Securities Regulation

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I have previously blogged about Institutional Shareholder Services’ policy survey and noted that a number of business groups, including the Chamber of Commerce, had significant concerns. In case you haven’t read Steve Bainbridge’s posts on the matter, he’s not a fan either. 

Calling the ISS consultation period “a decision in search of a process,” the Chamber released its comment letter to ISS last week, and it cited Bainbridge’s comment letter liberally. Some quotable quotes from the Chamber include:

Under ISS’ revised policy, according to the Consultation, “any single factor that may have previously resulted in a ‘For’ or ‘Against’ recommendation may be mitigated by other positive or negative aspects, respectively.” Of course, there is no delineation of what these “other positive or negative aspects” may be, how they would be weighted, or how they would be applied. This leaves public companies as well as ISS’ clients at sea as to what prompted a determination that previously would have seen ISS oppose more of these proposals. This is a change that would, if enacted, fly in the face of explicit SEC Staff Guidance on the obligations to verify the accuracy and current nature of information utilized in formulating voting recommendations.

The…

Daniel Fisher at Forbes has posted an interesting story about Columbia Law Professor Robert Jackson’s attempt to obtain information about investment advisors from the SEC. The SEC first denied they had the information, then said it would be too burdensome to produce the information. The kicker: an SEC economist has published a study using that very data. Fisher provides copies of Professor Jackson’s persistent FOIA requests and the SEC’s responses.

It’s a fascinating study in bureaucratic favoritism and stubbornness. Not particularly surprising, but fascinating.

 

 

Miriam Schwartz-Ziv from Michigan State University and Russ Wermers from the University of Maryland have written an interesting article in time for the next proxy season. The abstract is below:

This paper investigates the voting patterns of shareholders on the recently enacted “Say-On-Pay” (SOP) for publicly traded corporations, and the efficacy of vote outcomes on rationalizing executive compensation. We find that small shareholders are more likely than large shareholders to use the non-binding SOP vote to govern their companies: small shareholders are more likely to vote for a more frequent annual SOP vote, and more likely to vote “against” SOP (i.e., to disapprove executive compensation). Further, we find that low support for management in the SOP vote is more likely to be followed by a decrease in excess compensation, and by a more reasonable selection of peer companies for determining compensation, when ownership is more concentrated. Hence, the non-binding SOP vote offers a convenient mechanism for small shareholders to voice their opinions, yet, larger shareholders must be present to compel the Board to take action. Thus, diffuse shareholders are able to coordinate on the SOP vote to employ the threat that large shareholders represent to management.

On Friday, I participated in the 2014 Workshop for Corporate & Securities Litigation sponsored by the University of Richmond School of Law and the University of Illinois College of Law and held on the University of Richmond’s campus.  Thanks to Jessica Erickson and Verity Winship for hosting an amazing group of scholars presenting impressive, interesting papers.  I attended the workshop to test an idea for a paper tentatively entitled: “Policy and International Securities Fraud Actions: A Matter of Investor and (or) Market Protection?”

The paper would address an important issue in U.S. federal securities law: the extraterritorial reach of the general anti-fraud protections in Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 adopted by the U.S. Securities and Exchange Commission under Section 10(b). In a world where securities transactions often cross borders—sometimes in non-transparent ways—securities regulators, issuers, investors, and intermediaries, as well as legal counsel and the judiciary, all need clarity on this matter in order to plan and engage in transactions, advocacy, and dispute resolution. Until four years ago, the rules in this area (fashioned more as a matter of  jurisdiction than extraterritorial reach) were clear, but their use often generated unpredictable results.

In…

I used to joke that my alma mater Columbia University’s core curriculum, which required students to study the history of art, music, literature, and philosophy (among other things) was designed solely to make sure that graduates could distinguish a Manet from a Monet and not embarrass the university at cocktail parties for wealthy donors. I have since tortured my son by dragging him through museums and ruins all over the world pointing spouting what I remember about chiaroscuro and Doric columns. He’s now a freshman at San Francisco Art Institute, and I’m sure that my now-fond memories of class helped to spark a love of art in him. I must confess though that as a college freshman I was less fond of  Contemporary Civilization class, (“CC”) which took us through Plato, Aristotle, Herodotus, Hume, Hegel, and all of the usual suspects. At the time I thought it was boring and too high level for a student who planned to work in the gritty city counseling abused children and rape survivors.

Fast forward twenty years or so, and my job as a Compliance and Ethics Officer for a Fortune 500 company immersed me in many of the principles…

Whether you are teaching insider trading as part of a corporations or a securities regulation course, you practice in the area, or you like these cases because they contain some of the most interesting fact patterns….. I have a couple of gems for you.

First, the on line edition of the New Yorker features two great stories on insider trading.  The first story, The Empire of Edge written by Patrick Radden Keefe, focuses on the conviction of a trader at S.A.C. capital for trades made 10 days before the release of results from clinical trials on an alzheimer’s medication. The hedge fund reversed its $.785B position in two companies testing the drug and took a short position against the companies earning the fund $275M. In classic long-form journalism at its best, the story is riveting as it unfolds.  The second story, A Dirty Business by George Packer, tells the story of Raj Rajaratnam, head of the Galleon hedge fund at the heart of the 2009 informant ring scandal, the prosecution and the SEC’s stance on enforcement.  

For those of you who are interested, the SEC posted a running list of insider trading enforcement actions here.

-Anne Tucker

To be clear, I’m not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics.  I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law.   This week’s announcement of  Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.  

I admit I did not much about Tirole before the announcement, and after just a little reading, it’s clear to me that I need to know more.  A nice summary of Tirole’s work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:

A theory prize!  A rigor prize!  I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics.  He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too.  He is a broader economist than many of his fans realize.

Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s.  In industrial organization, you can think of him

…

The numbers are in on SEC Dodd-Frank conflict minerals filings. According to a Tulane study, the average company spent over half a million dollars to comply. A review by law firm Schulte Roth & Zabel shows how meaningless (in my view), some of those filings were. Meanwhile, Canada failed to pass another conflict minerals bill and NGOs are pressuring the EU to step up to the plate for more rigorous regulation. I continue to believe that there has to be a better way to resolve a deadly human rights crisis, and that disclosure and due diligence in the supply chain are important but are not the solutions.

Alibaba dominated the September business press coverage with its record-breaking IPO last month, and news of its stock price, trading at a 30% premium, continues to dominate coverage.  I have been using the headline-hogging IPO in my corporations class to discuss raising capital, which I am sure many of you are doing as well.  Here are a few creative uses for the class-friendly headlines:

  • I used coverage of the IPO and its short-lived halo effect on other tech IPO’s as a companion to the E-bay stock spinning case (taught under director fiduciary duties).  

As we move into securities next week,

Please add to the list of uses in the comments section if you have any new ideas or suggestions.

-Anne Tucker

For the second time, I have assigned my BA students to write their own shareholder proposals so that they can better understand the mechanics and the substance behind Rule 14-a8. As samples, I provided a link to over 500 proposals for the 2014 proxy season. We also went through the Apple Proxy Statement as a way to review corporate governance, the roles of the committees, and some other concepts we had discussed. As I reviewed the proposals this morning, I noticed that the student proposals varied widely with most relating to human rights, genetically modified food, environmental protection, online privacy, and other social factors. A few related to cumulative voting, split of the chair and CEO, poison pills, political spending, pay ratio, equity plans, and other executive compensation factors.

After they take their midterm next week, I will show them how well these proposals tend to do in the real world. Environmental, social, and governance factors (political spending and lobbying are included) constituted almost 42% of proposals, up from 36% in 2013, according to Equilar. Of note, 45% of proposals calling for a declassified board passed, with an average of 89% support, while only two proposals for the separation…