A recent article by Dan Amiram, Andrew M. Bauer, and Mary Margaret Frank examines the issue of corporate tax avoidance as a product of incentives. The authors suggest that “corporate tax avoidance by managers is driven by the alignment of their interest with shareholders.”* The tax role of the manager is made clear by studying the “effects of corporate tax avoidance on shareholders’ after-tax cash flows” in both classical tax systems and imputation tax systems. The authors conclude that there is higher corporate tax avoidance in classical tax systems if managerial and shareholder interests are closely aligned. (more…)
SEC Fines NASDAQ Over Botched Facebook IPO
As a result of Facebook’s initial public offering (IPO) mishap last year, the SEC has charged NASDAQ with securities laws violations resulting from its poor systems and decision-making in handling the IPO and secondary market trading of Facebook shares. In order to settle the SEC’s charges, NASDAQ has agreed to pay a $10 million penalty – the largest ever against an exchange.
Exchanges such as NASDAQ have an obligation to ensure that their systems, processes, and contingency planning are adequate to manage an IPO without disruption to the market. However, despite the anticipation that the Facebook IPO would be among the largest in history, NASDAQ failed to address a design limitation in their system that matched buy and sell orders, causing disruptions to the Facebook IPO. These disruptions then led NASDAQ to make a series of ill-fated decisions that led to the rules violations.
SEC Proposes Cross-Border Security-Based Swap Rules
[Editor’s Note: The following Post is authored by Davis Polk & Wardwell LLP]
On May 1, 2013, the Securities and Exchange Commission took long awaited action to propose rules governing cross-border activities in security-based swaps. The SEC’s proposal, developed over the course of more than two years, reflects a holistic approach that differs in key respects from that taken by the Commodity Futures Trading Commission with respect to transnational swap activities (the “CFTC Proposal”). In light of the far-ranging significance of its cross-border proposal, the SEC has reopened comment periods for many of its previously proposed security based swap regulations and its policy statement on the sequencing of compliance with these rules.
The comment period for the proposed cross-border rules ends 90 days after publication in the Federal Register. The comment period for the previously proposed rules and policy statement ends 60 days after publication in the Federal Register.
This memorandum provides an overview of key provisions of the SEC’s proposal, highlighting the most important differences from the CFTC Proposal. We focus on those provisions of the SEC’s proposal that address the regulation of security-based swap dealers and security-based swap end users, but we note that the SEC’s proposal also addresses the cross-border regulation of clearing agencies, security-based swap data repositories, and security-based swap execution facilities.
To read the complete story, click here.
Weekly News Update: Bank Violations and Protecting Confidential Information
Last year the $25 billion National Mortgage Settlement meant to end mortgage servicing abuses was announced by federal and state officials; however, there is mounting evidence that not all the involved banks are living up to their commitment. The five banks involved with the settlement are Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial Inc. In a recent letter, New York Attorney General Eric Schneiderman claims that Bank of America and Wells Fargo are violating the terms of the settlement. Schneiderman states that the two banks have committed a combined 339 violations of servicing standards, including deliberate delays by Wells Fargo and Bank of America to reviewing loan modification applications, a practice reminiscent of the “same misconduct that precipitated the National Mortgage Settlement.” Schneiderman has plans to sue both banks for failing to uphold their obligations under the settlement. However, in a letter to Schneiderman, Bank of America responded that they cannot be sued since they have not been given ample time to remedy their alleged violations. Both Bank of America and Wells Fargo say they remain committed to the terms of the settlement and deny that they have committed violations.
According to a recent story published by Corporate Crime Reporter, the proxy advisory services firm Institutional Shareholder Services (ISS) was fined by the SEC for failing to prevent one of its employees from distributing confidential material. In exchange for information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots, the employee, who no longer works at ISS, received expensive tickets to concerts and sporting events, meals, and an airline ticket. The SEC investigation revealed that ISS lacked sufficient controls over access to confidential client vote information, allowing for the employee to gather the data. As a result of the failure of ISS to protect its confidential information, the SEC has required ISS to pay a $300,000 penalty and allow for an independent compliance consultant to review its procedures and ensure they comply with the Investment Advisers Act’s requirements for treatment of confidential information.
EDGAR Update
The SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system has been updated to include the new Form 13F online application. The ability to file online corresponds with the original goal of Section 13(f) of the 1975 Securities Exchange Act to “increase the public availability of information regarding the securities holdings of institutional investors.” The new online application “illustrates each step of the process to submit an electronic submission and helps filers understand the tools provided by the SEC for constructing and transmitting those submissions.” This update should make it easier for firms to provide current and accurate information about their holdings. (more…)
Robert P. Bartlett’s Credit Risk Models
Recently, Robert P. Bartlett’s article Making Banks Transparent, 65 Vand. L. Rev. 293-386 (2012), was included in this year’s list of the Ten Best Corporate and Securities Articles. The article is a self-proclaimed “thought experiment” that uses two case studies to suggest that more specific, limited credit risk models can be used to increase bank transparency. According to Bartlett, increased bank transparency will help financial institutions avoid crises like the subprime mortgage crisis, by allowing market participants to “more effectively monitor and price the risks embedded in particular institutions.”*
The Alternative Investment Fund Managers Directive – UK Treasury Releases Near-Final Draft of Implementing Regulations
[Editor’s Note: The following Post is authored by Goodwin Procter LLP’s Glynn Barwick.]
The UK Treasury has recently published a new, and near final, version of the implementing Regulations for the Alternative Investment Fund Managers Directive (the “AIFMD”). (We have commented on the consequences of the AIFMD for EU managers and non-EU managers in our 4 January, 11 January, 27 February and 27 March client alerts.) This updated version of the implementing Regulations represents a considerable improvement for managers compared to the initial draft.
In summary, with effect from the implementation date (22 July 2013), European managers of Alternative Investment Funds (“AIFs”) – essentially:
(a) any European manager of a PE, VC, hedge or real estate fund will need to be authorised in its home member state and comply with various requirements regarding the funds that it manages concerning information disclosure and third-party service providers; and
(b) any non-European manager of a PE, VC, hedge or real estate fund will need to comply with various marketing and registration restrictions if it wishes to obtain access to European investors.
This Client Alert discusses the major changes to the AIFMD implementing Regulations.
Click here to read the complete story.
The “Franken Amendment” Receives New Life; Plan Calls for SEC to Promulgate New Rules for Credit Rating Agencies
Senators Al Franken (D-MN) and Roger Wicker (R-MS) have renewed the call for the SEC to regulate how credit-rating agencies generate revenue. Eight of the nine registered credit-rating agencies employ what is known as the “issuer-pays” model in which ratings agencies receive “their principal revenue stream from issuers whose products they rate.” This model has been blamed for inflating the value of financial products, particularly mortgage-backed securities, and thus misleading investors and contributing to the 2007-2009 financial crisis. The senators want to prevent future manipulation by empowering the SEC to better regulate these credit-rating agencies’ revenue generating systems.
BHCs Instructed to Conduct First Round of Mid-Cycle Stress Tests
This month the Federal Reserve instructed 18 Bank Holding Companies (BHCs) to conduct their first biannual Mid-Cycle Stress Test in compliance with the Dodd-Frank Act. While the Federal Reserve has conducted its own stress tests since 2009, this is the first time firms will conduct the test based on their “own processes and analyses.” (more…)
Recent Lessons on Management Compensation at Various Stages of the Chapter 11 Process
[Editor’s Note: The following Post is authored by Kirkland & Ellis LLP’s James H.M Sprayregen, Christoper T. Greco, and Neal Paul Donnelly.]
Setting compensation for senior management can be among the most contentious issues facing companies reorganizing under Chapter 11 of the US Bankruptcy Code. Corporate debtors argue that such compensation—often in the form of base salary, bonuses, or stock of the reorganised company–helps retain and incentivize management, whose services are believed necessary to achieve a successful reorganisation. Creditors, by contrast, may be loath to support compensation packages that they perceive as enriching the very managers who led the company into bankruptcy.
This tension over management compensation, though long present in corporate bankruptcy cases, has been more pronounced since 2005, when the US Congress added Section 503(c) to the Bankruptcy Code. Section 503(c) limits bankrupt companies’ freedom to give management retention bonuses, severance payments, or other ancillary compensation. For instance, under the current regime, a company cannot pay managers retention bonuses unless it proves to a bankruptcy court that the managers both provide essential services to the reorganising business and that they have alternative job offers in hand. Even then, the Bankruptcy Code caps the amount of the retention bonuses. Severance payments to managers are similarly restricted by Section 503(c).
Despite these restrictions, companies continue to search for ways to boost managers’ compensation in and around the time of bankruptcy. They do so because retaining existing managers is often the best way to maximise the value of the company in a restructuring. Existing managers typically have valuable institutional knowledge and industry-specific experience that is hard to replace. They may also be vital to preserving relationships with customers, employees, and suppliers. Recognising their value, leaders of bankrupt companies often demand incentives to stay on during bankruptcy. Even where a company would prefer new management, it can be hard to recruit top people to a bankrupt company undergoing a restructuring. Companies must therefore choose how and when to compensate managers without running aground on Section 503(c) and related provisions of the Bankruptcy Code.
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