Monthly Archives: April 2019

Remarks at the 29th International Institute for Securities Market Growth and Development

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at the 29th International Institute for Securities Market Growth and Development, 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.

Thank you, Erin [McCartney], for that warm introduction.

Welcome to the SEC’s 29th Annual International Institute for Securities Market Growth and Development. [1]

Thank you for being our guests over the next two weeks.

It is our honor to host 186 delegates from 69 countries this year. I know that many of you traveled long distances to be with us today, and I am appreciative of your dedication and your desire to engage in a dialogue with your international counterparts.

During your time at the Institute, you will hear from the SEC’s experts on a wide variety of subject matters, and you will also receive presentations from staff at the World Bank, the Commodity Futures Trading Commission, and the Financial Industry Regulatory Authority. I am confident that you will gain new insights and approaches that you can apply when you return home.


The Politics of CEOs

Alma Cohen teaches at Harvard Law School and Tel-Aviv University School of Economics. Moshe Hazan and David Weiss teach at Tel-Aviv University School of Economics. Roberto Tallarita is Associate Director of the Program on Corporate Governance, as well as Terrence C. Considine Fellow in Law and Economics, at Harvard Law School. This post is based on a new Harvard Law School Program on Corporate Governance study that they authored, The Politics of CEOs.

Related research from the Program on Corporate Governance includes The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here); Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending by Leo E. Strine, Jr. (discussed on the Forum here); and Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United by Leo E. Strine Jr. and Nicholas Walter (discussed on the Forum here).

We have recently placed on SSRN a new study, The Politics of CEOs. The study, which was the subject of a recent New York Times column by Andrew Ross Sorkin last week, presents novel empirical evidence on the partisan leanings of public-company CEOs. We also discuss the policy implications of our findings.

Chief executive officers (CEOs) of public companies have substantial influence over the political spending of their firms, an issue that has attracted significant attention since the Supreme Court decision in Citizens United. Furthermore, the policy views expressed by CEOs receive both substantial media coverage and attention from policymakers. Therefore, we argue that the political preferences of CEOs are important for understanding the inner dynamics of U.S. policymaking and politics.

To measure CEO political views, we use Federal Election Commission (FEC) records to compile a comprehensive database of the political contributions made by public-company CEOs during the 18-year period 2000-2017. In particular, we examine the political spending of more than 3,500 individuals who served as CEOs of S&P 1500 companies during this period.

We find that these political contributions display substantial partisan preferences in support of Republican candidates. We classify CEOs as “Republican” if they contribute primarily to Republican candidates, “Democratic” if they contribute primarily to Democratic candidates, and “Neutral” if they split their financial support among the two major parties. We find that 58% of CEOs are Republicans (so defined), while only 18% are Democrat (and the remaining 24% Neutral). Furthermore, Republican CEOs lead companies with more than twice the asset value of companies led by Democratic CEOs.

We also investigate the extent to which the predominance of Republican CEOs varies across industries, geographical regions, and CEO gender. Additionally, we show that public companies led by Republican CEOs are less likely to disclose their political spending to their investors. Finally, we conclude by discussing the important policy implications of our analysis.

Below we provide a more detailed account of our analysis:


FCPA and the Commodity Exchange Act: A New Relationship

David Yeres is senior counsel, and David DiBari and Robert Houck are partners at Clifford Chance US LLP. This post is based on a Clifford Chance memorandum by Mr. Yeres, Mr. DiBari, Mr. Houck, Brendan Stuart and Ben Peacock.

On March 6, 2019, the Enforcement Division of the U.S. Commodity Futures Trading Commission (“CFTC” or the “Commission”) issued an Enforcement Advisory applicable to non-registered companies and individuals regarding its cooperation and self-reporting program specifically relating to violations of the Commodity Exchange Act (“CEA”) that involve foreign corrupt practices (the “CFTC Foreign Corrupt Practices Advisory” or the “Advisory”). [1] The CFTC Foreign Corrupt Practices Advisory indicates a potential new front of the CFTC’s enforcement program based on a novel application of the CEA. In recent remarks, the CFTC’s Division of Enforcement Director has indicated that the Commission may bring enforcement actions in cases involving foreign corrupt practices under CEA provisions that are analogous to those contained in statutes enforced by the U.S. Securities and Exchange Commission (“SEC”). [2] In addition, the Advisory builds upon and incorporates the CFTC’s January 2017 and September 2017 Enforcement Advisories, which promised meaningful reductions in penalties where a company or individual self-reports, fully cooperates, and takes remedial measures (see our January 2017 and September 2017 client briefings). And in keeping with the CFTC’s stated desire to harmonize its enforcement regime with those of authorities holding concurrent jurisdiction, the Advisory echoes guidance that the U.S. Department of Justice (“DOJ”) published in its November 2017 FCPA Corporate Enforcement Policy. [3]


The SEC and Self-Reporting of Financial Conflicts of Interest

Shamoil T. Shipchandler, Sarah L. Levine, and Laura S. Pruitt are partners at Jones Day. This post is based on a Jones Day memorandum by Mr. Shipchandler, Ms. Levine, Ms. Pruitt, and David P. Bergers.

Initial results of the SEC’s Share Class Disclosure Initiative indicate a heightened focus on disclosures made to retail investors and consequences for any failure to self-report.

On February 12, 2018, the U.S. Securities and Exchange Commission launched its “Share Class Selection Disclosure Initiative” (“SCSDI”), which provided incentives to investment advisers to self-report violations of the federal securities laws related to undisclosed conflicts of interest in mutual fund share class selections. In establishing the initiative, the SEC warned that any failure by a firm to self-report under the initiative would likely result in even more significant sanctions.


Proxy Preview 2019

Heidi Welsh is Executive Director at the Sustainable Investments Institute (Si2) and Michael Passoff is the founder and CEO of Proxy Impact. This post is based on a joint report from Proxy Impact, Si2, and As You Sow, authored by Ms. Welsh, Mr. Passoff, and Andrew Behar. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Proponents have filed at least 386 shareholder resolutions on environmental, social and sustainability issues for the 2019 proxy season, Environmental, Social & Sustainability Resolutions with 303 still pending as of February 15. Securities and Exchange Commission (SEC) staff have allowed the omission of only six proposals so far in the face of company challenges, far fewer than the 27 omitted at this point last year because the SEC was included in the recent six-week government shutdown. Companies have lodged objections to at least 54 more proposals that have yet to be decided.

Proponents have already withdrawn more proposals than they had last year—71, up from 62 in mid-February 2018. Usually these are a sign that proponents and companies have reached an agreement.

Last year, the overall tally of resolutions reached 460 by year’s end, down from 494 in 2017. The proportion voted on dropped by 10 percentage points, to 177 resolutions, the lowest level of the decade and well below a high of 243 in 2016. Proponents withdrew 210 resolutions in 2018, nearly half of all they filed. Companies omitted a total of 65 proposals after SEC challenges in 2018, down from 77 in 2017.


Negative Activism

Barbara Bliss is assistant professor of finance at the University of San Diego School of Business; Peter Molk is associate professor of law at the University of Florida Levin College of Law; and Frank Partnoy is the Adrian A. Kragen Professor of law at the University of California Berkeley School of Law. This is based on their recent article, forthcoming in the Washington University Law Review. 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).

What we call “positive activism” is familiar to readers here. A hedge fund acquires a stake in a company, announces it, and demands reform. The targeted company’s stock price typically increases, and a battle ensues.

We focus on the mirror image of positive activism, which we term “negative activism.” Negative activists take short positions and profit from share price declines. They have the financial incentive to destroy, rather than create, company value.

In our article Negative Activism, we identify and systematically address the concept of negative activism. First, we set forth an analytic framework, grouping negative activism into three categories. Informational negative activism seeks to reduce company values by releasing negative information about those companies. We provide empirical evidence showing that, across a wide variety of informational categories, informational negative activism is associated with statistically significant decreases in company values. Operational negative activism seeks to destroy companies’ operations, in the process reducing those companies’ stock prices.  We offer a mix of empirical and anecdotal evidence highlighting negative activists’ success in doing so.  Finally, unintentional negative activists are failed positive activists; their interventions are meant to increase company values but are instead associated with negative returns.  We provide empirical evidence on the surprising frequency of this phenomenon.


Mandatory Arbitration Shareholder Proposal Goes to Court

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

You might remember this no-action letter to Johnson & Johnson granting relief to the company if it relied on Rule 14a-8(i)(2) (violation of law) to exclude a shareholder proposal requesting adoption of mandatory shareholder arbitration bylaws. (See this PubCo post.) In that letter, the staff relied on an opinion from the Attorney General of the State of New Jersey, the state’s chief legal officer, which advised the SEC that the proposal was excludable under Rule 14a-8(i)(2) because “adoption of the proposed bylaw would cause Johnson & Johnson to violate applicable state law.” The issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position: “The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention. As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration,” consideration that would be more appropriate at the Commissioner level than at the staff level. However, mandatory arbitration was not an issue that he was anxious to have the SEC wade into at that time. To be sure, if the parties really wanted a binding answer on the merits, he suggested, they might be well advised to seek a judicial determination. And, you guessed it—Clayton’s words to the proponent’s ears—the proponent filed this complaint on March 21.


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