securities offering process. There is much debate about whether the Supreme Court’s construction of the relevant provisions of SLUSA, which Justice Alito at oral argument referred to as “gibberish,” make sense. Regardless of one’s views on that score, it is difficult to contest that the result of Cyan is, to pick a word, odd: putative class-action plaintiffs can now avoid federal court by asserting solely federal claims under the ’33 Act. Whether state courts generally or particular state courts will become, to borrow a term utilized by the Supreme Court in another leading securities law ruling, the “Shangri-La of class-action litigation for lawyers representing those allegedly” misled in the context of a securities offering remains to be seen. [2] In any event, Cyan undoubtedly will be a catalyst for class-action-litigation lawyers to search for the most-plaintiff-friendly jurisdiction and thus introduce all the well-recognized perils associated with forum-shopping and inconsistent, unpredictable standards across multiple jurisdictions.

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Department of Labor Cautionary Tone on ESG-Related Activities

David M. Silk and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Silk, Mr. Niles, Alicia C. McCarthy, and Carmen X.W. Lu.

With shareholder proposals regarding ESG and sustainability matters becoming the most common kind of proposal, proxy advisory firm ISS marketing a new “Environmental & Social QualityScore” product for rating public companies, asset managers developing ESG-related guidelines and voting policies, and significant activist and investor fundraising efforts underway with ESG-linked themes, the U.S. Department of Labor (the “DOL”) has issued new guidance that may influence the going-forward behavior of some market participants.

On April 23, 2018, the DOL issued Field Assistance Bulletin No. 2018-01, clarifying previous DOL guidance for ERISA-covered private-sector employee benefit plans regarding proxy voting, shareholder engagement, and economically targeted investments in the context of environmental, social, and corporate governance (ESG) initiatives. The bulletin addresses the role of ESG in several areas, including:

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Busy Directors and Firm Performance: Evidence from Mergers

Roie Hauser is Assistant Professor of Finance at Temple University Fox School of Business. This post is based on his recent article, forthcoming in the Journal of Financial Economics.

In my article, Busy Directors and Firm Performance: Evidence from Mergers, forthcoming in the Journal of Financial Economics, I study directors’ concurrent service on boards of multiple companies. More than 20% of directors in S&P1500 companies hold multiple board seats and nearly 85% of S&P1500 firms share at least one director with other S&P1500 firms. While critics debate the efficiency of this practice, numerous studies report mixed results on its merits. The main hurdle in estimating the causal effect of concurrent directorship is the endogeneity of board composition, and specifically, that this effect is entangled with directors’ skills. Highly skilled directors are likely to hold multiple board seats; they are pursued by many firms precisely for their expertise (Fama and Jensen, 1983, Kaplan and Reishus, 1990).

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Missing Pieces Report: The 2016 Board Diversity Census of Women and Minorities on Fortune 500 Boards

Deborah DeHaas is Vice Chairman, Chief Inclusion Officer, and National Managing Partner at the Center for Board Effectiveness, at Deloitte. This post is based on a co-publication from Deloitte and the Alliance for Board Diversity.

Shifting demographics in the United States have brought diversity to the forefront of issues on the minds of c-suite executives and corporate boards. As the population of the United States continues to diversify, companies may need to determine ways to gain more diversity of thought, experience, and background in both management as well as the boardroom.

Since 2004, the Alliance for Board Diversity (“ABD” or “we”) has been striving to enhance shareholder value by promoting inclusion of women and minorities on corporate boards. During this time ABD has celebrated the accomplishments and movement forward, but the fact remains that progress in this vein has been slow.

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The Life-Cycle of Dual Class Firms

Martijn Cremers is Bernard J. Hank Professor of Finance at University of Notre Dame Mendoza College of Business, and an ECGI research member; Beni Lauterbach is a Professor of Finance and the Raymond Ackerman Family Chair in Corporate Governance at Bar Ilan University Graduate School of Business Administration, and an ECGI research member; Anete Pajuste is an Associate Professor of Finance and Head of Accounting and Finance Department at the Stockholm School of Economics, and an ECGI research member. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

In our paper, The Life-Cycle of Dual Class Firms, we consider the market valuation of dual class firms over their life cycle. Dual class financing is on the rise in recent years, particularly among high-tech firms, following Google’s seminal 2004 dual-class IPO structure. This financing choice leaves control of the firms in the hands of entrepreneurs, giving outside investors with inferior-vote shares no direct mechanism to influence the board or management. Rather, public investors buying inferior vote shares at the IPO are betting that granting the entrepreneurs such control allows them to better implement their unique vision.

However, as dual class firms mature and their vision is largely accomplished, entrepreneurs’ leadership may no longer be needed, and entrepreneurs may start self-serving behavior. Public investors’ resentment may then develop, accusing dual class firms’ controlling shareholders for wanting their money without any accountability. Such public pressure arguably recently led MSCI to issue a proposal to reduce the weight of inferior-vote shares in MSCI indices by multiplying the regular weight by the shares fractional voting power. Notably, the same MSCI also issued a report a few months ago stating that “[o]ur research shows that unequal voting stocks in aggregate outperformed the market over the period from November 2007 to August 2017, and that excluding them from market indexes would have reduced the indexes’ total returns by approximately 30 basis points per year over our sample period.” Obviously, confusion reigns over the merits of dual class financing.

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