Monthly Archives: September 2019

Incorporating Market Reactions Into SEC Rulemaking

Alex Lee is Professor of Law at Northwestern Pritzker School of Law. This post is based on a recent article, forthcoming in the Wake Forest Law Review.

How might a financial regulator, such as the SEC, engage in an empirically informed rulemaking? This question has been an interest of mine since my days of working at the SEC. For example, how exactly would empirically informed rulemaking work in a setting where a regulatory agency seeks to adopt a rule of first impression—a rule for which the agency (as well as the industry) lacks data to support its position?

There are a few possible approaches. One approach is for the agency to reason by way of analogy: the agency can try to argue that its new rule will operate in a similar manner as another known regulation that has been tried and tested. If the agency is lucky, it may even be able to cite an empirical study that documents the effectiveness of this other regulation. Imperfect as it is, even this option is not always available. The fact is that there isn’t always a similar rule out there for each new proposed rule. Another approach is for the agency to rely on a trial regulation: the agency can adopt a version of the rule on an experimental basis, assess the rule’s effectiveness and efficiency after some time, and then adopt a final version of the rule informed by the industry’s compliance experience. This would be considered an ex post approach—in the sense that the agency would gather compliance data from the industry after the rule has been in effect for some time. While promising, this approach has two limitations. First, reliable compliance data may not become available for a long time. Second, it is difficult to use this approach for decisionmaking purposes when the rule’s effects are irreversible.


Firearms—Investor Responses amid Political Inaction

Damien Fruchart is Associate Director, Michael Jenks is Vice President, and Verena Simmel is an Associate at ISS ESG. This post is based on their ISS memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

During the first weekend of August, the United States (U.S.) again experienced two deadly mass shootings, the first one taking place in a Walmart store in El Paso, Texas, the second in the Oregon Historic District in Dayton, Ohio. The shootings, which occurred within less than 24 hours of each other, left 32 people dead and dozens more injured. In the wake of these events the issue of gun violence and gun control has once more become a focal point of public debate in the U.S., which, according to the Gun Violence Archive, already experienced more than 270 mass shootings, defined as a shooting incident where four or more people (not including the perpetrator) are shot or killed, since the beginning of 2019. As of today, three weeks after the shooting in Dayton on August 4, 2019, a further 25 mass shootings have taken place across the U.S.

Despite recurring outcry and raging debate following previous prominent mass shootings—including those at Sandy Hook Elementary School in Newton, Connecticut, in December 2012, at a nightclub in Orlando, Florida, in June 2016, and at Marjorie Stoneman Douglas High School in Parkland, Florida, in March 2018—legislative responses have been hampered by lawmakers’ divisions about how, or if, to address the issue. After the recent events in El Paso and Dayton the public debate focused anew on the issue of background checks.


Presidential Authority to Ban Companies from Operating in China

Brad S. Karp is chairman and Roberto J. Gonzalez and Jessica S. Carey are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Karp, Mr. Gonzalez, Ms. Carey, Richard S. Elliott and Joshua R. Thompson.

On August 23, 2019, President Trump tweeted that “American companies are hereby ordered to immediately start looking for an alternative to China, including bringing. . .your companies [home] and making products in the USA.” [1] In further tweets, the President raised a series of grievances with China, including intellectual property theft, and ordered several U.S. companies to begin searching for and refusing all deliveries of fentanyl from China. [2] Responding to press reaction questioning the authority for his directives, President Trump tweeted: “For all the Fake News Reporters that don’t have a clue as to what the law is relative to Presidential powers, China, etc., try looking at the Emergency Economic Powers Act of 1977. Case closed!” [3]

Although viewed by many observers as a negotiating tactic, the President’s threatened ban on U.S. business in China has provoked debate over whether such action would be authorized by the statute he cites, the International Emergency Economic Powers Act (“IEEPA”), and vulnerable to other legal challenges. Below we provide an overview of the relevant legal issues.


SEC Proposal Concerning Regulation S-K

Brian Breheny is partner, Andrew Brady is of counsel, and Ryan Adams is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

On August 8, 2019, the Securities and Exchange Commission (SEC) announced proposed amendments to modernize the rules requiring description of business, legal proceeding and risk factor disclosures pursuant to Regulation S-K. The proposed amendments are intended to improve the readability of disclosures for investors and simplify compliance requirements for companies. Below is a summary of the highlights from the proposal.

Proposed Amendments

Notably, the proposed amendments eliminate certain prescriptive requirements to reflect a more principles-based approach to disclosures relating to the description of business (Item 101) and risk factors (Item 105), by focusing on information that is material to an investor’s understanding of a company’s business and avoiding redundant disclosures. Although the proposal contemplates potentially incorporating parallel changes across all forms filed by foreign private issuers, including annual reports on Form 20-F, the proposed changes regarding risk factors would apply to foreign private issuers filing registration statements on Forms F-1, F-3 and F-4.


Proxy Scorecard and Fund Competition

James McRitchie is the publisher of 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) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Corporations facilitated the most dynamic economic growth in history. Dispersed ownership hampers their ability to address adverse impacts that undermine workers, society and the environment. Ironically, the concentrated power of giant index funds presents an opportunity to address those issues through proxy scorecards providing increased feedback. See SEC rulemaking petition, File 4-748, Request to amendment of Title 17, §270.30b1-4, Report of proxy voting record. Real-time disclosure of corporate proxy votes would lead to competition among funds, based not only on historic costs and returns, but values expressed in vigorously debated proxy scorecards.

Suggested Tax Reforms Will Not Change Mutual Funds into Worker Advocates

Leo E. Strine, Jr, Chief Justice of the Delaware Supreme Court, and Antonio Weiss, of Harvard’s Kennedy School), argue large institutional investors fail to engage on behalf of workers in corporate governance debates (Why Isn’t Your Mutual Fund Sticking Up for You?). Since worker interests go unrepresented, America suffers growing inequality, environmental degradation and a host of other ill-effects. Most Americans invest through their employer’s 401(k) accounts.


Putting to Rest the Debate Between CSR and Current Corporate Law

Peter A. Atkins, Marc S. Gerber, and Edward B. Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

There is an ongoing debate regarding the role of publicly traded for-profit business corporations in addressing the many serious challenges confronting society, including some directly involving nonshareholder corporate stakeholders (such as employees and communities). It has been framed most recently by a statement issued by the Business Roundtable on the purpose of a corporation and a response by the Council of Institutional Investors. [1] As is the nature of many debates, some frame this as an all-or-nothing exercise, with a spotlight on the sharpest point of divergence, and with some calling for federal legislation to address the issue.

Stepping back from an all-or-nothing dichotomy, and regardless of whether one is ideologically for or against publicly traded for-profit business corporations spending corporate funds on societally important objectives, from a legal perspective this debate already has been solved.


Implicit Communications and Enforcement of Corporate Disclosure Regulation

Ashiq Ali is the Charles and Nancy Davidson Chair in Accounting at the Naveen Jindal School of Management, University of Texas at Dallas; Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law and Co-Director, Institute for Law and Economics at the University of Pennsylvania Law School; and Hoyoun Kyung is an assistant professor at the Trulaske College of Business at the University of Missouri. This post is based on their recent paper.

Corporate disclosure regulation and enforcement attempt to regulate the information publicly-traded corporations disseminate into the market. Although the federal securities laws focus primarily on explicit quantitative disclosures, corporations and corporate officials also make extensive use of implicit communications—qualitative information, tone and non-verbal cues. Thus, it is important to understand the extent to which information is communicated in an implicit manner. One of the key sources of implicit communication is private meetings in which there are only a select few market participants, providing the attendees with an opportunity to observe not just what is said, but how it is said. The scope of potential liability exposure that corporate officials face for such private communications has a critical effect on the effectiveness of corporate disclosure regulations in regulating implicit communications.

In our paper, we examine this issue in the context of Regulation Fair Disclosure (FD), which prohibits publicly-traded companies from disclosing material non-public information selectively. Specifically, we analyze empirically the effect of the federal court’s 2005 decision in SEC v. Siebel Systems on managers’ selective disclosure to financial analysts. Using a variety of tests, we provide evidence consistent with the conclusion that the court’s ruling led to a statistically and economically significant increase in selective disclosure. We posit that the market viewed the Siebel decision as a signal that the SEC could not effectively enforce Regulation FD against corporate officials who privately communicated information through positive or negative language, tone, and non-verbal cues.


Weekly Roundup: August 30–September 5, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 30–September 5, 2019.

UK Guidance on Corporate Cooperation Credit

Closing the Information Gap

Compensation Committees and ESG

A More Strategic Board

Confidentiality and Inspections of Corporate Books and Records

Cyber Risk Board Oversight

Federal Forum Provisions and the Internal Affairs Doctrine

Automatic Stay of Discovery—Securities Act Class Actions in State Courts

2019 Mid-Year Securities Litigation Update

SEC’s New Guidance on Proxy Voting Responsibilities

Remarks to the SEC Investor Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s remarks to the SEC Investor Advisory Committee, 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.

Good morning. I understand the Committee will be continuing the discussion about our proxy system in today’s telephonic meeting.

Last month the Commission issued guidance regarding how an investment adviser’s fiduciary duty and Rule 206(4)-6 under the Advisers Act relate to an adviser’s proxy voting on behalf of its clients, including in circumstances where the investment adviser uses a proxy advisory firm. [1] In addition, the Commission issued a separate interpretation and related guidance that proxy voting advice provided by proxy advisory firms generally constitutes a solicitation subject to the federal proxy rules. [2] Neither of these actions changed existing law or rules. They do, however, embody two fundamental tenets.

First, as this group’s work has often emphasized, including today’s agenda, proxy voting generally is considered important. [3] The importance of the proxy voting process is made clear in many ways, including that our proxy rules regulate how proxies can be solicited and what information must be disclosed. Those rules impose significant anti-fraud liability on statements which, at the time and in the light of the circumstances under which they are made, are false or misleading with respect to any material fact. [4]


Activist Proxy Slates and Advance Notice Bylaws

Steven M. Haas is partner at Hunton Andrews Kurth LLP. This post is based on a Hunton Andrews Kurth memorandum by Mr. Haas, and is part of the Delaware law series; links to other posts in the series are available here.

In a recent bench ruling, the Delaware Court of Chancery enforced an advance notice bylaw and thereby precluded an activist investor from nominating a slate of directors and conducting a proxy contest at a company’s annual meeting.  The court enforced the plain terms of the advance notice bylaw, which required that notice of the nominations had to be given by a stockholder of record. The court found that the activist owned shares only in “street name” on the deadline for giving notice of its nominations, was aware of the bylaw’s requirements, and failed to meet such requirements, and that the corporation was not at fault for the activist’s mistake. The court also refused to give effect to a second notice submitted by the activist promptly after the deadline that had cured its share ownership deficiency.


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