Monthly Archives: March 2020

Statement by Chairman Clayton on Harmonizing, Simplifying and Improving the Exempt Offering Framework

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. 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.

Today, the Commission proposed amendments that would harmonize, simplify and improve the framework for private offerings under the Securities Act of 1933. Today’s proposals would rationalize an overly complex, patchwork regulatory framework and thereby promote capital formation while preserving or enhancing important investor protections. The proposals, which reflect a comprehensive retrospective review, are a continuation of our ongoing efforts to modernize our key rule sets.

Our markets are far different today than they were 35 or more years ago. Then, our private capital markets were a minor component of our economy for both companies and investors. Today, in terms of the amount of capital raised, investment opportunities, returns and other key metrics, our private capital markets often are seen as more attractive for large, seasoned companies and professional investors than our public markets. These companies and investors have the resources, expertise and experience to navigate complex rule sets. Today’s proposals are centered on small and medium-sized companies. These companies contribute substantially to our economy but are unlikely to become public companies due to their size, the nature of their capital needs, or other factors. For them, private offerings are a key source of capital to continue to grow and create jobs. However, they generally do not have the sophistication to effectively navigate complex rule sets. Congress and the Commission have long recognized this dependence on our private markets and have significantly expanded the private offering framework over many years. These efforts have created more avenues for capital formation but have not reduced complexity.


Statement by Commissioner Peirce on Proposed Amendments for Facilitating Capital Formation and Expanding Investment Opportunities

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Today’s [March 4, 2020] proposed rules are a welcome next step in the Commission’s efforts to simplify, harmonize, and improve our exempt offering framework. This proposal, which follows last year’s harmonization concept release and proposed amendments to the accredited investor definition, reflects a healthy regulatory habit—reviewing rules in light of their implementation and our experience to see what is working, what is not, and where there are gaps. I commend the staff in the Divisions of Corporation Finance, Economic and Risk Analysis, and Investment Management, and others throughout the building for their hard work on this release. Chairman Clayton has made it a priority to remove unnecessary friction from the capital-raising process and this proposal is the latest fruit of that important initiative.

I am grateful for the comments we received in response to our concept release and look forward to further comment in response to this proposal. I hope to hear from commenters not only about the proposed reforms, but also about possible additional reforms. Some of the questions I have been asking include the following:


Statement by Commissioner Lee on Proposed Amendments to the Exempt Offering Framework

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Harmonizing the exempt offering framework makes good sense as a concept. It’s reasonable to examine the increasingly complex patchwork of exemptions from registration to ensure the regime is operating well as a whole, eliminate overlap, and fill in gaps. But today’s [March 4, 2020] proposal goes far beyond what can rightly be called harmonization. If adopted, it would erode significant distinctions between the public and private markets that are well-grounded in law and policy. Specifically, today’s proposal would weaken two cornerstones of protection for retail investors in private markets—the ban on general solicitation for the bulk of private offerings, and the limitation on sales of those offerings mainly to accredited investors.

Equally concerning, we are doing so in the face of a data deficit of our own making regarding the nature and extent of offerings under Regulation D. More new capital is raised through such offerings than any other form of offering. [1] Given the size of this market, it is difficult to see why we have not made an effort to enhance our limited visibility into these offerings. [2] Even more troubling, however, is that we continue to propose rules to expand this market, such as today’s rule and the accredited investor proposal from last December, while failing to take simple but critical steps related to Form D filings that would help us to gather data necessary to inform our rulemaking.


Executive Pay for Luck: New Evidence Over the Last 20 Years

Jung Ho Choi is Assistant Professor of Accounting, Brandon Gipper is Assistant Professor of Accounting, and Shawn Shi is a Ph.D. Student at the Stanford Graduate School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Lucky CEOs and Lucky Directors by Lucian Bebchuk, Yaniv Grinstein and Urs Peyer (discussed on the Forum here); Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); and Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).

Per the Wall Street Journal (May 17, 2019), when it comes to CEO compensation at big companies, “the best performers got big pay and big raises […], but the laggards didn’t do much worse.” The data underlying the central argument of that article pointed to a year-on-year rise in median compensation for S&P 500 CEOs of 6.6 per cent, taking pay to its highest level since the 2008 recession, in spite of median shareholder return generated by those same companies slumping 5.8 per cent over the same period, the worst such dip since the financial crisis.

This state of affairs is presented as a classic manifestation of the concept of “pay for luck”, a common form of compensation for non-performance—a long-established theory of executive rent extraction. There is considerable public interest in executive pay, and in particular its relation to both individual and company performance. However, the two foundational papers providing empirical evidence of the “pay for luck” phenomenon—Bertrand and Mullainathan, and Garvey and Milbourn—date from 2001 and 2006, and are based on data from 1984-1991 and 1992-2001, respectively. In the years since then, there have been major changes to corporate governance—including the expensing of stock options, new pay disclosure rules, and reforms (such as TARP and Dodd-Frank) prompted by the financial crisis—that we predict should be associated with a decrease in pay for luck in the period since that foundational research was published.


US Securities Law Liability for Securities Issuers Outside the U.S.

Kevin J. Harnisch is Head of Regulation, Investigations, Securities and Compliance at Norton Rose Fulbright US LLP; David Ho is Head of Financial Lines, Asia and Nepomuk Loesti is Head of Financial Lines, Europe at American International Group, Inc. This post is based on a joint Norton Rose and AIG memorandum by Mr. Harnisch, Mr. Ho, Mr. Loesti, Andrew Price, James Bateson, and Patrick Doyle.

Public companies outside of the United States often contemplate whether to sell their securities in the US to access new sources of capital. Many companies choose not to do so to limit their exposure to liability under US securities laws. So long as a company is not actively selling its securities in the US, the thought was that it was unlikely to face lawsuits—meritorious or not—from an active plaintiffs’ securities bar. This was true even if its securities were being traded by others as American Depository Receipts (ADRs) on over-the-counter markets in the US.

A recent decision from a US appellate court may change the way that non-US companies view the sale of their securities in the US. That case, Stoyas v. Toshiba Corp., found that a foreign issuer could be liable under US securities laws for a sale of its securities in the US, even if the company was not involved in the sale. This creates real risk for publicly-traded, non-US companies.

This post discusses the recent decision in Toshiba and the circumstances under which US courts have decided that a foreign issuer can be held liable for transactions in its securities under US securities laws. We will also identify ways in which a foreign issuer can mitigate its exposure risk to US securities laws. For more background on the risk of securities class actions and public companies via ADRs please see AIG’s white paper, which also highlights the need for specialist D&O claims experience.


Potential Impact of New SEC Guidance on Performance Metrics on Disclosure of ESG Metrics

Lee T. Barnum is a partner, Donna Mussio is special counsel, and Mary Beth Houlihan is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum.

On January 30, the Securities and Exchange Commission (“SEC”) published new guidance (the “Metrics Guidance”) on key performance indicators and other metrics in the Management’s Discussion and Analysis (“MD&A”) sections of reports filed under the Securities Exchange Act of 1934 (the “Exchange Act”). [1] The Metrics Guidance provides that public companies disclosing metrics (whether financial or non-financial) in MD&A should consider whether additional disclosure is necessary to ensure that such metrics are not misleading, and further reminds companies to maintain disclosure controls and procedures with respect to such metrics. Although public reporting companies typically disclose environmental, social and governance (“ESG”) metrics in voluntary sustainability reports, some companies also disclose certain key ESG data in their Exchange Act filings. Companies that choose to disclose such ESG performance data in their MD&A should be mindful of the Metrics Guidance going forward.


Weekly Roundup: February 28–March 5, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 28–March 5, 2020.

Spotlight on Boards

ESG Performance and the Credit Markets

Top 10 ESG Trends for the New Decade

CII Comment Letter on Proposed Amendments to Rule 14a-8

CII Comment Letter on Proposed Proxy Rules for Proxy Voting Advice

ESG Disclosures—Considerations for Companies

The Federal Reserve’s New “Control” Framework—Greater Opportunities for Minority Investments

“Operation Codebreaker” and the Culture of Compliance

Proxy Voting Guidance Update

Joint Statement on the Importance of Long-term, Sustainable Growth

Joint Statement on the Importance of Long-term, Sustainable Growth

Hiromichi Mizuno is Executive Managing Director and Chief Investment Officer at Japan’s Government Pension Investment Fund (GPIF); Christopher J. Ailman is Chief Investment Officer at the California State Teachers’ Retirement System (CalSTRS); and Simon Pilcher is Chief Executive at UK’s USS Investment Management Ltd (USS). This post is based on a joint GPIF, CalSTRS, and USS statement.

As asset owners, our ultimate responsibility is to provide for the post-retirement financial security of millions of families across multiple generations. Since our commitment to providing financial stability spans decades, we do not have the luxury of limiting our efforts to maximizing investment returns merely over the next few years.

If we were to focus purely on short-term returns, we would be ignoring potentially catastrophic systemic risks to our portfolios. For instance, according to one estimate by Moody’s Analytics, climate change alone has the potential to destroy US$69 trillion in global economic wealth through 2100. [1] As asset owners with the longest of long-term investment horizons, more inclusive, sustainable, dynamic, strong and trusted economies are critical for us to fulfill the responsibility we have to multiple generations of beneficiaries.


Another Link in the Chain: Uncovering the Role of Proxy Advisors in Investor ESG Voting

Kevin Chuah is a PhD Candidate at London Business School; and Isobel Mitchell is Networks Officer and Lily Tomson is Head of Networks at ShareAction. This post is based on their ShareAction report. 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); Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).

Executive summary

This analysis is the second of a two-part report exploring the role and influence of proxy advisors in the investment system, with particular reference to asset managers frequently used by UK- based charity investors. The first part, “Another Link in the Chain: Uncovering the Role of Proxy Advisors” provides an overview of who the major proxy advisors are, and what influence they have on asset managers’ voting decisions. This second part analyses proxy advisors’ recommendations on environmental, social and governance (ESG) shareholder resolutions from the 2019 AGM season, compared to 23 asset managers’ voting decisions, including commonly used charity and other major asset managers.

Proxy voting is a key right of asset ownership—an opportunity for asset owners to influence the strategic direction and governance of the businesses they own. This right has increasingly been outsourced by asset owners to asset managers, who are often in turn advised by proxy advisors that provide recommendations to institutional investors on how to vote at shareholder meetings.


Proxy Voting Guidance Update

David A. Bell and Ran Ben-Tzur are partners at Fenwick & West LLP. This post is based on their Fenwick memorandum.

In January 2020, Institutional Shareholder Services and the U.S. Securities and Exchange Commission agreed to stay litigation filed by ISS in October challenging the SEC’s interpretation and guidance related to voting recommendations of proxy advisers and their use. Announced in August 2019, the SEC’s guidance aims to enhance the accuracy and transparency of the information that proxy voting advice businesses provide to investors and others who vote on investors’ behalf. Importantly for our clients, the SEC has indicated that the interpretation and guidance “does not itself create any new or additional obligations and does not have the force and effect of law,” and that it would not invoke its August 2019 interpretation and guidance “as an independent source of binding law in any enforcement or other regulatory action” during the pendency of the stay, which has been granted by a court.


In August 2019, the SEC issued two sets of interpretive guidance, one regarding proxy advisory firms under the proxy solicitation rules, and one regarding investment advisers and their proxy voting responsibilities. Among other things, the SEC issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules (the interpretation and related guidance are described in our prior alert). At that time, the SEC did not seek public comment or propose or adopt any formal new rules.


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