The SEC Whistleblower Program Year in Review

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday August 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Jordan A. Thomas, partner at Labaton Sucharow LLP and former assistant director at the Securities and Exchange Commission, and is based on a Labaton Sucharow publication by Mr. Thomas and Vanessa De Simone.

Four years ago this month, with the country still reeling from financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act–the most sweeping financial reform effort since the Great Depression. The goal of Dodd-Frank was as ambitious as its scope; as President Barack Obama remarked, the legislation would “restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed.”

…continue reading: The SEC Whistleblower Program Year in Review

Statement on Asset-Backed Securities and Credit Rating Agencies

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday August 29, 2014 at 9:00 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here and here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Commission will today [August 27, 2014] consider recommendations of the staff for adopting two very important final rules in different, but closely related, areas—asset-backed securities and credit rating agencies.

The reforms before us today will add critical protections for investors and strengthen our securities markets by targeting products, activities and practices that were at the center of the financial crisis. With these measures, investors will have powerful new tools for independently evaluating the quality of asset-backed securities and credit ratings. And ABS issuers and rating agencies will be held accountable under significant new rules governing their activities. These reforms will make a real difference to investors and to our financial markets.

We will first consider the recommendation related to asset-backed securities, and then we will consider the rules relating to credit rating agencies.

…continue reading: Statement on Asset-Backed Securities and Credit Rating Agencies

Securities Class Action Filings—2014 Midyear Assessment

Posted by John Gould, Cornerstone Research, on Thursday August 28, 2014 at 9:09 am
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Editor’s Note: John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, titled “Securities Class Action Filings—2014 Midyear Assessment,” available here.

Number and Size of Filings

  • Plaintiffs filed 78 new federal class action securities cases (filings) in the first six months of 2014—13 fewer than in the second half of 2013, but slightly higher than the 75 filings in the first half of 2013. This number was 18 percent below the historical semiannual average of 95 filings observed between 1997 and 2013.
  • The total Disclosure Dollar Loss (DDL) of filings remained at low levels. Total DDL was $30 billion in the first half of 2014, 52 percent below the historical semiannual average of $62 billion.

…continue reading: Securities Class Action Filings—2014 Midyear Assessment

Military CEOs

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday August 28, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Efraim Benmelech and Carola Frydman, both of the Finance Department at Northwestern University.

In our paper, Military CEOs, forthcoming in the Journal of Financial Economics, we examine the effect of military service of CEOs and managerial decisions, corporate policies, and corporate outcomes. Service in the military may alter the behavior of servicemen and women in various ways that could affect their actions when they become CEOs later in life. Militaries have organized, sequential training programs that combine education with on-the-job experience and are designed to develop command skills. Evidence from sociology and organizational behavior research suggests that individuals may acquire hands-on leadership experience through military service that is difficult to learn otherwise and that they may be better at making decisions under pressure or in a crisis (Duffy, 2006). It is possible, therefore, that military CEOs may be more prepared to make difficult decisions during periods of industry distress. Moreover, military service emphasizes duty, dedication, and self-sacrifice. The military may thus inculcate a value system that encourages CEOs to make ethical decisions and to be more dedicated and loyal to the companies they run rather than pursue their own self-interest (Franke, 2001).

…continue reading: Military CEOs

Securities Litigation in the Roberts Court: An Early Assessment

Posted by John Coates, Harvard Law School, on Wednesday August 27, 2014 at 9:02 am
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Editor’s Note: John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School.

This article, Securities Litigation in the Roberts Court: An Early Assessment, provides a preliminary quantitative and qualitative appraisal of the Roberts Court’s securities law decisions. In the Roberts Court, decisions that “expand” or “restrict” the reach of securities law have occurred in roughly the same 50/50 proportion as in the Rehnquist Court after the departure of Justice Powell, and polarization (5-4 votes and dissents) has decreased. A simple political attitudinal model fails to account for these developments. The article proposes that Roberts Court’s securities law decisions are better understood in the context of Chief Roberts’ background as an appellate litigator and the Roberts Court’s broader “procedural revolution,” which has been more prominent in contract, commercial, and antitrust cases. This procedure-based analysis is then used to predict likely outcomes of securities law cases to be argued in the October 2014 term and to forecast the types of cases that are likely to gain the Court’s attention moving forward.

…continue reading: Securities Litigation in the Roberts Court: An Early Assessment

Survey of Board Leadership 2014

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday August 27, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Robert E. Hallagan and Dennis Carey, both Vice Chairmen at Korn Ferry, and is based on portions of a survey conducted by the Korn Ferry Institute. The complete publication is available here.

This is our second annual report on board leadership.

The numbers and trends are interesting but the subtleties and substance behind them are extremely valuable as the National Association of Corporate Directors (NACD) and Korn Ferry continue their study of high-performing boards. The thoughtful selection and performance of board leaders is one of two pillars of leadership that drive long-term shareholder value—the other being the CEO of the company.

There is universal agreement that each board must have an independent leader but how each company has achieved this takes many shapes.

In this year’s report, we see continued evidence of a slow and deliberate trend toward separation of the roles, higher in mid-cap companies than the large-cap S&P 500. Key catalysts included activism, and a transition of CEO leadership that prompted the board to elect to separate the roles. Between this report and the next, Korn Ferry and NACD will be in active discussion with companies that have changed leadership structures in the last several years and will ask the following questions to uncover what is driving long-term shareholder value:

…continue reading: Survey of Board Leadership 2014

The Hidden Costs and Underpinnings of Debt Market Liquidity

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday August 26, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from Amar Bhidé, Thomas Schmidheiny Professor at The Fletcher School.

Even as rabble rousers rail against financiers, the powers that be prize the breadth and liquidity of financial markets. Flash traders are investigated for unsettling stock markets and violators of securities laws receive jail sentences on par with violent criminals. The Federal Reserve has spent trillions with the avowed aim of pumping up the prices of traded securities, while expressing little more than the pious hope that this largesse might spill over into old-fashioned, illiquid loans.

…continue reading: The Hidden Costs and Underpinnings of Debt Market Liquidity

The Battle Against Multiforum Stockholder Litigation

Posted by Theodore Mirvis, Wachtell, Lipton, Rosen & Katz, on Monday August 25, 2014 at 12:17 pm
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Editor’s Note: Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, David A. Katz, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Just over a year ago, the Delaware Court of Chancery upheld the facial validity of exclusive forum bylaws adopted by corporate boards as a means of rationalizing stockholder litigation. In the time since Chancery’s landmark Chevron opinion, numerous corporations have adopted exclusive forum bylaws, and courts in New York, Texas, Illinois, Louisiana, and California have enforced such bylaws against stockholders bringing duplicative lawsuits in violation of their terms. The result, as one commentator recently noted, has been to disincentivize duplicative filings and reduce the concomitant litigation “deal tax” on merging parties. Yet, despite this progress, pernicious multijurisdictional litigation persists. A recent decision from a court in Oregon (Roberts v. TriQuint SemiConductor, Inc., No. 1402-02441 (Or. Cir. Ct. Aug. 14, 2014)) illustrates the potential harm from such litigation and the importance of continued authoritative articulation of the law to ensure the efficacy of exclusive forum bylaws.

…continue reading: The Battle Against Multiforum Stockholder Litigation

Understanding and Implementing the NIST Cybersecurity Framework

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday August 25, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on an article authored by Mr. Ferrillo and Tom Conkle.

Why the Cybersecurity Framework was created and why it is so important

Despite the fact that companies are continuing to increase spending on cybersecurity initiatives, data breaches continue to occur. According to The Wall Street Journal, “Global cybersecurity spending by critical infrastructure industries was expected to hit $46 billion in 2013, up 10% from a year earlier according to Allied Business Intelligence Inc.” [1] Despite the boost in security spending, vulnerabilities, threats against these vulnerabilities, data breaches and destruction persist. To combat these issues, the President on February 12, 2013 issued Executive Order (EO) 13636, “Improving Critical Infrastructure Cybersecurity.” [2] The EO directed NIST, in cooperation with the private sector, to develop and issue a voluntary, risk-based Cybersecurity Framework that would provide U.S. critical infrastructure organizations with a set of industry standards and best practices to help manage cybersecurity risks.

…continue reading: Understanding and Implementing the NIST Cybersecurity Framework

A Strict Liability Regime for Rating Agencies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday August 25, 2014 at 9:02 am
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Editor’s Note: The following paper comes to us from Alessio Pacces and Alessandro Romano, both of the Erasmus School of Law at Erasmus University Rotterdam.

In our recent ECGI working paper, A Strict Liability Regime for Rating Agencies, we study how to induce Credit Rating Agencies (CRAs) to produce ratings as accurate as the available forecasting technology allows.

Referring to CRAs, Paul Krugman wrote that: “It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt […] could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job.”

However, the conflicts of interest stemming from the issuer-pays model and rating shopping by issuers are not sufficient to explain rating inflation. Because ratings are valuable only as far as they are considered informative by investors, in a well-functioning market, reputational sanctions should prevent rating inflation.

…continue reading: A Strict Liability Regime for Rating Agencies

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