Yearly Archives: 2020

Statement by Caroline Crenshaw for Senate Nomination Hearing

Posted by Caroline Crenshaw, U.S. Securities and Exchange Commission, on
Thursday, July 23, 2020

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Caroline A. Crenshaw is currently senior counsel at the U.S. Securities and Exchange Commission and a nominee for Commissioner. This post is based on her written statement for her nomination hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

Chairman Crapo, Ranking Member Brown and distinguished Senators of the committee:

Thank you for the opportunity to appear here today. It is an honor to testify before you regarding my nomination to be a Commissioner of the Securities and Exchange Commission, where I have worked for the past seven years, and in whose mission I deeply believe.

To begin, I want to thank all those who have encouraged and supported me through this process: family, friends, colleagues, Members of Congress and their talented staff, and many others whom I did not know prior to my nomination. It has been an educational and memorable journey.

America’s capital markets have powered the largest, most vibrant economy in the world. But our economy is facing unprecedented challenges and, now more than ever, I believe we must do all we can to keep our markets transparent, competitive, and safe. All Americans must have the confidence to invest their hard-earned savings in their futures.

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A Thoughtful Approach in Uncertain Times

Posted by Greg Arnold and Mark Emanuel, Semler Brossy Consulting Group, LLC, on
Wednesday, July 22, 2020
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Greg Arnold and Mark Emanuel are Managing Directors at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy memorandum. 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).

The coronavirus pandemic gave the global economy an unprecedented shock that has raised the stakes for one of the compensation committee’s most challenging tasks—determining when and how to apply discretion to adjust executives’ incentive pay for circumstances outside their control.

The question of when to make discretionary adjustments is always a tricky one. Although the impacts of COVID-19 have been sudden, significant and unexpected, it is important to remember that 2020 was already shaping up as a particularly challenging year for incentive goal-setting. The U.S. economy was marching toward its 11th year of economic expansion and the potential for tariff wars, Brexit and an upcoming U.S. election all added to a heightened level of uncertainty. The pandemic has simply accelerated the urgency to establish a framework for what compensation committees will and won’t do to apply discretion. Without forethought—and forewarning to executives—decisions on compensation adjustments can create unintended consequences. The heightened emphasis on corporate social responsibility in today’s environment and focus on how a company’s actions affect its broader stakeholders mean that now more than ever, committees need a thoughtful process for considering discretionary adjustments.

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Behavioral Biases of Analysts and Investors

Posted by David Hirshleifer (University of California Irvine), on
Wednesday, July 22, 2020
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David Hirshleifer is the Paul Merage Chair in Business Growth at the University of California at Irvine Paul Merage School of Business. This post is based on his recent paper.

Financial analysts and stock market investors alike are subject to behavioral biases. Objective analyst forecasts can potentially help correct investor misperceptions. On the other hand, biased forecasts can reinforce or incite investor misperceptions. Furthermore, data on analyst behavior provide a rich window of insight into the nature of psychological bias among an important and incentivized group of professionals, since ex post information is available about the accuracy of analyst forecasts under different conditions. Analyst behavior also provides insights into the sources of stock market mispricing.

As a possible example of analyst psychological bias, consider decision fatigue, defined as the tendency for decision quality to decline after an extensive session of decision-making. Whether decision fatigue exists has been a topic of controversy as part of the greater replication crisis in experimental psychology. My collaborators Yaron Levi, Ben Lourie, Siew Hong Teoh, and I provide a test of whether decision fatigue affects a set of skilled financial professionals in the field. Specifically, we test whether decision fatigue causes stock market analysts to be more heuristic in their forecasting.

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SEC Enforcement Actions Against Companies for Misleading COVID-19 Claims

Posted by Kenneth M. Silverman, Morgan E. Spina, and Robert C. Gagne, Olshan Frome Wolosky LLP, on
Wednesday, July 22, 2020
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Kenneth M. Silverman is a partner and Morgan E. Spina and Robert C. Gagne are associates at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum.

The U.S. Securities and Exchange Commission (the “SEC”) filed enforcement actions on May 14, 2020, against two unrelated companies, Turbo Global Partners, Inc. (“Turbo”) and Applied BioSciences Corp. (“APPB”). The SEC charged both companies with securities fraud based on alleged materially misleading statements that the companies were offering and shipping products to combat the coronavirus (COVID-19). These actions taken by the SEC are consistent with approaches taken by other regulators, including the Federal Trade Commission and Food and Drug Administration (the “FDA”), with regard to misleading statements made in connection with coronavirus-related products. On the whole, regulators appear to be particularly cognizant of businesses and individuals seeking to take improper advantage of the circumstances created by the global pandemic, and as such are taking action against such companies and individuals.

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Comment Letter on Proposed Regulation of ESG Standards in ERISA Plans

Posted by Jon Lukomnik, Sinclair Capital, LLC, on
Tuesday, July 21, 2020
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Jon Lukomnik is Managing Director of Sinclair Capital, LLC. This post is based on his comment letter submitted to the Department of Labor, with input from Keith Johnson and signed by 30 people, including various experts in the field. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (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).

To Whom It May Concern:

We are writing in opposition to proposed rule RIN 1210-AB95. We believe the rule is not only unnecessary, but

  1. Is based on a woefully incorrect understanding of the current state of investing knowledge and theory,
  2. Endangers the retirement security of Americans rather than protects it,
  3. Is Internally inconsistent,
  4. Applies an inadequate analysis of ERISA fiduciary duties by ignoring the duty of impartiality, and
  5. Would violate Federal cost-benefit regulations.

The proposed rule is based on a woefully incorrect understanding of the current state of investing knowledge and theory: An “eye singular” towards retirement security is not the same as encouraging willful blindness.

The major goal of investing for retirement is to create a desirable risk/return portfolio over time, so as to offset retirement expenses. As the Department of Labor wrote in the background to the rule, “Courts have interpreted the exclusive purpose rule of ERISA Section 404(a)(i)(A) to require fiduciaries to act with “complete and undivided loyalty to the beneficiaries,” The Supreme Court as recently as 2014 unanimously held in the context of ERISA retirement plans that such interests must be understood to refer to “financial” rather than “nonpecuniary” benefits… plan fiduciaries when making decisions on investments and investment courses of action must be focused solely on the plan’s financial returns and the interests of plan participants and beneficiaries in their plan benefits must be paramount.”

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Firm-Level Climate Change Exposure

Posted by Zacharias Sautner (Frankfurt School of Finance & Management), on
Tuesday, July 21, 2020
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Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management. This post is based on a recent paper authored by Professor Sautner; Laurence van Lent, Professor of Accounting and Economics at Frankfurt School of Finance and Management; Grigory Vilkov, Professor of Finance at Frankfurt School of Finance & Management; and Ruishen Zhang, Ph.D. candidate at the Accounting Department of Frankfurt School of Finance and Management.

Climate change has started to significantly affect a large number of firms in the economy. A challenge for investors, regulators, and policy makers lies in the difficulty to properly quantify firm-level exposure to climate change, with respect to the associated risks but also in terms of the opportunities that come with it. Complications stem from different sources.

  • First, the effects of climate change on firms are highly uncertain.
  • Second, the effects of climate change are likely to be heterogeneous across firms, even among firms within the same industry.
  • Third, there exists no common understanding about how to reliably quantify firm-level climate change exposure.

While a firm’s voluntarily disclosed carbon emissions are gaining some traction as an exposure measure, this data exists only for a limited and selected sample. What’s more, disclosed emissions reflect historic rather than future business models of firms, and they do not allow the distinction between “good” and “bad” emissions. These challenges are severe and they have the potential to impede the reallocation of resources from “brown” to “green” firms. Furthermore, the lack of a firm-level exposure measure may contribute to the potential mispricing of climate risks and opportunities, and it complicates the development of financial instruments that allow market participants to hedge the effects of climate change.

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Seventh Circuit Holds That Price Impact Must Be Decided at the Class Certification Stage

Posted by Meredith Kotler, Mary Eaton, and Doru Gavril, Freshfields Bruckhaus Deringer LLP, on
Tuesday, July 21, 2020
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Meredith Kotler, Mary Eaton, and Doru Gavril are partners at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum

The Seventh Circuit Court of Appeals has just issued a decision of special interest to defendants in securities class actions under Section 10(b) of the Exchange Act. The Court vacated the district court’s certification of a class in a lawsuit against Allstate, holding that the district court failed to consider defendants’ evidence that the misrepresentations alleged by plaintiffs had no impact on Allstate’s stock price. Such evidence, the Court explained, could rebut the presumption of reliance on the market price, as the Supreme Court made clear in Halliburton II.

This new ruling has multiple implications for the defense of securities class actions. First, district courts cannot fail to consider defendants’ evidence at class certification stage, merely because the same evidence may also be relevant to merits issues. Second, where applicable, defendants should consider offering expert analysis at the class certification stage severing the “transaction causation” link between the alleged misrepresentation and the market price. Third, defendants must be careful about the probative value of the evidence they offer: as discussed below, the Court expressed skepticism that “no price movement” is the same thing as “no price impact.” We discuss below why we believe plaintiffs—not defendants—should bear the burden of distinguishing between these two concepts.

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Our Approach to Sustainability

Posted by Sandra Boss, BlackRock, Inc., on
Monday, July 20, 2020
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Sandra Boss is Global Head of Investment Stewardship at BlackRock, Inc. This post is based on a BlackRock report authored by Ms. Boss, Michelle Edkins, Amra Balic, Gassia Fox, Jon Posen, and Jim Badenhausen. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (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).

This past January, BlackRock wrote to clients about how we are making sustainability central to the way we invest, manage risk, and execute our stewardship responsibilities. This commitment is based on our conviction that climate risk is investment risk and that sustainability-integrated portfolios, and climate-integrated portfolios in particular, can produce better long-term, risk-adjusted returns.

Our efforts around sustainability, as with all our investment stewardship activities, seek to promote governance practices that help create long-term shareholder value for our clients, the vast majority of whom are investing for long-term goals such as retirement. This reflects our approach to sustainability across BlackRock’s investment processes, in which we use Environmental, Social, and Governance factors in order to provide clients with better risk-adjusted returns, in keeping with both our fiduciary duty and the range of regulatory requirements around the world. As a result, we have a responsibility to our clients to make sure companies are adequately managing and disclosing sustainability-related risks, and to hold them accountable if they are not.

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The Real Effects of Modern Information Technologies

Posted by Itay Goldstein (University of Pennsylvania), Shijie Yang (The Chinese University of Hong Kong), and Luo Zuo (Cornell University), on
Monday, July 20, 2020
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Itay Goldstein is the Joel S. Ehrenkranz Family Professor at the Wharton School of the University of Pennsylvania; Shijie Yang is Assistant Professor at the Chinese University of Hong Kong, Shenzhen; and Luo Zuo is Associate Professor of Accounting at Cornell University SC Johnson College of Business. This post is based on their recent paper.

Modern information technologies have greatly facilitated timely dissemination of information to a broad base of investors at low costs. In our paper entitled The Real Effects of Modern Information Technologies,  we exploit the staggered implementation of the EDGAR system from 1993 to 1996 as a shock to information dissemination technologies to examine their effects on the real economy. Our first hypothesis is that the EDGAR implementation leads to an increase in the level of corporate investment through the equity financing channel. This hypothesis follows from the conventional wisdom that greater and broader information dissemination leads to an increase in the amount of total information in the marketplace, which improves the functioning of the financial market and firms’ access to external capital, thereby allowing firms to tap into new investment opportunities.

Our second hypothesis is that the EDGAR implementation affects the sensitivity of corporate investment to stock prices through the managerial learning channel. The idea that prices are a useful source of information goes back to Hayek (1945). Stock prices can reveal traders’ private information that is otherwise not available to managers, and hence can affect managers’ forecasts about their own firms’ fundamentals and their investment decisions. The managerial learning perspective predicts that the investment-to-price sensitivity depends on the extent to which prices reveal new information to managers (i.e., revelatory price efficiency), which can be and is often different from the extent to which prices reflect all available information (i.e., forecasting price efficiency).

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Supreme Court Holds That CFPB’s Structure Is Unconstitutional

Posted by Rachel Rodman, Scott Cammarn, and Nihal Patel, Cadwalader, Wickersham & Taft LLP, on
Monday, July 20, 2020
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Rachel Rodman and Scott Cammarn are partners and Nihal Patel is a special counsel at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum.

On June 29, the Supreme Court issued its long-awaited opinion in Seila Law LLC v. Consumer Financial Protection Bureau, finally resolving the question that has dogged the new agency since its inception: Is the leadership structure of the Consumer Financial Protection Bureau (CFPB) constitutional? Writing for a 5-4 majority, Chief Justice John Roberts ruled that the CFPB structure—“an independent agency that wields significant executive power and is run by a single individual who cannot be removed by the President unless certain statutory criteria are met”—violates the Constitution’s separation of powers.

For financial services companies regulated by the CFPB, the most important aspect of Seila Law is not the headline constitutional defect, but the remedy. Choosing “a scalpel rather than a bulldozer,” the Court did not invalidate the CFPB. The Court held 7-2 that the Director’s constitutionally offensive removal protection could be severed from the CFPB’s other authorities, thus bringing the Director (and with her, the CFPB) under Presidential control, while leaving the CFPB’s other powers in place.

While Seila Law is an important case in the evolving doctrine of separation of powers as applied to independent agencies, the case has three immediate consequences for financial services companies. First, the CFPB is here to stay, and its broad authorities and other controversial aspects (such as its insulation from Congressional appropriations) remain intact. Second, the CFPB’s Director is now directly accountable to the President, significantly raising the stakes in the 2020 election for the agency’s regulatory and enforcement agenda. Third, the Court left one important question unanswered: it declined to address the effect of its ruling on prior CFPB rules and enforcement actions. While we believe the agency will attempt to cure the constitutional defect, we expect continued litigation—and uncertainty—on this issue.

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