Securities Regulation

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Ten days ago, I posted on conflicts of interest and the POTUS.  Today, friend-of-the-BLPB Ben Edwards has an Op Ed in The Washington Post on conflicts of a different kind–those created by brokerage compensation based on commissions for individual orders.  The nub:

In the current conflict-rich environment, Wall Street gorges itself on the public’s retirement assets. While transaction fees are costs to the public, they’re often juicy paydays for financial advisers. A study by the White House Council of Economic Advisers found that Americans pay approximately $17 billion annually in excess fees because of such conflicts of interest. The high fees mean that the typical saver will run out of retirement money five years earlier than he or she would have with better, more disinterested advice.

The solution posed (and fleshed out in a forthcoming article in the Ohio State Law Journal, currently available in draft form on SSRN here):

[S]imply banning commission compensation in connection with personalized investment advice would put market forces to work for consumers. This structure would kill the incentive for financial advisers to pitch lousy products with embedded fees to their clients. While the proposal might sound radical, Australia and Britain have…

My friend and colleague, Jena Martin’s coauthored book (which she wrote with another West Virginia University professor Karen Kunz) has just been released: When the Levees Break: Re-visioning Regulation of the Securities Markets. I have just started the book, and I look forward to working my way through it. I cannot say Prof. Martin and I always see eye to eye on things (though we often do), she always has a thoughtful and interesting take. It’s been an interesting read so far, and I recommend taking a look. Following is a synopsis of the book: 

The stock markets. Whether you invest or not, the workings of the stock market almost certainly touch your life. Either through your retirement fund, your mutual fund or just because you work for a place that invests (or is invested in)—the reach of the securities markets is expanding, like an ever growing tidal wave. 

This book discusses what happens when that wave hits the shore. Specifically, this book argues that, given the mounting deluge from misplaced regulation, fast-paced technology, and dominant financial players, the current US regulatory structure is woefully inadequate to hold back the tide. 

Using vivid imagery and plain language, Karen Kunz and Jena

…

U.S. Securities and Exchange Commission Chair Mary Jo White has vowed to press on in her efforts to adopt new rules related to derivatives and mutual funds, among other issues, says a Reuters report.  The Senate Banking Committee’s top two Republicans, Chairman Richard Shelby and Mike Crapo of Idaho, sent a letter asking her to stop the rule making process while the Trump administration reviews the SEC’s agenda. She declined. 

Chair White replied that the SEC must “exhibit a spirit of firm independence” in continuing its work “without fear or favor.” She further wrote,  “I am not insensitive to the issues raised by your letter and have carefully considered what impact, if any, the election should have on the current work of the Commission.” (Reuters saw the letter, but I have not found a copy.) 

I am on record as saying (e.g., here and here) I’d like to see the SEC and Congress take a break from new regulations and focus on enforcement, though I know some of the proposed rules are (at least in some form) required by Dodd-Frank. Still, even where I disagree with some of the proposals, I think it’s right for independent agencies to continue on with their work. Each such agency can be respectful…

It used to be that Friday night was Domino’s Pizza night in our house . . . .  My, how things change if one lets 15-20 years slip by unnoticed.  No more of that in our house!

I guess Domino’s is doing OK without us, however.  Third quarter 2016 financial results for Domino’s Pizza, Inc., a Delaware corporation with common stock listed on the New York Stock Exchange, were favorable as compared to the firm’s 2015 results, accordingly to the most recent quarterly earnings release.  Somebody’s eating a lot of Domino’s pizza, even if it isn’t the Heminway family.

Apparently, Domino’s wants to share the wealth–with its customers.  Co-blogger Haskell Murray pointed this recent press item out to me and co-blogger Ann Lipton in an email message last week, knowing full well that we both were or would be interested.  He was right.  Ann may have more to say on this in a later post.  (She also noted that other firms are adopting consumer benefit plans similar to the Domino’s plan I describe here today.)

Of course, as a corporate finance/securities lawyer, I immediately had visions of Ralston Purina dancing in my head.  (Not quite like visions of sugarplums, in this holiday…

In a relatively brief opinion released this morning, the U.S. Supreme Court affirmed the Ninth Circuit’s judgment in Salman v. United States.  The decision of the Court was unanimous.  The big take-aways include:

  • doctrinally, the Court’s complete, unquestioning reliance on the language in Dirks v. Sec’s Exch. Comm’n, 463 U. S. 646 (1983), as to when the sharing of information through a tip is improper, and therefore a basis for insider trading liability (quoting from the text on page 662 of the Dirks opinion: “'[T]he test,’ we explained, ‘is whether the insider personally will benefit, directly or indirectly, from his disclosure.’”);
  • factually, the emphasis placed by the Court on the value proposition represented by the information-sharing between the close brothers, Maher and Michael–that information passed on with the knowledge that it will be traded on was effectively a substitute for a monetary gift (“In one of their tipper-tippee interactions, Michael asked Maher for a favor, declined Maher’s offer of money, and instead requested and received lucrative trading information.”), noting “[a]s Salman’s counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his

…

When it comes to regulations and economic policy, I am quite conservative.  Not a Republican-type conservative (probably more Libertarian in a political sense), but in the sense that I often advocate for less regulation, and even more often, for less changes to laws and regulations. People need to be able to count on a system and work within it. As such, whether it is related to securities law, energy and environmental law, or other areas of the law, I find myself advocating for staying the course rather than adding new laws and regulations.  

For example, a while back, co-blogger Joan Heminway quoted one of my comments about securities law, where I noted “my ever-growing sense that maybe we should just take a break from tweaking securities laws and focus on enforcing rules and sniffing out fraud. A constantly changing securities regime is increasingly costly, complex, and potentially counterproductive.” 

After the BP oil blowout of the Deepwater Horizon well in the Gulf of Mexico, I similarly argued that we should approach new laws with caution, and that we might be better served with existing law, rather than seeking new laws and regulation in a hasty manner. I explained, 

[T]here are times when new laws and regulations are

…

Rep. John Shimkus (R-Ill.) has already started soliciting support as he seeks to chair the House Energy & Commerce Committee. He says in his letter: 

[W]e will use our oversight and investigative authority to rebalance the federal government, recommending changes so future administrations won’t have the same ability to abuse their power.  In particular, this will entail building the case against the Chevron Deference, which has enabled executive agencies to upend congressional intent through the courts.

Our success in this area will restore Congress as the sole lawmaking apparatus of the federal government.

This is rather funny to me.  First of all, Chevron was a case during the Reagan Administration in which the Administration decided to take a view of the Clean Air Act with which the Natural Resources Defense Council, Inc. disagreed. The court sided with the Administration.  The power of deference has value to who ever is in charge of the executive branch.  

More important, though, Congress has always been the sole lawmaking apparatus of the federal government. Congress can eliminate Chevron deference by statute. Congress can repeal Massachusetts v. EPA by statute.  Congress has the power.  They are just unwilling or unable to wield it.  This…

I have been on hiatus for a few weeks, and had planned to post today about the compliance and corporate governance issues related to Wells Fargo. However, I have decided to delay posting on that topic in light of the unexpected election results and how it affects my research and work.

I am serving as a panelist and a moderator at the ABA’s annual Labor and Employment meeting tomorrow. Our topic is Advising Clients in Whistleblower Investigations. In our discussions and emails prior to the conference, we never raised the election in part because, based on the polls, no one expected Donald Trump to win. Now, of course, we have to address this unexpected development in light of the President-elect’s public statements that he plans to dismantle much of President Obama’s legacy, including a number of his executive orders.

President-elect Trump’s plan for his first 100 days includes, among other things: a hiring freeze on all federal employees to reduce federal workforce though attrition (exempting military, public safety, and public health); a requirement that for every new federal regulation, two existing regulations must be eliminated; renegotiation or withdrawal from NAFTA; withdrawal from the Trans-Pacific Partnership; canceling “every unconstitutional executive action…

General Electric (GE)  and Baker Hughes (BHI) announced on Monday, October 31st, a proposed merger to combine their oil and gas operations.  GE and Baker Hughes will form a partnership, which will own a publicly-traded company.   GE shareholders will own 62.5% of the “new” partnership, while Baker Hughes shareholders will own 37.5% and receive a one-time cash dividend of $17.50 per share.  The new company will have 9 board of director seats:  5 from GE and 4 from Baker Hughes.  GE CEO Jeff Immelt will be the chairman of the new company and Lorenzo Simonelli,  CEO of GE Oil & Gas, will be CEO. Baker Hughes CEO Martin Craighead will be vice chairman.

Reuters is describing the business synergies between the two companies as leveraging GE’s oilfield equipment manufacturing (“supplying blowout preventers, pumps and compressors used in exploration and production”) and data process services with Baker Hughes’ expertise in ” horizontal drilling, chemicals used to frack and other services key to oil production.”

Baker Hughes had previously proposed a merger with Halliburton (HAL), which failed in May, 2016, after the Justice Department filed an antitrust suit to block the merger. Early analysis suggests that the proposed GE & Baker Hughes will pass regulatory scrutiny because of the limited business overlap of GE and Baker Hughes.

As I plan to tell my corporations students later today: this is real life!  A high-profile, late-semester merger of two public companies is a wonderful gift.  The proposed GE/Baker Hughes merger illustrates, in real life, concepts we have been discussing (or will be soon) like partnerships, the proxy process, special shareholder meetings, SEC filings, abstain or disclose rules, and, of course, mergers.

The Stanford Law Review Online has just released a series of essays on Salman v. United States, scheduled for oral argument on Wednesday.  I plan to blog more about the Salman case as/if I can find time this week, but I wanted you to have this link right away–first thing this morning.  The essays are a veritable insider trading feast and are written by some of the most thoughtful scholars in the area: Jill Fisch, Don Langevoort, Jonathan Macey, Donna Nagy, and Adam Pritchard.  There’s something in at least one of the essays for almost everyone out there.