A couple of days ago, the SEC announced that it had filed a settled administrative action against former Deutsche Bank research analyst Charles Grom. The administrative order is interesting because it gives a little glimpse into the lives of sell-side research analysts in the wake of early 2000s reforms. It also serves as an object lesson in the failures of attempts to “level the playing field” regarding access to inside information.
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In recent years, and particularly since the Supreme Court’s decision in Citizens United v. FEC, 558 U.S. 310 (2010), there have been increasing calls for the SEC to require public companies to disclose their spending on political activities.
The situation is complex because while there may be many reasons for transparency on the subject, it is difficult to tie disclosure specifically to the needs of investors as investors. Most political spending is likely undertaken by companies to benefit the firm itself – that is, in fact, precisely why people find it objectionable – and it is difficult to articulate why investors as investors (rather than, say, as employees or as citizens) should care about political spending any more than any other ordinary business decision for which we have no required disclosures.
The SEC has resisted increasingly loud calls that it regulate in this area, likely due to this precise problem. In December, Congress passed a budget that actually forbade the SEC from using funds to regulate political spending in the following year, though that has not ended the matter for Democrats. (Interestingly, I note that it was only after the budget had passed both Houses that there
This piece in the Wall Street Journal reports on a recent article by David F. Benson, James C. Brau, James Cicon, Stephen P. Ferris regarding the language used in charters and bylaws of companies going public. As described in the WSJ, they conclude that companies with shareholder-unfriendly provisions – such as, for example, staggered boards or supermajority voting – are inclined to “camouflage” this fact by using more obscure, harder-to-parse language. And this effect is more pronounced for companies that can expect they won’t be caught – such as, companies with a smaller analyst following and fewer institutional investors. They also find that companies that use camouflage reap benefits in the form of higher pricing. I was intrigued by the description in the WSJ, and thought the findings might be a useful point of discussion in my Sec Reg class, so I tracked down the actual study. But I found myself a bit confused by the evidence offered to support their conclusions.
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Back in the heady days of 2011, everyone wanted Facebook shares, but Facebook was not yet publicly traded. It was close to bumping up against the then-500 shareholder-of-record threshold, however, which would have triggered reporting requirements under Section 12(g) of the Exchange Act. As a result, Goldman Sachs developed a single investment vehicle to allow clients to invest in Facebook indirectly; the vehicle would purchase Facebook shares (and count as a single shareholder), and then Goldman clients would buy shares of the vehicle. Eventually Goldman ultimately was forced to modify its plan due to a different SEC rule, so its legality was never tested.
Fastforward to 2016. The JOBS Act has now upped the shareholder threshold to 2000 shareholders of record (or 500 unaccredited shareholders), and eliminated the rule that tripped up Goldman’s earlier efforts, so Morgan Stanley and Merrill Lynch are playing the game again with Uber shares. Accredited investors will have the opportunity to buy interests in New Riders LP, whose sole assets will be stock in Uber.
(okay, different New Riders LP).
The minimum price tag is $1 million through Merrill, or a paltry $250K through known-populist Morgan Stanley. The 290-page offering materials are heavy on risk disclosures, but fail to include any financial information about Uber; instead, investors are urged to trust Morgan Stanley’s and Merrill’s valuation.
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There has long been a debate about whether corporations should be forced to disclose non-financial information about their operations, particularly information pertaining to social responsibility. For example, as Marcia Narine has repeatedly discussed, Dodd-Frank’s “conflict minerals” disclosure requirement may be not only ineffective to pressure companies into making ethical purchasing decisions, but may even be counterproductive, by causing companies to pull out of the Congo entirely (thus devastating the regional economy) rather than endure the expense of ensuring that their purchases do not indirectly finance armed groups.
Further to this issue, Hans B. Christensen, Eric Floyd, Lisa Yao Liu, and Mark Maffett have recently released a paper studying the effects of Dodd-Frank’s requirement that mining companies disclose information about their compliance with the Federal Mine Safety & Health Act of 1977. They find that after mine-owning companies became subject to Dodd-Frank’s disclosure requirements, they demonstrated a marked decrease in safety violations and injuries, counterbalanced by a decrease in productivity (apparently because they are spending more time on safety compliance). They also find that mines that disclose an “imminent danger order” from regulators post-Dodd Frank not only experience an immediate stock price reaction (especially the first time such an order
Spring semester classes begin on Monday, and as a newbie professor, I’ve been spending a lot of my break preparing to teach Securities Regulation for the first time. While all my pals hang out at AALS in New York (hi, guys! Hope you’re having a good time!), I’ve chosen to remain at home, with multiple casebooks spread out over my living room floor.
Though the casebooks naturally focus on federal regulation, most have at least some discussion of regulation at the state level, including a brief explanation of the term “blue sky law.” This is a phrase whose etymology has long been shrouded in mystery; Professors Macey and Miller traced it as far back as 1910, but could not find its origins. See Jonathan R. Macey & Geoffrey P. Miller, Origin of the Blue Sky Laws, 70 Tex. L. Rev. 347 (1991). As a result, the casebooks I’ve seen simply quote the Supreme Court’s opinion in Hall v. Geiger-Jones Co., 242 U.S. 539 (1917), describing such laws as designed to prevent “speculative schemes which have no more basis than so many feet of ‘blue sky.’”
I mention this because a few years ago, Rick Fleming, who was then
Marcia’s post about the importance of teaching ethics reminded me of a Bloomberg story from a little while ago.
It’s been widely reported that today’s students have been shunning investment banks and instead have been seeking careers in Silicon Valley. Well, according to William Dudley, president of the Federal Reserve Bank of New York, that’s not just because Silicon Valley pays more and has an aura of excitement. In fact, it’s at least partly due to the fact that Wall Street strikes students as an unethical place to work – prompting students to seek alternative opportunities.
Obviously, that’s a problem: If the most ethical students shun Wall Street, it can only make matters worse, not better; and there is at least some evidence that the perception of corruption in finance may lead women away from those jobs, contributing to ongoing gender disparities (not that Silicon Valley is all that much better in this regard).
There’s obviously no easy fix, but it does occur to me that one thing we need to teach students is not simply how to think ethically or make ethical choices, but also the concrete, practical skill of saying “no,” even when that means going against
I was baffled by the idea of a film adaptation of this book – it doesn’t exactly lend itself to visual storytelling. But my skepticism was unwarranted; I enjoyed it tremendously, and, I have to admit, for a movie where everyone knows the ending going in, it was surprisingly suspenseful.
[Spoilers below the cut – but I’m giving it away now, the world economy collapses in the end]
It was recently announced that Dow and DuPont plan to merge, and then split into three separate companies – focusing on agriculture, materials, and specialty products. The move has been described as a victory for activist shareholders, and doubts have been raised about the practical viability of the plan.
But the aspect that intrigues me is the tax planning.
Now, I’m not a tax lawyer – I just play one on the internet – but after consultation with my colleague, Shu-Yi Oei, here’s my understanding of how this works.
Ordinarily, if a company spins off an aspect of its business and distributes the shares to existing shareholders, it can be treated as tax free under 26 U.S.C. § 355. The idea is that the existing shareholders once held shares in a single company, but now hold shares in two companies, there has been no substantive change, and the entire transaction is not treated as a realization event. If, however, a company simply sells off a business line to a third party, that is treated as a realization event, and it is taxed.
As a result, companies have tried to structure sales as tax free spinoffs. For example, a target
