Monthly Archives: September 2018

The SEC and Foreign Private Issuers: A Path to Optimal Public Enforcement

Yuliya Guseva is Associate Professor of Law at Rutgers Law School. This post is based on her recent article, recently published in the Boston College Law Review.

The question of finding an optimal approach to securities law liability and enforcement against foreign issuers in U.S. markets remains open. Seeking to find answers to this policy question, my recent article presents relevant empirical, doctrinal, economic, and institutional arguments. To my knowledge, this paper is the first empirical survey of the recent changes in SEC enforcement against foreign private issuers (“FPIs”). The article argues that although the Commission needs to react to the recent developments in class-action litigation against foreign corporations, a possible lemons problem, and the potential risk of underenforcement, it should not ramp up enforcement. Through traditional enforcement, the SEC would be pursuing an insurmountable task of designing a national “Pigouvian tax” on fraud committed by international corporations operating in multiple jurisdictions. The article suggests a logical alternative that I dub a soft preventive approach. The SEC may send an explicit signal to the market that it is designing more efficient, low-cost monitoring policies by building better cooperation with foreign firms and utilizing its recently improved capacity to analyze “big data” to identify anomalies in foreign issuer reporting.

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Testimony on “Oversight of the SEC’s Division of Investment Management”

Dalia Blass is Director of the Division of Investment Management at the U.S. Securities and Exchange Commission. This post is based on her recent testimony before the United States House of Representatives Committee on Financial Services, Subcommittee on Capital Markets, Securities, and Investment, available here.

Chairman Huizenga, Ranking Member Maloney, and Members of the Subcommittee, thank you for inviting me to testify before you today about the work of the Division of Investment Management (the “Division”). I would also like to thank you for your interest in asset management and the efforts of our Division in this space.

The asset management industry is critical to the U.S. economy and for the retirement and financial needs of millions of American investors, particularly our Main Street investors. Over the last two decades, assets in mutual funds have grown from around $4.5 trillion to over $19 trillion, a growth of over 330 percent. [1] During this same time period, exchange-traded funds (“ETFs”) have grown from around $6.7 billion in assets [2] to be an over $3.6 trillion market. [3] Money market funds have grown from around $1.35 trillion in assets in 1998 [4] to over $3.14 trillion today. [5] Investment advisers employ over half a million people, [6] and the staff has seen the number of investment advisers registered with the Commission grow to over 13,000, with total reported assets under management rising to nearly $84 trillion. [7] These assets represent the earnings and investments of millions of Americans who are saving for retirement, college tuition, and other goals.

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On Elon Musk, Donald Trump, and Corporate Governance

Alissa Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico.

There was something Trumpian in Elon Musk’s tweet about taking Tesla private. “Am considering taking Tesla private at $420. Funding secured”, he boldly and succinctly announced on August 7, claiming that the necessary capital has been confirmed from the Public Investment Fund (PIF), the Saudi sovereign fund that is seeking to become the region’s largest according to the ambitions of its government, including through the much-debated public offering of Saudi Aramco.

Like in a Mexican soap opera, news about the PIF raising fresh capital through the transfer of its 70% stake in SABIC, the Saudi $100 billion petrochemicals giant and the largest listed company in the Kingdom to Saudi Aramco, as well its talks with Tesla’s rival Lucid followed shortly, immediately highlighting the perils of instant communication. As it turns out, tweeting 280-character messages is straightforward, explaining them takes a little more character and significantly more characters.

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Corporate Governance Update: Shareholder Activism Is the Next Phase of #MeToo

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz and Ms. McIntosh that originally appeared in the New York Law Journal.

As the #MeToo movement continues to make itself felt in all facets of American life, public company boards of directors that are newly focused on the issue of workplace harassment have seen corporate responses evolve. In recent months, many boards have overseen the addition of anti- harassment policies to corporate codes of conduct, the establishment of procedures for addressing allegations, and the enhancement of employee training at all levels. Directors are taking proactive steps toward educating themselves and looking deeply into the issues involved, and many have highlighted it as a priority for the senior management team. Boards that have successfully installed the nuts and bolts of good governance in this area can now step back and consider the larger project of gender equality in corporate America, in which sexual harassment, corporate culture, gender pay equity, and gender diversity are related issues. Shareholder activity in all four of these areas—which we will call collectively, “corporate equality”—has markedly increased, and boards looking ahead to the next phase of corporate governance activism should take note of this trend and try to be proactive as opposed to reactive.

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How Blockchain will Disrupt Corporate Organizations

Mark Fenwick is Professor of International Business Law at Kyushu University; Wulf Kaal is Associate Professor at University of St. Thomas School of Law; and Erik P. M. Vermeulen is Professor of Business & Financial Law at Tilburg University. This post is based on their recent paper.

Closed, hierarchical organizations have dominated political, economic and social life for the past several hundred years. Such organizations are characterized by (i) a centralized source of authority; (ii) a formal hierarchy with clearly differentiated functional “roles”; and, (iii) standardized operational systems and procedures dictated by the authority/hierarchy. This type of organization has exerted an enormous influence on the modern world.

In a business context, for instance, centralized, hierarchical organizations have been central to the emergence and global expansion of capitalism. Corporations are the most prominent example of such structures, and the advent and proliferation of the corporate form has been a defining feature of modern economic development. Recall the rapid growth of such organizational structures during the rise of mass production in the context of the industrial revolution.

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Weekly Roundup: September 21-27, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of September 21–27, 2018.


Fake News: Evidence from Financial Markets



Machine Learning and Artificial Intelligence in Financial Services



Audit Committee Disclosures


California Law Awaiting Governor’s Signature Exceeds State’s Jurisdiction



Freeze-Out Mergers


IRS Guidance on Section 162(m) Tax Reform


Employee Voice


Regulation A+ Offerings for Tokens: What is the SEC Waiting For?


Can the First Dutch Stewardship Code Encourage Investors to Act as Stewards


Short-Changing Compliance


Digital Tokens: No Such Thing as a Free Launch

Digital Tokens: No Such Thing as a Free Launch

Daniel Nathan is partner and Angelo Aratan is an associate at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick memorandum by Mr. Nathan and Mr. Aratan, that was previously published on Law360.

The issuance of digital tokens in exchange for services rather than money still can constitute an offering of securities, according to findings recently made by the Securities and Exchange Commission in a settled enforcement action, In the Matter of Tomahawk Exploration LLC and David Thompson Laurance, Securities Act Rel. No. 33-10530, Exchange Act Rel. No. 34-83839, Admin. Proc. File No. 3-18641 (Aug. 14, 2018). Tomahawk Exploration LLC offered and distributed digital assets in the form of tokens called “Tomahawkcoins,” or “TOM tokens” through an initial coin offering (“ICO”). The company offered a “Bounty Program,” whereby Tomahawk dedicated 200,000 TOM tokens to pay third parties, offering between 10 and 4,000 TOM tokens in exchange for the following activities:

  • marketing efforts;
  • making requests to list TOM tokens on token trading platforms;
  • promoting TOM tokens on blogs and online forums such as Twitter or Facebook;
  • creating professional picture file designs;
  • YouTube videos, other promotional materials; and
  • online promotional efforts that targeted potential investors and directed them to Tomahawk’s offering materials.

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Short-Changing Compliance

John Armour is the Hogan Lovells Professor of Law and Finance at the University of Oxford; Jeffrey N. Gordon is Richard Paul Richman Professor of Law at Columbia Law School; and Geeyoung Min is Adjunct Assistant Professor and Postdoctoral Fellow in Corporate Law and Governance at Columbia Law School. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Excess-Pay Clawbacksby Jesse Fried and Nitzan Shilon (discussed on the Forum here).

Our paper Short-Changing Compliance argues for a refashioning of the rules of director liability for failures of compliance oversight, the so-called Caremark standard, in light of changing patterns of executive and director compensation that create short-termist pressures to under-invest in compliance. We propose a regime of fact-finding and clawbacks that runs through an alternative dispute resolution process that could be implemented through a shareholder by-law initiative.

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Can the First Dutch Stewardship Code Encourage Investors to Act as Stewards

Hélène Vletter-van Dort is Professor of Financial Law & Governance at the Erasmus School of Law and Titiaan Keijzer is a Visiting Scholar at Columbia Law School and PhD Candidate at Erasmus School of Law. This post is based on their recent memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

Introduction

On July 3rd, 2018, Eumedion published the first Dutch Stewardship Code (the “Code”), following a public consultation launched in September 2017. The Code provides a set of principles for stewardship by asset owners and asset managers towards Dutch listed investee companies. Eumedion is a cooperative body of mainly Dutch institutional investors, although in recent years, it has been (formally) joined by well-known foreign parties such as BlackRock and Aberdeen. Thus, Eumedion represents a globally highly diversified asset base in excess of € 5 billion. We discuss the background and implications of this first Code and draw comparisons with the Dutch Corporate Governance Code and the UK Stewardship Code.

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Regulation A+ Offerings for Tokens: What is the SEC Waiting For?

Robert Rosenblum is partner and Amy Caiazza and Ben Dickson are associates at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini memorandum by Mr. Rosenblum, Ms. Caiazza, and Mr. Dickson.

In a recent article, we discussed why the Securities and Exchange Commission (“SEC”) and its staff (the “Staff”) continue to think most cryptocurrencies and other crypto assets (“tokens”) are securities at the time they are offered. [1] If a token issuer plans to publicly offer and sell tokens that are securities, the offer and sale of those tokens generally needs to be registered (such as on a Form S-1) or qualified under Regulation A+. [2] For many token issuers, a Regulation A+ offering may be the preferable choice; among other reasons, a token offering under Regulation A+ does not need to be separately approved by state securities commissions, while a registered token offering may require state-by-state approval in addition to approval from the SEC. [3]

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