Monthly Archives: December 2018

The CFTC and Market Manipulation

David Nasse and Lindsey Sullivan are counsels and Stefan Schropp is an associate at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Nasse, Ms. Sullivan, Mr. Schropp, Debbie Monson, and Dan Ward.

In an opinion released on November 30, 2018, federal Circuit Judge Richard Sullivan dismissed a lawsuit brought by the U.S. Commodity Futures Trading Commission (the “CFTC”) seeking to hold a prominent Chicago trader and his investment firm liable for manipulation and attempted market manipulation of a highly illiquid segment of the interest rate swaps market. The decision—which followed a four-day bench trial conducted in 2016—is noteworthy not only for the setback dealt to the CFTC in its first market manipulation trial since 2008, but also for the overarching tenor of the opinion. The CFTC had argued that defendants, responding to a perceived undervaluing of certain swaps, had engaged in market manipulation by placing bids designed to drive up the price of those swaps, thereby benefiting from gains to preexisting long positions and from daily margin payments. Judge Sullivan pulled no punches in concluding that efforts to drive prices towards their “true” value are not the same thing as manipulation, alternatively describing the CFTC’s arguments and evidence as “absurd,” “sermonizing,” “tautological,” and on par with an “earth is flat” denial of basic facts. In addition to its harsh criticism of the CFTC’s case, the court arguably set a higher bar for the government to establish the artificial price element of market manipulation claims, expressly rejecting the CFTC’s long-held position that proving a defendant’s subjective intent to affect the price of commodity could alone satisfy this requirement. What effect the decision will have on the CFTC’s appetite for pursuing market manipulation—particularly at trial—remains to be seen, but the court’s emphatic dismissal will undeniably serve as an important benchmark for market participants assessing enforcement risk in an area of law with few judicial precedents to draw on for guidance.


2019 Global & Regional Trends in Corporate Governance

Jack “Rusty” O’Kelley, III is Global Leader of the Board Advisory & Effectiveness Practice, Anthony Goodman is a member of the Board Consulting and Effectiveness Practice, and Melissa Martin is a Board and CEO Advisory Group Specialist at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Goodman, and Ms. Martin.

Institutional investors (both active managers and index fund giants) spent the last few years raising their expectations of public company boards—a trend we expect to see continue in 2019. The demand for board quality, effectiveness, and accountability to shareholders will continue to accelerate across all global markets. Toward the end of each year, Russell Reynolds Associates interviews a global mix of institutional and activist investors, pension fund managers, proxy advisors, and other corporate governance professionals regarding the trends and challenges that public company boards may face in the coming year. This year we interviewed over 40 experts to develop our insights and identify trends.

Overview of Global Trends

In 2019, we expect to see the emergence or continued development of the following key global governance trends:


Fighting the Rising Tide of Federal Disclosure Suits

Alexandra C. Boudreau is counsel and Daniel W. Halston is partner at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on their WilmerHale memorandum.

In the past few years, there has been a dramatic rise in the number of M&A disclosure lawsuits filed in federal court. Recently, courts have begun to fight back against this nuisance litigation using different approaches. This post summarizes those developments.

Recently, many have reported on the increase in the number of lawsuits in Federal Court challenging public company mergers brought by shareholders alleging violations of Section 14(a), which prohibits false and misleading statements in proxy materials. It appears that after the Delaware Court of Chancery cracked down on reflexively filed M&A suits in In re Trulia Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), the plaintiffs’ bar diverted its flood of litigation following the public announcement of a merger into this previously quiet rivulet. The rush of 14(a) suits continues unabated this year.


Stock Exchanges and Shareholder Rights: A Race to the Top, Not the Bottom?

George S. Dallas is Policy Director at International Corporate Governance Network (ICGN). This post is based on an ICGN memorandum by Mr. Dallas. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Lucian A. Bebchuk, Michal Barzuza, and Oren Bar-Gill.

Stock exchanges form a critical component of the global financial market ecosystem, serving as gatekeepers linking companies to investors and as a platform for trading the securities of listed companies. Investors, as providers of capital, are customers of stock exchanges, and constitute a key stakeholder base. [1] In many areas, investors and stock exchanges are aligned in their views about promoting the health of financial markets, the protection of investors and the corporate governance of listed companies. But there are also potential areas of disconnect. These were explored in the plenary of ICGN’s 2018 Milan conference and also in a private meeting in Milan between ICGN members and some representatives of the World Federation of Exchanges. The discussions focused on how stock exchanges influence corporate governance, and also raised questions about conflicts of interest and the governance of stock exchanges themselves.


Regulatory Support for Innovative Compliance Measures

V. Gerard Comizio and Michael T. Gershberg are partners and Nathan S. Brownback is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum.

On December 3, 2018, the federal banking regulators [1] and the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a joint statement (the “Statement”) [2] encouraging banks to adopt innovative technological approaches to comply with the requirements imposed on them pursuant to the Bank Secrecy Act (“BSA”) and other anti-money laundering (“AML”) laws and related regulations. [3] The Statement does not impose any new obligations, but instead provides some degree of regulatory comfort for banks that seek to reduce costs and/or improve their compliance systems by trying new approaches to meet their BSA/AML compliance obligations, provided they continue to comply with BSA/AML requirements in accordance with their safety and soundness obligations.


Corporate Governance 2030: Thoughts on the Future of Corporate Governance

Stilpon Nestor is the managing director of Nestor Advisors Ltd and the Chairman of Aktis Ltd. This post is based on his keynote speech delivered at the Nominee Directors Day of the Deutsche Investitions-und Entwicklungsgesellschaft (KfW DEG), in Cologne, 28 September 2018.

The topic of “Corporate Governance 2030” might encourage wild speculation in this period of great, some would say, epochal change. Some might see the demise of the corporation; others, the emergence of new organisations with intelligent robots playing the role of boards. And so on and so forth. The truth is that 12 years is not such a long time. Heuristically turning to the past 12 years, one sees that the changes in corporate governance have been relatively limited. Only in the banking sector have there been any truly significant changes. These were not the result of a huge technological disruption but of a crisis: the most common reason to change corporate governance expectations, regulation and practice. One should therefore expect limited change. But change there will be, and it will be mainly driven by four key drivers: diversity, disclosure, data and Development Financial Institutions (DFIs)


The Aftermath of the SEC Proxy Process Roundtable

Steve Seelig and Puneet Arora are regulatory advisors at Willis Towers Watson. This post is based on a Willis Towers Watson memorandum by Mr. Seelig and Mr. Arora.

What’s clear from the recent Securities and Exchange (SEC) roundtable on the proxy voting process and subsequent press accounts is that concerned parties have very different agendas for possible next steps. So we’re hesitant to believe predictions that regulation of proxy advisory firms is imminent or that the entire shareholder proposal process needs to be revamped. Many stakeholders are content with the current state of affairs. That said, the roundtable enables the SEC to build a record of public comments to support its rulemaking decisions, increasing the odds of new regulations forthcoming on the three topics covered.

Proxy Advisor Discussion

Prior to the roundtable, the proxy advisor topic appeared to be the most controversial, so it seemed appropriate for the SEC to place it last on the agenda. Yet, we heard little appetite from attendees for changing how advisors participate in the proxy voting process based on the important role they play in assisting institutional investors with voting recommendations. The roundtable also avoided a deep examination of whether ISS’ simultaneous work with clients and issuance of proxy recommendations is a potential conflict of interest. ISS, however, noted that it makes available to its clients revenue data earned from consulting services to issuers to whom it makes voting recommendations.


The Scope of Liability for Fraudulent Statements

Jonathan K. Youngwood, Cheryl Scarboro, and James G. Kreissman are partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Youngwood, Ms. Scarboro, Mr. Kreissman, Michael J. Osnato, Peter E. Kazanoff, and Susannah S. Geltman.

The Supreme Court heard oral arguments in Lorenzo v. Securities and Exchange Commission, No. 17-1077, on Monday, December 3, 2018, to decide whether an individual who merely distributed a material misstatement or omission, and is thereby not the “maker” of the statement under the test set forth in Janus Capital Group, Inc. v. First Derivative Traders[1] can nonetheless be held liable under the “fraudulent scheme” provisions of Rule 10b-5(a) and (c). The circuit courts are split on this issue: The Second, Eighth, and Ninth Circuits have held that a misstatement cannot be the sole basis for a fraudulent scheme claim, while the D.C. Circuit and Eleventh Circuit have held that a misstatement standing alone can be the basis for such a claim.

The decision in this case has the potential to impact civil enforcement by the Securities and Exchange Commission, as well as the claims that can be brought by private litigants.


SEC Formal Comment Process for Quarterly Reporting and Earning Guidance

Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz, focusing on rapid response shareholder activism and preparedness, takeover defense and corporate governance. This post is based on a Wachtell Lipton memorandum by Mr. Niles. 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 hereand Stock Market Short-Termism’s Impact by Mark Roe (discussed on the Forum here).

In a potentially significant step for public companies and the U.S. economy, the SEC today [December 18, 2018] launched a formal comment process aimed at optimizing the periodic reporting system for U.S. companies. The SEC’s review is wide-ranging, reaching whether reforms could and should be made to discourage quarterly forward-looking earnings guidance, the reasons for quarterly earnings releases and their content, whether Form 10-Qs are useful or overly burdensome or duplicative, the possibility of moving to mandatory or optional semi-annual reporting for all or some reporting companies, the degree to which the frequency of reporting and guidance may lead managers to focus on short-term results to the detriment of long-term performance, the identification of other factors that may promote short-termism and whether there are relevant learnings from other markets where companies can report on a six-month or other schedule.


Safe Harbor for the Distribution of Research Reports

Brian D. Hirshberg is counsel and J. Paul Forrester and Anna T. Pinedo are partners at Mayer Brown LLP. This post is based on their recent Mayer Brown memorandum.

On November 30, 2018, the Securities and Exchange Commission (the “Commission”) adopted a new rule [1] establishing a non-exclusive research report safe harbor (“Rule 139b”) for unaffiliated brokers or dealers that publish or distribute research reports [2] regarding qualifying investment funds. The Commission took this action in furtherance of the mandate of the Fair Access to Investment Research Act of 2017 (the “FAIR Act”). The FAIR Act required that the Commission expand the Rule 139 safe harbor for research reports in order to cover research reports on investment funds.

The research safe harbor is now available to research reports regarding qualifying mutual funds, exchange-traded funds, registered closed-end funds, business development companies (“BDCs”) [3] and similar covered investment funds. Under the new safe harbor, the publication or distribution of a research report would not be deemed to constitute an “offer” under the Securities Act of 1933, as amended (the “Securities Act”), of the qualifying covered investment fund’s securities. The safe harbor is available even if the broker-dealer is participating in or may participate in a registered offering of the covered investment fund’s securities. Adoption of this safe harbor reduces obstacles that previously prevented investors from accessing research reports on investment funds.


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