Benjamin Colton is Global Head of Asset Stewardship (Voting & Engagement), and Robert Walker is the Global Head of Asset Stewardship (Strategy), at State Street Global Advisors. This post is based on their SSgA memorandum.
This post covers State Street Global Advisors’ stewardship activities in Q4 2021, including examples of notable successes and resulting outcomes from high-profile engagements, and outlines our stewardship priorities for 2022.
Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the 2022 NASAA Spring Meeting & Public Policy Symposium. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
Thank you, Melanie. My thanks to the state securities regulators in the audience and to the North American Securities Administrators Association (NASAA) for your vital work to protect investors.
As is customary, I’d like to note that my views are my own, and I’m not speaking on behalf of the Commission or SEC staff.
Today, you’ve asked me to talk about investor protection in a digital age.
The topic gets me thinking about grocery stores.
When you visit a grocery store, do you notice that you travel around the outer aisles to find the fruits and vegetables, but the candy, gum, and chips are waiting for you near the cash register?
By design, grocery stores tap into our behavioral psychology, activating our impulses to purchase things we may not need. Research has shown that impulsive purchases account for 62% of supermarket sales. [1] A bit of evidence: all those bags of gummy bears I’ve purchased in my day.
These stores serve the public, and they also have a profit incentive. Thus, they may tempt us with products that serve their interests rather than ours, and use the latest technology and research to do so. [2] Many consumers recognize this.
When instead we seek advice from an investment professional, that expectation changes. If you are a broker-dealer or an investment adviser—including if you provide your services digitally through an investment platform—when you provide advice, you have to act in the best interests of us, your clients, and not place your own interests ahead of our interests. [3]
Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his testimony before the U.S. House Appropriations Committee, Subcommittee on Financial Services and General Government. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
Good morning, Chairman Quigley, Ranking Member Womack, and members of the Subcommittee. I’m honored to appear before you for the second time as Chair of the Securities and Exchange Commission. It is good to be here alongside Federal Trade Commission Chair Khan. As is customary, I’d like to note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.
I’d like to open by discussing two key years in economic policymaking: 1933 and 1934.
We were in the midst of the Great Depression. President Franklin Delano Roosevelt and Congress addressed this crisis through a number of landmark policies.
Amongst them, in 1933 and 1934, Congress and FDR came together to craft the first two federal securities laws. These statutes created requirements and regulations around disclosure, registration, exchanges, and broker-dealers, and established the SEC to oversee the markets.
Additionally, in 1933, President Roosevelt formally suspended the use of the gold standard. Then, in 1934, the Gold Reserve Act was enacted, prohibiting government and financial institutions from redeeming dollars for gold.
Though it takes constant vigilance to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation, the U.S. laws became the gold standard for capital markets around the world.
In other words, in those two key years, one could say we replaced one gold standard with another gold standard: the securities laws.
Cydney S. Posner is special counsel at Cooley LLP. This post is based on her Cooley memorandum.
As described in this press release, the SEC has filed a complaint against Vale S.A., a publicly traded (NYSE) Brazilian mining company and one of the world’s largest iron ore producers, charging that it made “false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. The collapse killed 270 people, caused immeasurable environmental and social harm, and led to a loss of more than $4 billion in Vale’s market capitalization.” The SEC alleged that Vale “fraudulently assured investors that the company adhered to the ‘strictest international practices’ in evaluating dam safety and that 100 percent of its dams were certified to be in stable condition.” Significantly, these statements were contained, not just in Vale’s SEC filings, but also, in large part, in its sustainability reports. According to Gurbir Grewal, Director of Enforcement, “[m]any investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions….By allegedly manipulating those disclosures, Vale compounded the social and environmental harm caused by the Brumadinho dam’s tragic collapse and undermined investors’ ability to evaluate the risks posed by Vale’s securities.” The SEC’s charges arising out of this horrific accident are a version of “event-driven” securities litigation—brought this time, not by shareholders, but by the SEC.
As the SEC alleged in the complaint, Vale “committed securities fraud by intentionally concealing the risks that one of its older and more dangerous dams, the Brumadinho dam, might collapse. Specifically, Vale (1) improperly obtained stability declarations for the dam by knowingly using unreliable laboratory data; (2) concealed material information from its dam safety auditors; (3) disregarded accepted best practices and minimum safety standards; (4) removed auditors and firms who threatened Vale’s ability to obtain dam stability declarations; and (5) made false and misleading statements to investors.” At the same time, Vale’s stock was actively traded on the NYSE, and it raised $1 billion in the U.S. debt markets.
According to the SEC, the Brumadinho dam collapse in January 2019 was “one of the worst mining disasters in history,” releasing nearly 12 million cubic tons of toxic mining waste (called “tailings”) that killed 270 people (burying over 150 people alive) and poisoned the river. The dam collapse created “immeasurable environmental, social, and economic devastation.” Following the collapse, the company’s market cap fell by over $4 billion, its NYSE-traded ADSs declined in value by over 25% and its corporate credit rating was downgraded to junk status. The SEC alleged that Vale “intentionally concealed alarming signs of the dam’s instability from the investing public and Brazilian authorities. Vale also deliberately manipulated multiple dam safety audits; obtained numerous fraudulent stability declarations; and regularly and intentionally misled local governments, communities, and investors about the dam’s integrity.”
Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School. This post is based on his recent paper.
I write this post in response to the release (the “Proposing Release”) regarding proposed rules (the “Proposed Rules”) under the Investment Advisers Act of 1940 (the “Advisers Act”).
The Scope of this Post. The Proposed Rules are of three categories: Disclosure Rules, Audit Rules, and Prohibited Activity Rules. These comments relate solely to the Prohibited Activity Rules that would forbid the following terms and conditions in investor advisory agreements:
Michael W. Peregrine and Eric Orsic are partners at McDermott Will & Emery LLP. This post is based on a NACD BoardTalk publication.
As we sit squarely in the middle of proxy season, we have a useful vantage point from which to consider already announced shareholder proposals and anxiously await investor feedback on those matters presented for shareholder votes. From this vantage point, corporate directors can better anticipate and prepare for trends that may ultimately be presented to them.
If the most recent shareholder proposals can be considered a guide, directors should plan on a busy wrap-up to this proxy season. This is the case given continued investor focus on environmental, social, and governance (ESG) matters, renewed pressures on diversity, equity, and inclusion (DE&I) initiatives, and increased attention to the corporation’s social voice. All of these issues must be considered against the backdrop of the war in Ukraine and the twin economic pressures of increasing inflation and the prospect of an economic slowdown.
Corporate boards should keep their fingers on the pulse of possible investor interest in these and other nontraditional topics emerging from the 2022 proxy season.
Public company shareholders can submit proposals for consideration at a corporation’s annual meeting through a well-established process that is administered by the US Securities and Exchange Commission (SEC). The SEC requires proponents to satisfy certain procedural and substantive requirements before a proposal is included in a company’s proxy statement. The SEC views the shareholder proposal process as fundamental to shareholder democracy and it is actively involved in adjudicating disputes between companies and proponents as to whether a company may properly exclude a shareholder proposal from its proxy statement.
Matthew Rawlinson and Melissa Arbus Sherry are partners and Nicholas Rosellini is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Rawlinson, Ms. Sherry, Mr. Rosellini, and Daniel Gherardi.
On April 28, 2022, the California Court of Appeal issued a much-anticipated decision in Wong v. Restoration Robotics, Case No. A161489, enforcing a forum selection clause contained in a corporate charter provision that required all claims under the Securities Act of 1933 to be brought in federal court. Such forum selection provisions—known as federal forum provisions or FFPs—were broadly implemented in the wake of the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees’ Retirement Fund, 138 S. Ct. 1061 (2018). In Cyan, the Court held that state courts retain concurrent jurisdiction over claims arising under the Securities Act, and unleashed a wave of wasteful parallel litigation in federal and state court. Through bylaw and charter provisions, many companies sought to avoid these harmful consequences by requiring that Securities Act claims be brought exclusively in federal court.
Two years ago, the Delaware Supreme Court held in Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020) that FFPs were facially valid under both Delaware state law and federal law. But the Delaware Supreme Court’s decision in Sciabacucchi left open whether FFPs are enforceable under the laws of other states. In Restoration Robotics, the California Court of Appeal was confronted with a slew of challenges to FFPs under both federal and California law—and rejected them all. According to the Court—FFPs do not violate the Securities Act, they do not violate the federal constitution, and they do not violate California law. The decision marks a significant win for corporations and their shareholders hoping to stem the tide of duplicative litigation arising from public securities offerings—particularly in cases brought in California state court.
Gail Weinstein is senior counsel, and Andrew Colosimo and Mark H. Lucas are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Colosimo, Mr. Lucas, Bret T. Chrisope, Andrea Gede-Lange, and Shant P. Manoukian, and is part of the Delaware law series; links to other posts in the series are available here.
Related research from the Program on Corporate Governance includes The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here); and Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).
In In re Cellular Telephone Partnership Litigation (Mar. 9, 2022), a wholly-owned subsidiary of AT&T, Inc., which was the 98.12% controlling partner of Salem Cellular Telephone Company (the “Partnership”), froze out the minority partners by acquiring the Partnership’s assets and liabilities and then liquidating the Partnership. AT&T paid to the Partnership, and then caused the Partnership to distribute to the minority partners their respective pro rata shares of, the Partnership’s value as had been determined by a major national valuation firm that AT&T had retained (the “Valuation Firm”). Litigation ensued with respect to AT&T’s freeze-out of the minority partners of this and fifteen other AT&T cellular partnerships. In the decision issued March 9, 2022, which related only to the plaintiffs’ fiduciary claims against AT&T with respect to the freeze-out of Salem Cellular’s minority partners (the “Freeze-out”), the Delaware Court of Chancery held that the transaction (which, as the parties had agreed, was subject to the “entire fairness” standard of review because the controller stood on both sides of the transaction), did not satisfy the entire fairness standard and that AT&T therefore had breached its duty of loyalty to the minority partners.
Most notably, the decision suggests that outside appraisal, alone, may not be sufficient to establish entire fairness—at least where, as was the case in Salem Cellular, the court views the controller’s timing and initiation of the transaction at issue to have been opportunistic (i.e., designed to benefit the controller at the expense of the minority); the appraisal was by a firm retained by the controller; and the court views the appraisal as seriously flawed.
Proposed SEC Rule on Private Fund Advisers
More from: William Clayton
William W. Clayton is an Associate Professor at Brigham Young University Law School. This post summarizes his recent comment letter to the U.S. Securities and Exchange Commission.
The SEC recently published a proposed rule (the “Proposal”) that would impose unprecedented mandatory disclosure obligations and various other forms of intervention in the private funds industry. [1] On April 21, 2022, I filed a comment letter in response to the Proposal. [2] My letter addresses what appears to be one of the most profound sources of disagreement between proponents and opponents of SEC intervention in the private funds industry: the question of whether investors and managers in private funds can be assumed to bargain effectively.
My comment letter has four primary objectives. First, it discusses the heightened importance of understanding the limits of private market bargaining as the SEC considers this new phase of regulatory activity. Second, it provides new insight into how private equity investors think about bargaining problems by introducing recent polling data obtained from institutional investors. Third, it encourages the SEC to be more explicit about identifying and articulating the bargaining problems that it believes are producing the problematic outcomes described in the Proposal, and it also calls for greater scholarly engagement with these issues going forward. An explicit assessment of private fund bargaining limitations should play a central role in the cost-benefit analysis of any regulatory interventions in this space. Lastly, it includes a brief discussion of certain of my papers that were cited by the SEC in the Proposal. My letter does not analyze the extent of the SEC’s formal rule-making authority in this area.
READ MORE »