Monthly Archives: July 2019

How Boards Govern Disruptive Technology—Key Findings from a Director Survey

Posted by Steve Klemash and Jennifer Lee, EY Center for Board Matters, and Kris Pederson, EY, on
Monday, July 1, 2019
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Steve W. Klemash is Americas Leader and Jennifer Lee is Senior Manager at the EY Center for Board Matters; and Kris Pederson is Corporate Governance Leader, Americas Advisory at EY. This post is based on their joint EY and Corporate Board Member memorandum.

Technology can enable innovation and disrupt existing business models. Many corporate leaders are increasingly considering how technology can improve operational efficiencies, create new products and services, and help their organizations enter untapped markets. They are also surveying the landscape for competitive entrants seeking to disrupt their industry.

Of course, adopting new technology can be challenging and have far-reaching effects both inside and outside of an organization. While many of these can be positive, others can lead to unforeseen risks and unintended consequences. For instance, implementation can bring about risks related to alignment with new or existing business models, resources and training, security and data management, and overall project management, to name just a few.

Overlooking the opportunities and risks related to disruptive technology can be costly, but so too can a rush to implement it. In this report, Corporate Board Member and EY present the key findings of a survey of 365 corporate directors on the topic of disruptive technology. Here’s what we found:

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Deal Insurance: Representation & Warranty Insurance in M&A Contracting

Posted by Sean J. Griffith (Fordham University), on
Monday, July 1, 2019
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Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on his recent article, forthcoming in the Minnesota Law Review. Related research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) both by John C. Coates, IV.

Parties to M&A transactions now commonly purchase insurance against breaches of the reps and warranties. In a forthcoming article, I study Representation and Warranty Insurance (“RWI”) in the U.S. market using two empirical methodologies. First, I survey nearly 100 market participants in the market—insurers, brokers, lawyers, and private equity managers. And second, I analyze the terms of over 400 merger agreements, comparing the terms of insured and uninsured deals. The full study is available here. These are the basics of what I found:

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SEC Rules and Guidance for Broker-Dealers and Investment Advisers

Posted by Jessica Forbes, Stacey Song, and Joanna D. Rosenberg, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Monday, July 1, 2019
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Jessica Forbes and Stacey Song are partners and Joanna D. Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum. Related research from the Program on Corporate Governance includes The Trilateral Dilemma in Financial Regulation by Howell E. Jackson (discussed on the Forum here).

On June 5, 2019, the Securities and Exchange Commission (the “SEC”) voted 3-1 to adopt the highly anticipated rulemaking package addressing investment adviser and broker-dealer standards of conduct. The package includes final versions of (i) the SEC’s interpretation of the standard of conduct for investment advisers (“Final Interpretation”), [1] (ii) new rules to require registered advisers and registered broker-dealers to provide to retail investors a relationship summary (“Form CRS”), [2] (iii) a new rule establishing a standard of conduct for broker-dealers when making recommendations to retail customers (“Regulation Best Interest”), [3] and (iv) the SEC’s interpretation of the “solely incidental” prong of the broker-dealer exclusion from the definition of investment adviser (“Broker-Dealer Exclusion Interpretation”) in the Investment Advisers Act of 1940 (the “Advisers Act”). [4] We discuss each of the rules and interpretations below.

The Fiduciary Duty Interpretation

As with the proposed interpretation of the standard of conduct for investment advisers (the “Proposed Interpretation”), [5] the Final Interpretation includes a discussion of existing SEC guidance and case law regarding an investment adviser’s federal fiduciary duty. This fiduciary duty, which is made enforceable by the antifraud provisions of the Advisers Act, consists of a duty of care and a duty of loyalty. An adviser’s duty of care includes the duty to provide advice that is in the client’s best interest, including a duty to provide advice that is suitable for the client, as well as a duty to seek best execution (if applicable) and a duty to provide advice and monitoring over the course of the relationship (as applicable and agreed upon with the client). An adviser’s duty of loyalty includes the duty to not subordinate a client’s interests to its own, as well as a duty to make full and fair disclosure of all material facts relating to the advisory relationship (including the capacity in which it is acting with respect to the advice provided) and to obtain the client’s informed consent to conflicts of interest. The Final Interpretation clarifies that an adviser’s fiduciary duty applies to all investment advice, including advice about investment strategy, engaging a sub-adviser, and account type. We highlight below our key observations from the Final Interpretation, including notable clarifications and distinctions from the Proposed Interpretation.

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