Authors Zhaoxin Lin, Travis R.A. Sapp, Jackie Rees Ulmer, and Rahul Parsa examine insider trading data in order to assess the significance of this issue.

In their article, “Insider Trading Ahead of Cyber Breach Announcements,” the authors report on their review of stock price responses following 258 announced cyber breaches that occurred from 2011 to 2016.  Based on historical insider sales, the authors catalogue sales as routine or opportunistic, to the extent data is available. The authors identify a statistically significant sample of sales prior to announcements of breaches.   Opportunistic sales, or sales occurring in close proximity to a cybersecurity breach announcement by insiders that do not have an established trading program, produced significant abnormal savings for the insider sellers.  Of course, the study cannot confirm that such trades were made in violation of the securities laws, but perhaps does suggest that companies reviewing their cybersecurity-related policies and procedures ought to give thought to information handling.

October 1-2, 2018

PLI California Center
685 Market Street
San Francisco, CA 94105

This program is specifically designed for in-house and law firm attorneys and other professionals who work with financial information. It will enhance understanding of business strategies, accounting fundamentals and vocabulary used by management, investors, auditors and bankers. Practical advice and application of information to actual situations and financial reports will provide participants with opportunities to immediately implement growth and broaden capabilities.

Partner Anna T. Pinedo will lead a panel discussion titled “Investment Banking Basics: Fundamentals of Capital Structures” on Day One of the program. Topics will include:

  • Common financing alternatives — debt, equity and hybrids;
  • Sources of funding — public and private markets;
  • Liquidity — raising and deploying capital;
  • Finding the Optimal Capital Structure; and
  • Current marketplace developments.

PLI will provide CLE credit.

For more information, or to register, please visit the event website.

Thursday, September 20, 2018
11:00 a.m. – 11:30 a.m. EDT

On July 31, 2018, after a review period following its initial proposal, the Office of the Comptroller of the Currency (OCC) announced it would begin accepting applications for its special purpose national bank charter for financial technology (fintech) companies. While the New York State Department of Financial Services has (again) sued the OCC claiming that it lacks the legal authority to issue this type of charter, companies are actively exploring the OCC fintech charter as well as other bank charter alternatives, such as industrial loan companies (ILCs), to facilitate their nationwide operation. Because many of these companies want to avoid owning a “bank” and being regulated as a bank holding company, there is a particular interest in those depository institutions excluded from the Bank Holding Company Act’s definition of “bank.”

Please join Mayer Brown partners Tom Delaney, Jeff Taft and Don Waack as they answer:

  • What are the potential advantages and disadvantages of an OCC fintech charter?
  • What are the alternative banking charters, such as ILCs, credit card banks and full-service insured depository institutions?
  • What is a “bank holding company”? (And why you may want to avoid this status.)

For more information, or to register for this complimentary session, please visit the event website.

In a recent paper, author Brian Cheffins contends that the concerns about the death of the US public company are overstated. Although there has been a decline in the number of public companies since 2000, public companies continue to play an important role in the US economy. In assessing the role of public companies, Cheffins considers the ratio of aggregate market capitalization of publicly traded stocks to gross domestic product. The ratio is now near an all time high. Public companies are now larger than in prior periods. For example, he notes that in 2017, the market capitalization of listed US companies averaged almost $7 billion, which is more than ten times as much on an inflation-adjusted basis as the 1976 average.

Cheffins attributes the decline in the number of US IPOs (measured against historical levels) to market factors rather than regulatory burdens. The author notes that promising companies are exiting through M&A transactions, rather than IPOs. Unless the availability of private capital and M&A opportunities dry up, he notes that the current trend should be expected to continue. While his thesis may be accurate, the concerns expressed by representatives of the Securities and Exchange Commission that a smaller percentage of American investors now has the opportunity to benefit from the periods of the most significant growth of promising emerging companies also is true.

It is already that time of year when public companies should be thinking about the 2019 proxy and annual reporting season. Advance planning greatly contributes to a successful proxy season, culminating with the annual meeting of shareholders. This Legal Update highlights issues of importance to the upcoming 2019 proxy season.

We discuss the following topics:

  • Pay Ratio
  • Say-on-Pay
  • Compensation Litigation and Compensation Disclosure
  • Board Diversity
  • Investor Stewardship Group
  • Voluntary Proxy Statement Disclosure
  • Shareholder Proposal Guidance
  • ESG Shareholder Proposals
  • Notice of Exempt Solicitations
  • Proxy C&DIs
  • Examination of Proxy Process
  • Virtual Meetings
  • Disclosure Update and Simplification
  • Cybersecurity Disclosure
  • Risk Factors
  • Accounting Impact of Tax Reform
  • Auditor Report Requirements
  • Iran Disclosures
  • Changes to Form 10-K Cover Page
  • Exhibit Hyperlinks

Speaking at a session at the American Bar Association’s annual meeting, a representative of the Securities and Exchange Commission’s Division of Corporation Finance (Michael Seaman) provided guidance for attendees regarding areas of focus in the coming months.  After reviewing some of the Commission’s recent rulemaking initiatives, including the Concept Release regarding Rule 701 and Form S-8, the recent changes to Regulation S-K to address outdated, duplicative and other similar rules, and the proposed amendments to the disclosures required by Regulation S-X Rule 3-10 and Rule 3-16, Mr. Seaman commented on ongoing and upcoming priorities.  He noted that the staff is working on proposed rules that would address the statutory change that permits Exchange Act-reporting companies to undertake Regulation A offerings.  There appears to be significant interest on the part of smaller public companies in relying on the exemption.  Mr. Seaman cautioned that the exemption is not available to such companies until the Commission adopts final rules.  He noted that the staff continues its work on proposed changes to Industry Guide 3 for financial services companies.  Guide 3 requirements may be simplified in light of the disclosures required of regulated financial institutions as a result of Basel III and other standards, as well as disclosures otherwise already contained in financial statements and the accompanying notes.  Consistent with remarks made by other Commission representatives, Mr. Seaman noted that the staff also is working on a concept release related to private offering exemptions intended to harmonize conditions for such exemptions.  When asked whether there would be additional rulemaking in furtherance of the Commission’s disclosure-effectiveness initiative, Mr. Seaman noted that the staff continues to review other aspects of the Regulation S-K requirements, including those on which comment was sought in the Concept Release on Business and Financial Disclosure required by Regulation S-K.

As far as areas of staff comment, Mr. Seaman noted that the staff was reviewing issuer disclosure related to cyber breaches and cybersecurity and commenting on risks that were generic and did not address issuer-specific facts and circumstances, as well as on disclosures related to incidents of breaches.  He also noted that the staff was reviewing dispute-resolution provisions in governing documents that may have the effect of limiting investors’ rights, such as provisions requiring mandatory arbitration, waiver of jury trial provisions, provisions related to class-action waivers, and provisions requiring a minimum ownership threshold in order to bring certain claims.  In this regard, the staff was commenting on issuer disclosures related to the inclusion of such provisions in the governing documents with a focus on ensuring that such provisions are clearly explained and investors understand the risks associated with such provisions, including the limitations on remedies, as well as ensuring that issuers are addressing in their disclosures whether such provisions are enforceable and comply with the securities laws.

Mr. Seaman also mentioned a new initiative, led by the Chief Counsel’s office, with the support and involvement of other groups, to review all of the Compliance & Disclosure Interpretations for any required updates, as well as to eliminate any C&DIs that may no longer be relevant or applicable.  He encouraged practitioners to provide their views regarding any C&DIs that may be confusing or problematic, as well as any areas or topics that may be appropriate to address in new C&DIs.

Elder financial exploitation has been recognized by many state and national agencies as a concern as the population ages and elders shoulder more responsibility for managing their retirement assets under defined contribution plans.  For investment advisers and broker-dealers, balancing the protection of customer information and reporting financial exploitation is challenging.  Fortunately, state and national authorities have taken actions to ease the regulatory tension.

State Regulations

Most states have laws in place to address elder financial exploitation.  Under state laws, a financial institution, such as an investment adviser or a broker-dealer, that complies with the rules is immune from civil and administrative liability for reporting suspected elder financial exploitation.  State regulatory regimes that apply to financial institutions can be split into two groups:  the permissive and the mandatory.  Under the mandatory reporting regime, a financial institution has a duty to report suspected elder financial exploitation.  In the permissive reporting regime, a financial institution reporting elder financial exploitation is immune from liabilities but has no obligation to report such exploitation.  In addition, some state laws permit a financial institution to put a temporary hold on disbursals upon a reasonable suspicion of financial exploitation.

National Regulations

On the national level, three notable efforts were taken to address the elder financial exploitation.  Earlier this year, FINRA amended two rules to curb elder financial exploitation.  FINRA Rule 2165 allows a broker-dealer to place a temporary hold on disbursements from a client’s account when elder financial exploitation is suspected.  If the member firm places a hold on a customer’s account, FINRA Rule 4512 requires the firm to take reasonable efforts to notify the trusted contact of that account to address possible financial exploitation.

More recently, President Trump signed the Senior Safe Act of 2018 (the “Act”) into law.  The Act encourages reporting of elder financial exploitation by providing immunity for covered financial institutions that make reporting in good faith and with reasonable care.  Covered financial institutions under the Act include credit unions, depository institutions, investment advisers, broker-dealers, insurance companies, insurance agencies, and transfer agents.  The Act also encourages training at covered financial institutions by making the immunity from liability contingent on certain training specified in the Act.  Under the Act, covered individuals and financial institutions will not be liable for disclosure of information made to certain state and federal regulatory agencies.  The Act also has limited preemption provisions.  State laws that do not provide immunities for covered financial institutions and individuals for reporting elder financial exploitation will presumably be preempted by the Act.

In addition, a recent bipartisan bill introduced in Congress titled the “National Senior Investor Initiative Act of 2018” proposes to create a task force within the SEC to focus on the challenges senior investors face.  The task force would work with national and state authorities and issue biennial reports with recommendations for regulatory or statutory changes benefiting senior investors.  Furthermore, the bill would require a study on direct and indirect costs resulting from elder financial exploitation.

Potential Issues

While the Senior Safe Act is a positive step towards a uniform regulatory regime on elder financial exploitation, it does not resolve all the issues.  Because the Act has only limited preemption of state laws, there are potential inconsistent regulatory requirements across states.

Who are covered financial institutions and individuals?

Under the Act, covered financial institutions include credit unions, depository institutions, investment advisers, broker-dealers, insurance companies, insurance agencies, and transfer agents.  The individuals covered under the Act are limited to certain individuals with specified roles.  Under some state statutes, covered financial institutions include only depository institutions and credit unions, but all officers and employees of the covered financial institutions are covered.

Who are protected adults?

The Act only protects adults age 65 and older, while FINRA Rule 2165 and some state laws protect both elder adults and adults with a mental or physical impairment.

What is financial exploitation?

The definition of financial exploitation varies from state to state and from agency to agency.  For example, under the Act, exploitation is defined to include “fraudulent or otherwise illegal, unauthorized, or improper act or process of an individual… that … results in depriving a senior citizen of rightful access to or use of benefits, resources, belongings, or assets.”  This definition does not require wrongful use. Some state statutes, on the other hand, require “wrongful use.”  Furthermore, only an individual is capable of committing financial exploitation under the Act and FINRA Rule 2165, while in some states, both an individual and entity are capable of committing financial exploitation.

Other considerations

Finally, even when reporting elder financial exploitation is optional, a financial institution should carefully consider the potential risks of inconsistent practices across different offices and the reputational risks in the event an incident of elder financial exploitation goes unreported.  Consequently, a financial institution should balance the risk and benefits when developing or revisiting reporting policies and procedures.  To be eligible for the immunity provided by the Act, a financial institution must implement training programs, or update existing programs, to meet the requirements of the Act.

Read our full REVERSEinquiries issue here.

In a white paper titled, “Taking Stock,” published by MSCI and written by Ric Marshall, Pano Seretis, and Agnes Grunfeld, the authors analyze the effect of share buybacks. As we have written in a number of prior posts, particularly following US tax reform, corporate share buybacks have been criticized in the popular press as well as by regulators. The whitepaper studies buyback activity at the 610 MSCI USA Index constituents and track share buybacks versus capital expenditures and R&D spending. Buybacks exceeded capital expenditures and R&D spending for the first time in 2015. Of the 610 index constituents, 91 percent, or 554, bought back shares at some point during the study period. Buybacks continued to increase even as valuations increased, which is contrary to the prevailing view that companies engage in buybacks when shares are undervalued. Share buybacks have returned more cash to investors than dividends in the 15-year study period, with repurchases among the index constituents totalling $5.19 trillion and cash dividends totalling $3.86 trillion. The study notes that buyback activity varies among industry sectors with activity highest among tech, consumer discretionary/staples sectors, and lowest among telecom, real estate and utilities. The companies with the highest MSCI ESG ratings were among the most active in buybacks. MSCI also calculated 10-year economic spreads for 512 companies and of these only 74 experienced a negative spread or loss of value. MSCI concluded that there was no evidence that companies were diverting resources to buybacks instead of reinvestment.

In a recent paper titled, “Voluntary Disclosure and Firm Visibility: Evidence from Firms Pursuing an Initial Public Offering,” authors Michael Dambra, Bryce Schonberger, and Charles Wasley review the benefits of pre-IPO press releases and investor meetings. Based on a sample of 569 IPOs undertaken from 2004 to 2014, the median IPO company issues two press releases in the year before the IPO and 16.7 percent of the companies attend an investor conference in that year. The authors conclude that private companies that engage in pre-IPO communications about their business and products enhances firm visibility and results in, among other things, more positive filing price revisions during the IPO process, more dispersed investor ownership, and greater coverage in the post-IPO period. The authors also conclude that in contrast to concerns that removing restrictions on communications in proximity to securities offerings would encourage companies to hype their stock prior to raising capital, there is no evidence that private companies that engage in pre-prospectus disclosures display inflated prices that reverse over time. As we have suggested in other posts, perhaps, in connection with other capital formation initiatives, the time may be ripe for the Securities and Exchange Commission to revisit securities offering reform and revamp the communications rules and safe harbors.