On September 10, 2014, the Securities and Exchange Commission announced an unprecedented enforcement sweep against 34 companies and individuals for alleged failures to timely file with the SEC various Section 16(a) filings (Forms 3, 4 and 5) and Schedules 13D and 13G (the “September 10 actions”).  The September 10 actions named 13 corporate officers or directors, five individuals and 10 investment firms with beneficial ownership of publicly traded companies, and six public companies; all but one settled the claims without admitting or denying the allegations. The SEC emphasized that the filing requirements may be violated even inadvertently, without any showing of scienter. Notably, among the executives targeted by the SEC were some who had provided their employers with trading information and relied on the company to make the requisite SEC filings on their behalf.
Posts Tagged ‘Disclosure’
Earlier this week, the SEC adopted significant changes to Regulation AB, which governs the offering process and disclosure and periodic reporting requirements for public offerings of asset-backed securities, including residential mortgage backed securities (RMBS). The revisions to Regulation AB were a long time coming—they were first proposed in 2010 and have drawn several rounds of comments from industry participants. Issuers must comply with the new rules no later than one year after publication in the Federal Registrar (or two years in the case of the asset-level disclosure requirements described below). The new rules do not address “risk retention” by sponsors which is the subject of a separate rule-making process.
In our paper, Real Effects of Frequent Financial Reporting, which was recently made publicly available on SSRN, we examine the impact of financial reporting frequency on firms’ investment decisions. Whether increased financial reporting frequency improves or adversely influences a manager’s investments decision is ambiguous. On the one hand, increased transparency through higher reporting frequency can beneficially affect firms’ investment decisions in two ways. First, increased transparency can reduce firms’ cost of capital and improve access to external financing, allowing firms to invest in a larger set of positive NPV projects. Second, increased transparency can improve external monitoring and help mitigate over- or under-investment stemming from managerial agency problems. On the other hand, frequent reporting can distort investment decisions. In particular, frequent reporting can cause managers to make myopic investment decisions that boost short-term performance measures at the cost of long run firm value. Which of these two forces dominate is an open empirical question that we explore in this study.
In our paper, Window Dressing in Mutual Funds, forthcoming in the Review of Financial Studies, we investigate an alleged agency problem in the mutual fund industry. This problem involves fund managers attempting to mislead investors about their true ability by trading in such a manner that they disclose at quarter ends disproportionately higher (lower) holdings in stocks that have recently done well (poorly). The portfolio churning associated with this practice of window dressing has potentially damaging effects on both fund value and performance.
The Million-Comment-Letter Petition: The Rulemaking Petition on Disclosure of Political Spending Attracts More than 1,000,000 SEC Comment Letters
In July 2011, we co-chaired a committee of ten corporate and securities law experts that petitioned the Securities and Exchange Commission to develop rules requiring public companies to disclose their political spending. We are delighted to announce that, as reflected in the SEC’s webpage for comments filed on our petition, the SEC has now received more than a million comment letters regarding the petition. To our knowledge, the petition has attracted far more comments than any other SEC rulemaking petition—or, indeed, than any other issue on which the Commission has accepted public comment—in the history of the SEC.
On July 30, 2014, the Securities and Exchange Commission (“SEC”) advanced a novel theory of fraud against the former CEO (Marc Sherman) and CFO (Edward Cummings) of Quality Services Group, Inc. (“QSGI”), a Florida-based computer equipment company that filed for bankruptcy in 2009. The SEC alleged that the CEO misrepresented the extent of his involvement in evaluating internal controls and that the CEO and CFO knew of significant internal controls issues with the company’s inventory practices that they failed to disclose to investors and internal auditors. This case did not involve any restatement of financial statements or allegations of accounting fraud, merely disclosure issues around internal controls and involvement in a review of the same by senior management. The SEC’s approach has the potential to broaden practical exposure to liability for corporate officers who sign financial statements and certifications required under Section 302 of the Sarbanes-Oxley Act (“SOX”). By advancing a theory of fraud premised on internal controls issues without establishing an actionable accounting misstatement, the SEC is continuing to demonstrate that it will extend the range of conduct for which it has historically pursued fraud claims against corporate officers.
It almost goes without saying that the first half of 2014 brought with it the most significant development in securities litigation in decades: the U.S. Supreme Court decided Halliburton Co. v. Erica P. John Fund, Inc.—Halliburton II. In Halliburton II, the Court declined to revisit its earlier decision in Basic v. Levinson, Inc.; plaintiffs may therefore continue to avail themselves of the legal presumption of reliance, a presumption necessary for many class action plaintiffs to achieve class certification. But the Court also reiterated what it said 20 years ago in Basic: the presumption of reliance is rebuttable. And the Court clarified that defendants may now rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not affect the security’s price, making “price impact” evidence essential to class certification.
On June 25, 2014, the UK Government published the Small Business, Enterprise and Employment Bill  which, among other things, proposes that all UK companies (other than publicly traded companies reporting under the Disclosure and Transparency Rules (DTR5)) be required to maintain a register of people who have significant control over the company. The Bill is part of the UK Government’s initiative to implement the G8 Action Plan to prevent the misuse of companies and legal arrangements agreed at the Lough Erne G8 Summit in June 2013, which we discussed in our client alert entitled “Through the Looking Glass: The Disclosure of Ultimate Ownership and the G8 Action Plan” (June 20, 2013).  In broad terms, the G8 Action Plan is designed to ensure the integrity of beneficial ownership and basic company information and the timely access to that information by law enforcement and tax authorities.
A firm’s reputation is a valuable asset. Arguably, conventional wisdom suggests that a reputable firm will always act in the best interest of their clients to preserve the firm’s reputation. For example, in his testimony/defense of Goldman Sachs before Congress, the Chairman and CEO Lloyd Blankfein states, “We have been a client-centered firm for 140 years and if our clients believe that we don’t deserve their trust, we cannot survive.” In our forthcoming Review of Financial Studies article entitled Complex Securities and Underwriter Reputation: Do Reputable Underwriters Produce Better Securities?, we examine the extent to which this conventional wisdom holds with complex securities.
Recently issued SEC staff guidance addresses concerns that have been raised about proxy advisory firms by emphasizing that the investment adviser that retains and pays a proxy advisory firm is uniquely positioned to monitor the proxy advisory firm and is required to actively oversee the firm if it wants to benefit from the firm’s services to discharge its fiduciary duty. As a result of the greater oversight exercised by all of their investment adviser clients, the proxy advisory firms will presumably respond by enhancing their policies, processes and procedures, as well as the transparency of these policies, processes and procedures. In turn, the corporate community may indirectly benefit to some degree.