Monthly Archives: November 2021

Remarks by Commissioner Crenshaw Remarks at the PepsiCo-PwC CPE Conference

Posted by Caroline A. Crenshaw, U.S. Securities and Exchange Commission, on
Wednesday, November 17, 2021
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Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the PepsiCo-PwC CPE Conference. The views expressed in the post are those of  Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you for the kind introduction Kevin [Gould]. It’s a pleasure to be here today at the annual PepsiCo-PwC CPE conference, which I understand is a tradition going back 18 years now. I appreciate the opportunity to speak, and I look forward to answering your questions today.

It’s not often—even in this job—that I find myself speaking before such a large group of controllers, accountants and other finance professionals of public companies. And I welcome it because it means we can get a bit more technical and talk about financial reporting issues. I suspect many of you will not be surprised that Kevin and his team have shared with me that ESG is top of mind for this group. I understand there is an interest in hearing what ESG means to the SEC and what ESG regulations are on the horizon. It’s a big question, and spoiler alert—I cannot speak for the Commission and tell you what is to come. I have to caveat my statements today with the standard disclaimer that any views I express today are my own and do not reflect the views of my fellow Commissioners, the Commission or its staff. But I am an U.S. Army reservist, and the Soldier in me truly appreciates your commitment to readiness. So even though I cannot speak for the Commission, today I will discuss how I have been thinking about ESG in the public issuer context.

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The Rescue of Fannie Mae and Freddie Mac–Module F: Federal Reserve’s Large-Scale Asset Purchase (LSAP)

Posted by Rosalind Z. Wiggins (Yale), on
Wednesday, November 17, 2021
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Rosalind Z. Wiggins is Director of The Global Financial Crisis Project and Senior Editor at the Yale Program on Financial Stability, Yale School of Management. This post is based on a recent paper authored by Ms. Wiggins; Andrew Metrick, Janet L. Yellen Professor of Finance and Management at the Yale School of Management and the Director of the Yale Program on Financial Stability; and Yale Program on Financial Stability researchers Ben Henken, Adam Kulam, and Daniel Thompson.

In the Fall of 2008, the bursting of the US housing market and the subprime mortgage crisis that it spurred had sent shock waves throughout the financial system. For over a year, the Federal Reserve had been responding to tensions in the credit markets. Many markets had all but frozen in the wake of the unprecedented events of September—the government had taken the giant Fannie Mae and Freddie Mac into conservatorship to prevent their collapse and the collapse of the secondary mortgage market along with it, and the Fed had made one of its largest loans ever to the $ 1 trillion insurance company American International Group, to forestall it following in Lehman’s footsteps. Despite the intervening bankruptcy of the investment bank Lehman Brothers, the government and Fed had hoped that these extraordinary interventions would stabilize the system and keep credit flowing; but it wasn’t happening. The secondary mortgage markets continued to suffer high rates of default, causing mortgage lending to slow, and the value of mortgage-backed securities (MBS), widely held on the balance sheets of financial institutions, to plummet. Credit remained tight and rates remained high, especially mortgage and other long-term rates.

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Stockholder Nominees Barred For Noncompliance With “Clear Day” Advance Notice Bylaw

Posted by Andre G. Bouchard, Krishna Veeraraghavan, and Steven J. Williams, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Wednesday, November 17, 2021
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Andre G. Bouchard, Krishna Veeraraghavan, and Steven J. Williams are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Bouchard, Mr. Veeraraghavan, Mr. Williams, Scott A. Barshay, Jaren Janghorbani, and Laura C. Turano, and is part of the Delaware law series; links to other posts in the series are available here.

In Rosenbaum v. CytoDyn Inc., the Delaware Court of Chancery, in an opinion by Vice Chancellor Slights, upheld a board’s decision to exclude stockholder nominees from being considered at CytoDyn’s annual meeting based on deficiencies in the stockholders’ notice required by the company’s advance notice bylaw. The court found that the board had not engaged in any manipulative or inequitable conduct in rejecting the nominees. Even though the board waited almost one month before notifying the stockholders of deficiencies in their nomination notice, the court emphasized that the stockholders had not submitted their notice until close to the deadline, which left no time to fix the deficiencies, and that the bylaw did not in any event require the board to engage in an iterative process with the proponent to fix deficiencies.

Background

Plaintiff stockholders of CytoDyn provided advance notice of their nominations to CytoDyn’s board the day before the advance notice deadline in CytoDyn’s “commonplace” advance notice bylaw. One month after the deadline, the board sent a deficiency letter to the plaintiffs regarding the disclosures in their nomination notice. The deficiencies identified by the board included the plaintiffs’ failure to disclose (i) the identity of a limited liability company formed by one of the plaintiffs (who was also a nominee) to fund the proxy contest, as well as the limited liability company’s donors, and (ii) the plaintiffs’ support of an acquisition by CytoDyn that had been previously considered and rejected by the board, pursuant to which CytoDyn would acquire a company with ties to two of plaintiffs’ nominees and employ one of the nominees who also had patent disputes with CytoDyn. Plaintiffs attempted to address the deficiencies shortly after their receipt of the deficiency letter, but well after the advance notice deadline. Upon the continued rejection of their nominations by the CytoDyn board, the plaintiffs filed suit in the Court of Chancery, seeking an injunction requiring the board to place the plaintiffs’ nominees on the ballot for the CytoDyn annual meeting scheduled for October 2021. The court considered the matter after a trial on a paper record.

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Elizabeth Holmes and The Mythology of Silicon Valley

Posted by Boris Feldman and Sarah Solum, Freshfields Bruckhaus Deringer LLP, on
Tuesday, November 16, 2021
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Boris Feldman and Sarah Solum are partners at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

The Theranos criminal trial is underway. Our task is not to predict its outcome or to pass judgment on Elizabeth Holmes. That is for the jury. Rather, we write to challenge what is fast becoming conventional wisdom: that Theranos is a reflection of systemic flaws in Silicon Valley and the tech industry. We dissent.

Here are a few examples. From the BBC: “in Silicon Valley, many believe that Theranos—far from being an aberration—speaks of systemic problems with start-up culture.” From the Washington Post: “the trial is …an opportunity for the Silicon Valley ethos to be held in front of a public mirror.”

There are recurrent themes in much of the media coverage:

  • Theranos was a demonstration of the Valley’s “fake it ‘til you make it” culture
  • This is what happens with tech companies because of their stealth modes and black-box technology
  • Holmes typifies “Brilliant Founder Syndrome”
  • NDAs cover up fraud

In our view, the reality is that Theranos, and its apparent misdeeds, are not emblematic of Silicon Valley.  A few points for your consideration.

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Hearing on Board Gender Diversity Statute

Posted by Cydney Posner, Cooley LLP, on
Tuesday, November 16, 2021
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here); and Will Nasdaq’s Diversity Rules Harm Investors? by Jesse M. Fried (discussed on the Forum here).

On October 19, a federal district court judge held a hearing on a motion for a preliminary injunction in Meland v. Weber, a case challenging SB 826, California’s board gender diversity statute, on the basis that it is unconstitutional under the equal protection provisions of the 14th Amendment. The judge had previously dismissed the case on the basis of lack of standing, but was reversed by the 9th Circuit. What did the hearing reveal?

SideBar

As you may recall, SB 826 requires that public companies (defined as corporations listed on major U.S. stock exchanges) that have principal executive offices located in California, no matter where they are incorporated, include specified minimum numbers of women on their boards of directors. Under the law, each public company was required to have a minimum of one woman on its board of directors by the close of 2019. That minimum increases to two by December 31, 2021, if the corporation has five directors, and to three women directors if the corporation has six or more directors. The statute also requires that the office of the California Secretary of State post on its website reports on the status of compliance with the law. Under the statute, the Secretary may impose fines for violations, ranging from $100,000 to $300,000 per violation. So far, the Secretary has neither adopted regulations regarding fines or imposed fines for violations.

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DOJ Announces Revisions Strengthening Corporate Criminal Enforcement Policies

Posted by Jonathan Kolodner, Joon Kim, and Elizabeth (Lisa) Vicens, Cleary Gottlieb Steen & Hamilton LLP, on
Tuesday, November 16, 2021
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Jonathan Kolodner, Joon Kim, and Elizabeth (Lisa) Vicens are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Kolodner, Mr. Kim, Ms. Vicens, and Andres Saenz.

On October 28, 2021, as part of her Keynote Address at the ABA’s 36th National Institute on White Collar Crime, Deputy Attorney General Lisa O. Monaco announced the administration’s first significant changes to the DOJ’s policies on corporate criminal enforcement. [1] The announcement was accompanied by the release of a DOJ memorandum from Deputy Attorney General Monaco entitled “Corporate Crime Advisory Group and Initial Revisions to Corporate Criminal Enforcement Policies.” (the “Memorandum”). [2]

The announcement highlights departures from polices under the Trump administration and a return to corporate criminal enforcement policies in place under the prior Obama-led DOJ. Deputy Attorney General Monaco made clear that these changes are part of a broader effort to revisit, reassess, and strengthen the DOJ’s corporate enforcement policies and “invigorate” the DOJ’s prosecution of corporate criminal conduct.

Specifically, for all future DOJ investigations of corporate wrongdoing and matters pending as of October 28, 2021, three new policies will apply:

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Of Owners and Ownership

Posted by Paul Singer, Elliott Investment Management, on
Monday, November 15, 2021
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Paul Singer is the Founder, President, Co-Chief Executive Officer, and Co-Chief Investment Officer of Elliott Investment Management L.P. This post is based on an essay that first appeared in one of Elliott’s recent quarterly letters to investors.

Public ownership of shares is, in many ways, the essence of modern capitalism — which, along with the rule of law, has been responsible for the spectacular growth in global living standards over the past 200 years. Today, public ownership of shares is under significant pressure on a number of fronts.

A diminishing pool of public equity market investors is engaged in “active” investing (i.e., actually analyzing the merits of companies and selecting their securities accordingly). A growing plurality of investors chooses indices and engages in virtually no individual company or security analysis. This type of investing delegates security selection to small, anonymous committees at the index construction firms. Among the active investors are classic stock pickers at some mutual funds and hedge funds, a depleted cadre of analysts at investment banks and advisory firms, and a relatively small group of “activist” investors.

Activist investors do not just analyze and select securities and companies in which to invest. They also interact with company managements, publicly and/or privately, in a dialogue that the activist hopes will validate its analysis (or show why it is wrong) and lead to improvements in the company’s performance. Activists aim to influence outcomes and “make something happen” to cause a company’s share price to increase and hold its gains.

The dirty little secret about public capitalism is that many executives and directors of public companies abhor its essence: public ownership of “their” companies. Whether shareholders own shares for one minute or for 30 years, they are owners, deserving all of the privileges of ownership. Of course, their ability to exercise those privileges depends on, among other things, the rights conferred by their shares, the number of shares they are able to acquire, and their ability to voice their views and convince management and/or other shareholders (including index investors) of the merits of their analysis. However, on all of these fronts, the fundamental rights of owners are increasingly being pressured due in large part to the efforts of well-compensated corporate advisors and lobbyists, who masquerade as advocates for a new, more enlightened capitalism.

We have learned from decades of experience that most public company management teams do not like being told what to do, and they really do not like their performance to be critiqued by outsiders who have the temerity to call themselves “owners.” However, imagine if these same executives were not allowed to critique the performance of their own employees. Suppose one of these executives suggested that an employee adopt a performance-improvement plan and that employee responded by alleging that he or she was a victim of a “short-term attack,” one that focused too much on the numbers and overlooked his or her many positive intangible qualities. How would this executive react to such a response?

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Does Regulatory Cooperation Help Integrate Equity Markets?

Posted by Roger Silvers (University of Utah), on
Monday, November 15, 2021
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Roger Silvers is a former senior economist at the Securities and Exchange Commission and is currently Assistant Professor of Accounting at the University of Utah Eccles School of Business. This post is based on his recent paper, forthcoming in the Journal of Financial Economics.

The Achilles’ heel of global markets is that no single regulator has the authority to unilaterally investigate or enforce compliance with securities laws. For regulators, the only way to restore access to information and reestablish capacities that have been severed by jurisdictional boundaries is through assistance from foreign counterparts. Even when two countries individually possess effective local regulation, the ability to address cross-border issues still depends on cooperation. Thus, instead of defining institutional features—e.g., property rights, contract enforcement, and judicial quality—as country-level factors (as in prior work), I reframe institutional features as interactive, country-pair level constructs.

An extensive body of literature studies global capital markets and argues that they help firms raise more capital at lower costs, while allowing investors to diversify their portfolios and access higher yields as compared to domestic markets. However, despite the promise of widespread benefits, empirical work consistently shows a puzzling finding: relative to theoretical benchmarks, investors overinvest in local assets and underinvest in foreign ones. Much attention has been paid to understanding why this divergence from theory is the norm, and various economic frictions have been proposed as explanations.

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Investment Management Regulatory Update

Posted by Gregory S. Rowland, Sarah Kim, and Leon Salkin, Davis Polk & Wardwell LLP, on
Monday, November 15, 2021
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Gregory S. Rowland is partner, Sarah Kim is counsel, and Leon Salkin is an associate at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Rowland, Ms. Kim, Mr. Salkin, Chelsey Whynot and Amy Zhang.

Rules and regulations

SEC proposes to enhance proxy voting disclosure by investment funds and require disclosure of “say-on-pay” votes for institutional investment managers

The proposed amendments to Form N-PX would enhance the information investment funds report about their proxy votes. The proposed amendments also would require institutional investment managers to disclose how they voted on executive compensation, or so-called “say-on-pay” matters.

On September 29, 2021, the Securities and Exchange Commission (SEC) proposed amendments to Form N-PX to enhance the information mutual funds, exchange-traded funds (ETFs), and other registered management investment companies (collectively, funds) currently report annually about their proxy votes. The SEC also proposed new Rule 14Ad-1 under the Securities Exchange Act of 1934, as amended (Exchange Act) and amendments to Form N-PX to require institutional investment managers subject to Section 13(f) of the Exchange Act (managers) to report annually on Form N-PX how they voted proxies on executive compensation, or so-called “say-on-pay” matters.

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FSOC Issues Report Declaring Climate Change as Emerging Threat to U.S. Financial Stability

Posted by Jason Halper, Sara Bussiere and Timbre Shriver, Cadwalader, Wickersham & Taft LLP, on
Sunday, November 14, 2021
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Jason Halper is partner and Sara Bussiere and Timbre Shriver are associates at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum.

On October 21, 2021, the Financial Stability Oversight Council (“FSOC”), established in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act to respond to emerging threats to the stability of the U.S. financial system, [1] released a Report on Climate-Related Financial Risk (the “Report”). [2] The Report was published in response to President Biden’s Executive Order 14030 (the “Executive Order”), which recognized that the “intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies—such as increased extreme weather risk leading to supply chain disruptions,” and established the policy of the Biden Administration to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk[;]” “act to mitigate that risk and its drivers, while accounting for and addressing disparate impacts on disadvantaged communities and communities of color[;]” and “achieve our target of a net-zero emissions economy by no later than 2050.” The Executive Order required the Secretary of Treasury, as the Chair of the FSOC, to issue a report on the FSOC’s activities to address climate-related financial risks.

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