Yearly Archives: 2019

Proxy Plumbing Recommendation

Posted by Anne Sheehan and John C. Coates, SEC Investor Advisory Committee, on
Tuesday, September 10, 2019
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Anne Sheehan is Chair of the SEC’s Investor Advisory Committee (IAC) and John C. Coates is a Committee member and the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post is based on a recent IAC recommendation.

This recommendation relates to the U.S. proxy system. The proxy system is complex and multifaceted and will require an iterative, multi-step approach to improve it over a long period of time. We do not believe private actors will improve the system without SEC intervention. We have focused on areas that are clearly in need of immediate attention, that can attract a consensus from a wide array of stakeholders, and that we also believe are actionable by the Commission in a relatively short period of time. After setting out goals, noting reasons that private actors may lack incentives to improve the system on their own, reviewing evidence about problems with the current system, and noting the possibility of comprehensive, long-term, technology-based reform, we make four specific recommendations:

  • The SEC should require end-to-end vote confirmations to end-users of the proxy system, potentially commencing with a pilot involving the largest companies;
  • The SEC should require all involved in the system to cooperate in reconciling vote-related information, on a regular schedule, including outside specific votes, to provide a basis for continuously uncovering and remediating flaws in the basic “plumbing” of the system;
  • The SEC should conduct studies on (a) investor views on anonymity and (b) share lending, and
  • The SEC should adopt its proposed “universal proxy” rule, with the modest changes that would be needed to address objections that have been raised to that

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The SEC and Regulation of Exchange-Traded Funds: A Commendable Start and a Welcome Invitation

Posted by Henry T. C. Hu (University of Texas Law School) and John D. Morley (Yale Law School), on
Tuesday, September 10, 2019
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Henry T. C. Hu is the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School and John D. Morley is Professor of Law at Yale Law School of Law. This post is based on their recent article, forthcoming in Southern California Law Review.

Exchange-traded funds (“ETFs”) are among the most important financial innovations of the modern era. ETFs offer individual and institutional investors alike a unique investment opportunity. Throughout the trading day, the ETF can be viewed as providing a nearly “frictionless,” often low-cost portal to and from a bewildering universe of plain vanilla and arcane asset classes, passive and active investment strategies, and long, short, and leveraged exposures. But ETFs also entail distinctive risks, flowing in part from their reliance on a unique market microstructure for its shares, the central feature of which is a device we refer to as the “arbitrage mechanism.” This device has sometimes failed dramatically in times of market stress, even among the most plain vanilla ETFs. Certain ETFs may present complex risks not only to their shareholders but to the asset markets that the ETFs invest in. Despite the importance of ETFs and the distinctive risks they pose, the United States does not have a dedicated system of ETF regulation or even a workable, comprehensive conception of what an ETF is. This Article addresses the problem by assessing the SEC’s recent effort in this area in light of the recommendations we provided in prior research.

In March 2018, we offered the first academic work to show the need for, or to present, a comprehensive regulatory framework for all ETFs. On June 28, 2018, just prior to that article’s scheduled publication, the SEC issued a proposal to change the way it regulates certain types of ETFs. On May 20, 2019, the SEC issued its “Precidian” exemptive order, allowing for the first time “non-transparent” actively managed ETFs—an order that we believe has surprising, hitherto unexplored implications for ETF regulation.

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Executive Compensation and ESG

Posted by Jannice L. Koors, Pearl Meyer & Partners LLC, on
Tuesday, September 10, 2019
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Janice Koors is senior managing director at Pearl Meyer & Partners, LLC. This post is based on a Pearl Meyer memorandum by Ms. Koors. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

In the United States, environmental, social, and governance (ESG) issues have become a priority, especially for the largest public companies. In a 2017 survey, “Pearl Meyer Quick Poll: ESG and its Potential Link to Incentives,” [1] 60 percent of companies surveyed report that ESG issues are a top concern and of those, 34 percent indicated that ESG issues are firmly entrenched in their companies. From an external reporting perspective, the Governance and Accountability Institute, a consulting and research firm focused on sustainability issues, says that in 2015, 81 percent of the S&P 500 published corporate reports on their ESG positions, up from just 20 percent four years prior. [2] While not driven by disclosure regulation, the topic is receiving attention largely due to a combination of investor, employee, and customer interest.

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Rule 14a-8 No-Action Requests

Posted by William H. Hinman, U.S. Securities and Exchange Commission, on
Monday, September 9, 2019
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William H. Hinman is Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission.

After the recent proxy and shareholder proposal season, the Division considered whether additional guidance or changes to its process of administering Exchange Act Rule 14a-8 were warranted. As a result of that consideration, the staff focused on how it could most efficiently and effectively provide guidance where appropriate.

The staff will continue to actively monitor correspondence and provide informal guidance to companies and proponents as appropriate. In cases where a company seeks to exclude a proposal, the staff will inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to state a view, with respect to the company’s asserted basis for exclusion. Starting with the 2019-2020 shareholder proposal season, however, the staff may respond orally instead of in writing to some no-action requests. The staff intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.

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Incorporating Market Reactions Into SEC Rulemaking

Posted by Alex Lee (Northwestern University), on
Monday, September 9, 2019
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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.

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Firearms—Investor Responses amid Political Inaction

Posted by Damien Fruchart, Michael Jenks, and Verena Simmel, ISS ESG, on
Monday, September 9, 2019
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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.

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Presidential Authority to Ban Companies from Operating in China

Posted by Brad S. Karp, Roberto J. Gonzalez and Jessica S. Carey, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Sunday, September 8, 2019
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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.

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SEC Proposal Concerning Regulation S-K

Posted by Brian V. Breheny, Andrew J. Brady, and Ryan J. Adams, Skadden, Arps, Slate, Meagher & Flom LLP, on
Sunday, September 8, 2019
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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.

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Proxy Scorecard and Fund Competition

Posted by James McRitchie, CorpGov.net, on
Saturday, September 7, 2019
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James McRitchie is the publisher of CorpGov.net. 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.

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Putting to Rest the Debate Between CSR and Current Corporate Law

Posted by Peter A. Atkins, Marc S. Gerber, and Edward B. Micheletti, Skadden, Arps, Slate, Meagher & Flom LLP, on
Saturday, September 7, 2019
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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.

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