Monthly Archives: January 2019

The SEC’s Market Abuse Enforcement Priorities

Daniel M. Hawke is a partner at Arnold & Porter Kaye Scholer LLP. This post is based on his Arnold & Porter memorandum.

Since January 2017, the SEC has quietly racked up at least half a dozen major enforcement actions charging a wide range of equity market structure violations. In these cases, dark pools, exchanges and broker-dealers have collectively paid more than $100 million in civil penalties and several of them have involved admissions of liability. Although the Division of Enforcement issued press releases announcing each of the cases, it has been notably restrained in promoting its concentrated efforts in this area, as evidenced by the absence of any mention of market structure enforcement activity in its recently issued 2018 Annual Report. Nevertheless, the number of cases and size of penalties in these actions make clear that market structure enforcement remains a top priority for the Commission and the Enforcement Division’s Market Abuse Unit (MAU). The consequence of this low-key but robust enforcement approach is that market structure enforcement continues to be a high-risk compliance area for market participants with large dollar consequences for would-be violators.


Purpose & Profit

Larry Fink is Founder, Chairman and CEO of BlackRock, Inc. This post is based on Mr. Fink’s annual letter to CEOs.

Dear CEO,

Each year, I write to the companies in which BlackRock invests on behalf of our clients, the majority of whom have decades-long horizons and are planning for retirement. As a fiduciary to these clients, who are the owners of your company, we advocate for practices that we believe will drive sustainable, long-term growth and profitability. As we enter 2019, commitment to a long-term approach is more important than ever—the global landscape is increasingly fragile and, as a result, susceptible to short-term behavior by corporations and governments alike.

Market uncertainty is pervasive, and confidence is deteriorating. Many see increased risk of a cyclical downturn. Around the world, frustration with years of stagnant wages, the effect of technology on jobs, and uncertainty about the future have fueled popular anger, nationalism, and xenophobia. In response, some of the world’s leading democracies have descended into wrenching political dysfunction, which has exacerbated, rather than quelled, this public frustration. Trust in multilateralism and official institutions is crumbling.


Competition and Consumer Protection in the 21st Century

Barbara Novick is Vice Chairman and Bennett Golub is Chief Risk Officer at BlackRock, Inc. This post is based on BlackRock’s letter to the FTC challenging the theory of common ownership.

BlackRock, Inc. (“BlackRock”) appreciates the opportunity to comment in connection with the eighth session of the Federal Trade Commission’s (“FTC” or the “Commission”) hearings on Competition and Consumer Protection in the 21st Century. We welcome the FTC’s Hearings Initiative and efforts to evaluate the effectiveness of competition and consumer protection law, enforcement priorities, and public policy matters in the context of America’s diverse and evolving economy. As an asset manager that invests in thousands of American companies on behalf of our clients, our business benefits from competitive markets and industries. We commend the Commission for prioritizing information gathering and fact-finding to inform its policy efforts.


Market Power and Inequality

Joshua Gans is Jeffrey S. Skoll Chair of Technical Innovation and Entrepreneurship and Professor of Strategic Management at University of Toronto Rotman School of Management; Andrew Leigh is a Member of the Parliament of Australia; Martin C. Schmalz is Associate Professor of Finance at University of Oxford Saïd Business School; and Adam Triggs is Director of Research at the Asian Bureau of Economic Research at the Australian National University Crawford School of Public Policy. This post is based on their recent article, forthcoming in the Oxford Review of Economic Policy.

For over a century, the idea of the United States as a “nation of shareholders” has been a powerful one. This notion has its roots in attempts by the New York Stock Exchange to broaden its political base by ensuring that more Americans owned at least a handful of stocks, and Cold War comparisons of the United States as a shareholding democracy with the central planning of the Soviet Union. The myth of a market dominated by “mom and pop” investors has been used to argue that policies which boost corporate earnings are good for all Americans—because all citizens own a stake in America’s corporations.

But stock owners are not a representative cross-section of society. Most stocks are held by the richest. Inequality in stock holding is far more pronounced than inequality in consumption or income. Moreover, while consumption inequality has stayed stable, inequality in corporate equity holdings has grown considerably over the past generation.


The Expansion of Regulation A

Glenn Pollner and Peter Wardle are partners and Thurston Hamlette is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Pollner, Mr. Wardle, Mr. Hamlette, Hillary Holmes, and James Moloney.

On December 19, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to Regulation A allowing U.S. and Canadian companies that file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to conduct securities offerings using Regulation A. The amendments were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law in May 2018.

Regulation A is available to companies organized in and with their principal place of business in the United States or Canada. Regulation A provides an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), for offers and sales of securities up to $20 million, for Tier 1 offerings, or up to $50 million, for Tier 2 offerings, in a twelve-month period. Prior to the newly adopted amendments, Regulation A was not available to SEC reporting companies.


Remarks at FTC Hearing on Competition and Consumer Protection in the 21st Century

Barbara Novick is Vice Chairman at BlackRock, Inc. This post is based on Ms. Novick’s testimony at the recent FTC hearing on common ownership.

Good morning, and thank you for inviting me to speak on institutional investors, diversification, and corporate governance. I make my comments from the perspective of a practitioner in asset management.

Investment Stewardship

Investment stewardship is a critical element of the corporate accountability chain that empowers shareholders to engage and vote on issues relevant to the long-term success of a firm, and to hold company boards accountable. It is the very essence of how shareholders can exercise their rights to have a say in the governance of the firm in which they own a stake.

This clearly matters to the asset owners, who are the economic owner of the shares, as they participate directly in the fortunes of each company in their portfolio. It also matters to asset managers, who act as fiduciary agents on behalf of asset owners.

Voting in proxies is one of the primary ways that shareholders can express their views on matters important to the success of the company. Many asset owners choose to vote themselves. This includes both asset owners who manage their assets in-house, as well as some who outsource to asset managers. When an asset manager has the authority to vote on behalf of their clients, stewardship codes and regulations encourage, and in some cases mandate, them to do so.

Many asset owners and asset managers use the services of proxy advisors, who make voting recommendations. To understand the role of institutional investors in corporate governance, it is therefore important to understand the wider investment stewardship ecosystem and the different roles of the various participants.


Directors: Older and Wiser, or Too Old to Govern?

Ronald Masulis is Scientia Professor of Finance at University of New South Wales Australian School of Business; Cong Wang is Professor of Finance at The Chinese University of Hong Kong, Shenzhen and the associate director of Shenzhen Finance Institute; Fei Xie is Associate Professor of Finance at the University of Delaware; and Shuran Zhang is Associate Professor of Finance at Jinan University. This post is based on their recent paper.

The past two decades have witnessed dramatic changes to the boards of directors of U.S. public corporations. Several recent governance reforms (the 2002 Sarbanes-Oxley Act, the revised 2003 NYSE/Nasdaq listing rules, and the 2010 Dodd-Frank Act) combined with a rise in shareholder activism have enhanced director qualifications and independence and made boards more accountable. These regulatory changes have significantly increased the responsibilities and liabilities of outside directors. Many firms have also placed limits on how many boards a director can sit on. This changing environment has reduced the ability and incentives of active senior corporate executives to serve on outside boards. Faced with this reduced supply of qualified independent directors and the increased demand for them, firms are increasingly relying on older director candidates. As a result, in recent years the boards of U.S. public corporations have become notably older in age. For example, over the period of 1998 to 2014, the median age of independent directors at large U.S. firms rose from 60 to 64, and the percentage of firms with a majority of independent directors age 65 or above nearly doubled from 26% to 50%.


Corporate Governance Survey: 2018 Proxy Season

David A. Bell is partner at Fenwick & West LLP. This post is based on portions of a Fenwick memorandum titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies (2018 Proxy Season).

Since 2003, Fenwick has collected a unique body of information on the corporate governance practices of publicly traded companies that is useful for Silicon Valley companies and publicly‑traded technology and life science companies across the U.S. as well as public companies and their advisors generally. Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1]

Significant Findings

Governance practices and trends (or perceived trends) among the largest companies are generally presented as normative for all public companies. However, it is also somewhat axiomatic that corporate governance practices should be tailored to suit the circumstances of the individual company involved. Among the significant differences between the corporate governance practices of the SV 150 technology and life science companies and the uniformly large public companies of the S&P 100 are:


Another Look at “Super Options”

Joseph Bachelder is special counsel at McCarter & English LLP. This post is based on an article by Mr. Bachelder published in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this post. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

On Jan. 21, 2018, Tesla granted to its co-founder and chief executive officer, Elon Musk, a performance-based stock option to acquire shares equal to 12 percent of Tesla shares outstanding at the time of grant. This option was discussed in two columns published by the author in the New York Law Journal (May 1 and June 22, 2018), and discussed on the Forum here and here.

On Feb. 26, 2018 another public company, Axon Enterprise, granted a similar option to its co-founder and chief executive officer, Patrick Smith. Like the Tesla/Musk option, it covers shares equal to 12 percent of the employer’s shares outstanding at the time of grant.

These two very large options, with very challenging performance targets, will be referred to in the following discussion as “super options.” Both options were approved by shareholders subsequent to their grants. At the time of writing today’s column, the author was not aware of any other “super options” granted by public companies, except for the option granted by Tesla in 2012 as noted in the following paragraph.


Legal Personhood and Liability for Flawed Corporate Cultures

Jennifer G. Hill is Professor of Corporate Law at the University of Sydney Law School. This post is based on her recent paper.

Although the phrase, “corporate culture”, has been described by commentators as “inherently slippery”, it has become part of the global regulatory zeitgeist. It is now a central feature of a range international discussions about corporate governance and risk management. Numerous international regulators, such as the Basel Committee on Banking Supervision, the UK Financial Reporting Council, the Central Bank of Ireland and the Australian Securities and Investments Commission (“ASIC”) have promoted the need for a positive corporate culture. It is also currently a major theme in the British Academy’s Future of the Corporation Research Program and in Australia’s high-profile Banking Royal Commission. The importance of culture is also becoming increasingly important in corporate governance codes, such as the 2018 UK Corporate Governance Code, and proposed amendments to codes in Australia and Germany, which stress, respectively, a listed corporation’s “social licence to operate” and its “role in the community and its responsibility vis-à-vis society”.


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