Friday, November 21, 2014

Commissioner Bowen Seeks Input on New Market Risk Advisory Committee

[This story previously appeared in Securities Regulation Daily.]

By Lene Powell, J.D.

CFTC Commissioner Sharon Bowen put out a call for comment on the composition and priorities of a new committee looking at market risk, as well as nominations for committee members.

The newly established Market Risk Advisory Committee (MRAC) will examine matters of public concern to clearinghouses, exchanges, intermediaries, market makers, end-users, and the Commission relating to systemic issues that might threaten the stability of the derivatives markets and other financial markets. The committee will help the Commission understand the impact of evolving market structure and movement of risk across various market components.

The Commission expects the committee to have approximately 20 to 25 members drawn from entities with interests in the derivatives markets and systemic risk. The committee will hold from two to four meetings per year. The MRAC is solely advisory, and members will serve at the pleasure of the Commission.

Commissioner Bowen invited the public to submit topics for consideration by the committee. Topics should be focused on matters relating to systemic risk concerning market clearinghouses, exchanges, intermediaries, market makers, end-users, and the Commission. The commissioner also called for nominations to the committee of individuals with a high level of expertise and experience in the derivatives and financial markets.

Comments and nominations are due by December 3, 2014.

Thursday, November 20, 2014

Senator Blumenthal Urges SEC to Require Disclosure of Fee-Shifting Provisions in Company By-laws

Senator Richard Blumenthal (D Conn) called on the SEC to protect a key check on corporate malfeasance, namely, private citizen suits. Specifically, in a letter to SEC Chair Mary Jo White, the Senator asked the SEC to investigate Alibaba Group Holding, Ltd., one of several companies that failed to disclose to investors the existence of provisions limiting private citizen suits. The letter follows a Delaware Supreme Court ruling in ATP Tour v. Deutscher Tennis Bund that allowed companies to unilaterally amend their bylaws and require an investor who files suit against a company to pay the corporation’s legal expenses unless the investor receives substantially all of the relief he or she seeks.

The Senator urged the SEC to label such fee-shifting provisions as major risk factors and require companies to disclose them before any initial public offering. More broadly, the SEC should clarify that fee-shifting provisions are inconsistent with federal securities law. At a minimum, he urged the SEC to refuse to permit registration statements to move forward for any company that includes these provisions in violation of the federal securities laws.

The potential ramifications from the Delaware decision are immense, stressed Senator Blumenthal. No rational investor, even with significant financial interests at stake and when presented with clear evidence of corporate misconduct, will brave litigation when the corporate defendant can force the investor to face financial ruin unless he or she substantially wins on every point. While ATP Tour only affects corporations headquartered in Delaware, he acknowledged, Delaware is home to many of the country’s largest public companies. Further, the Delaware Supreme Court ruling is already beginning to have a ripple effect in other jurisdictions, leading other state courts to reconsider longstanding doctrine in this area.

Responding to the Delaware decision, in recent months dozens of companies have added provisions to their bylaws or articles of incorporation designed to stop shareholders from vindicating their legal rights. This change in corporate law, he said, not only leaves shareholders unable to protect their interests, but it also undermines the integrity of the capital markets and threatens to decrease market participation.

Wednesday, November 19, 2014

Oregon Proposes Crowdfunding Rules

[This story previously appeared in Securities Regulation Daily.]

By Jay Fishman, J.D.

The Oregon Finance and Corporate Securities Division recently proposed crowdfunding rules to help small businesses raise capital. The “Oregon Intrastate Private Offering Rules” (OIPO) provide Oregon businesses with an exemption from registration of securities in order to facilitate investment by Oregon residents while still protecting investors from fraud.

Highlights from the proposed rulemaking include:

  • Capping the aggregate price of all OIPO securities at $250,000;
  • Capping the amount an issuer can receive from a single investor at $2,500;
  • Requiring the issuer to file a notice with the Oregon Department Director accompanied by a $200 fee; and
  • Requiring the issuer to use its own company website or a third party Internet platform to facilitate the securities offering.
Public hearing. A public hearing on the rule proposals will be held at 9:00 a.m. on December 3, 2014 at the Department of Consumer and Business Services, Finance and Corporate Securities, 350 Winter St. NE, Salem, Oregon, in Conference Room 260 (2nd Floor).

A summary of the exemption’s conditions is provided here.

Monday, November 17, 2014

House Leaders Urge Strong Federal Preemption in Regulation A+ Offering Rules

House oversight leaders said that the SEC must broadly preempt state law in order to carry out the intent of the JOBS Act in expanding Regulation A+ offerings. In a letter to SEC Chair Mary Jo White, House Oversight Subcommittee Chair Patrick McHenry (R-NC) said that the proposed rules implementing Title IV of the Act are on the right track in preempting state registration requirements for Tier II Regulation A+ offerings; but need to go further and preempt state merits review of all Regulation A+ offerings. While recognizing the well-intentioned efforts of state securities regulators to streamline state registration, he noted that the existence of state merit review of the offering unnecessarily adds material uncertainty that hinders the objective of the federal JOBS Act and may deter small enterprises from pursuing a Regulation A+ offering.

Subcommittee Chair Scott Garrett (R-NJ), House and Insurance Subcommittee Chair Randy Neugebauer (R-TX) and Rep. David Schweikert (R-AZ), the prime architect of Title IV, were also on the letter.

By preempting state registration review of Regulation A+ securities, emphasized Chairman McHenry, the SEC is upholding its mandate to serve the public interest of competitive and even-handed markets. He warned that a failure by the SEC to preempt state registration requirements would effectively eliminate Regulation A+ as an option for small business capital-raising and defeat Congressional intent. The bi-partisanship of the JOBS Act is founded on a universal ambition to unlock access to capital for small businesses, he posited.

The objective of Regulation A+ as envisioned by Congress is to equip small businesses with efficient means to raise capital through mini-registrations that are exempt from the full registration requirements of the Securities Act, explained the Oversight Chair, who added that the costs and severe delays of meeting state registration requirements, in addition to SEC review, have rendered the existing Regulation A ineffectual. The Chair believes that this situation has robbed millions of entrepreneurs and businesses of an exemption intended to serve as a competitive channel of capital.

That is why House leaders view it as imperative that preemption of state review provide for national consistency of Regulation A+ offerings. Preemption of state registration is both judicious and necessary for Regulation A+ to meaningfully modernize the capital markets and level the playing field for start-ups, they believe, and free them from complying with the rulers of multiple state regulators.

Redefining Conduct Regulation to Include Behavior Is Critical to Improving Market Outcomes

[This story previously appeared in Securities Regulation Daily.]

By Joanne Cursinella, J.D.

In a Beasley lecture at The Institute of Directors in London, Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), emphasized that technology, data, and advances in economic techniques, which allow regulators to test behavioral interventions with much greater confidence and integrity than ever before, now redefine the future of conduct regulation. He argued in his prepared remarks that the use of economics by regulators is more significant than ever to the future of the financial sector.

The shift in “behavioural economics.” Over the last three years there has been significant debate among economists over why products like PPI in the U.K., currency swaps in Korea, and mini-bonds in Hong Kong were able to scale up in to such significant events, Wheatley said.

All the policy talk pre-crisis focused on letting the “invisible hand” do its work. But post-crisis, the emphasis has been on determining why these cases seemed to defy that logic, he said. What do the characteristics common to each of these cases tell us, he asked. The response in the U.K. at least, has been a significant intellectual distancing from interventions that rely on self-stabilization, equilibrium, and efficiency in the financial markets or the arch-rationality of consumers, he said.

To address better consumer outcomes, “we’re enhancing traditional economic analysis by integrating it with behavioural techniques. Considering the demand-side as well as supply-side of competition – how real people interact with markets,” Wheatley said. This is important for policy makers because the potential to materially improve consumer outcomes and because it can potentially increase competitive pressure on incumbents by reducing barriers to contestability like complexity and consumer inertia, he added.
According to Wheatley, the obvious question is why we are still seeing apparent breakdowns in price efficiency and rationality so often. He says it is because people aren’t very good at making “on-the-hoof “calculations of probability – or at assessing risk. So we make mistakes.

Data and processing power. “There is confidence today among economists that we can, this time, improve consumer outcomes and stimulate more effective competition,” Wheatley said. Technology, data, and advances in economic techniques have now allowed testing of behavioral interventions with much greater confidence and integrity than ever before, he added. In fact, he argued it is the specific combination of behavioral science, data, and technology that has turned economics in to such an important feature of conduct regulation.

In the U.K., for example, the government’s Behavioural Insights Team found they could improve the number of people who paid their taxes on time by making non-payers aware that their neighbors were completing their returns. Yet when the same team tested the use of social norms to nudge people to sign the organ donor register, the effect was far more nuanced, he said. Behavioral changes in complex markets are especially difficult to predict, and regulators have been criticized before over the ineffectiveness of interventions or the impact of unintended consequences, Wheatley added. Policy makers have relied on relatively unsophisticated techniques like focus groups to test interventions.

But now instead of relying on intuition and guesswork, “we combine trials, behavioural economics, and competition analysis, to work out what’s going on in each market – real markets, not just theoretical constructs,” Wheatley said.

Price cap analysis. “Today, regulators use vastly more advanced technology than Neil Armstrong used to reach the moon, “Wheatley claimed, and this processing power has been matched by a “similar scaling up in the amount of information we have at our disposal.” During their price cap analysis work, cost, revenue, and repayment information for some 2.3 million anonymized borrowers, covering a total of 16 million transactions, were analyzed along with loan information from a credit reference agency for another 4.6 million anonymized individuals, covering 50 million products purchased. So a detailed picture of borrowing patterns, costs, and financial circumstances in this market was constructed. Modeling behavior under different scenario allows regulators to narrow policy options more effectively and set a more authoritative cap level.

For Wheatley, there is no doubt that improvements in technology like this offer regulators some important possibilities. Not least for Wheatley in reducing the impact of unintended consequences, technology improvements have become “an imperative” for that critical question: how do you make sure regulatory intervention becomes socially useful intervention? Not just mere “activity.”

Add-on products. The key issue here for Wheatley was the fact that consumers were paying far more than the costs of providing many add-on products. A competition study focused on whether there are significant challenges around how competition is working for consumers across the different markets for add-ons and found that, among other things, the later the price is shown, the less likely the customer is to shop around for alternatives. The controlled experimental setting allowed the experimenters to “dig deeper” to find that it was not just the lack of transparency in revealing the price later that drove consumer error but one in five consumers did not choose the cheapest bundle on the main and add-on product, even if both prices were presented up front. In the case of general insurance add-ons, this means challenges like inertia and complexity are handled on what works in a particular market and interventions are guided by serious analytical research and data into what works, and doesn’t work, in that particular market, Wheatley said.

Cash saving and overdrafts. Wheatley also reported on the results of a market study on cash savings. “The large majority of us pay little or no attention to alternative accounts on offer. We cling to what we have,” he said. But again, a significant opportunity in this study is for regulators to use econometric techniques, technology, and big data alongside behavioral economics to better understand how the market works, he added.

With respect to overdraft analysis, Wheatley said they have been able to analyze the anonymized personal current account activity of about 500,000 customers, with more than 621,000 accounts between them collecting monthly information on transactions dating back to 2011. The data allows them to assess the customers who are most susceptible to overdraft charges and they have found considerable differences in the effectiveness of market initiatives to help consumers avoid unexpected charges.

The key issue for Wheatley is for global regulators to embrace modern, 21st century economics to try and remove the guesswork from interventions.

Saturday, November 15, 2014

Senator Levin Delivers Scathing Indictment of FASB-IASB Accounting Standards Convergence

Senator Carl Levin (D-MI) believes that the FASB-IASB project to converge US GAAP and IFRS accounting standards has undermined the integrity of U.S. financial reporting, particularly citing recent efforts to converge revenue recognition standards. In a letter to FASB Chair Russell Golden, the Senator, who chairs the Permanent Investigations Subcommittee, said that US GAAP has been the gold standard that helped create the deepest and most effective financial markets in the world, while IFRS allows less transparency, invites multiple interpretations, and has been more difficult to enforce. He fears that the end result of convergence will be that the U.S. may be left with a principles-based approach that is less precise and will not have the same level of trust and reliability as GAAP, thereby weakening U.S. standards and offering less investor protection.

While convergence was designed to take the best attributes from both US GAAP and IFRS, noted Senator Levin, it has instead resulted in a convergence on the weakest rules from each. FASB seems willing to surrender control over its accounting standards to follow the lead of the IASB, despite the fact that the SEC delegated its accounting standard setting authority to FASB under Section 108 of the Sarbanes-Oxley Act.

Senator Levin urged FASB to reorient its participation in the convergence project to ensure that the converged standards reflect the best, not the weakest, provisions in the two systems. Minimally, FASB should issue anti-abuse rules to combat the potential misuse of the principles-based convergence standards and make enforcement of accurate accounting standards both possible and effective.

Anti-abuse rules are critical, emphasized the Senator, because the converged standards shift from a detailed rules-based approach to a more generalized principles-based approach which, in his view, creates greater opportunities for abuse. In addition, the converged standards allow and even encourage companies to use judgment much more than ever before. Given competitive pressure and the history of accounting abuses in the last two decades, reasoned the Senator, greater reliance on management judgment to ensure proper accounting disclosures does not inspire confidence.

Revenue recognition. In particular, he asked FASB to strengthen the new revenue recognition standard, which seems to have become a focal point of Senator Levin’s indictment of convergence. On revenue recognition convergence, the Senator complained that the new standards appear to have weakened US GAAP revenue recognition and may open the door to greater revenue recognition abuses.

US GAAP provided industry-specific guidance and standards for revenue recognition, he noted, with the SEC interpreting the revenue recognition standard for financial statement reporting in SAB No. 101. The SEC staff said that revenue should not be recognized until it is realized or realizable and earned. SAB 101 requires that the collectability from the customer must be reasonably assured in order for revenue to be recognized. According to Senator Levin, this meant that there must be a high probability that a manufacturer will receive payment from a customer, even when goods have been delivered, before revenue may be recognized.

With convergence, US GAAP standards have been replaced with a generalized approach based on contractual relationships between sellers and customers. The new convergence standards provide a principles-based set of rules for accounting for revenues. They allow a company to recognize revenue as it transfers goods or services to customers in an amount reflecting the revenue it expects to receive. This new approach allows the recognition of income as soon as a business sends inventory to a distributor instead of allowing a company to declare income only when the distributor actually sells that inventory to a third party.

In Senator Levin’s view, this new standard makes it much more difficult to combat deceptive financial reporting by inviting in past revenue abuses in which manufacturers recognized revenue when they sent inventory to a distributor at the end of a quarter, only to have that same inventory returned after the end of the quarter due to a lack of sales.

Friday, November 14, 2014

SEC to Mull New Market Integrity Rules

[This story previously appeared in Securities Regulation Daily.]

By Mark S. Nelson, J.D.

The SEC will decide next week if it is going to adopt new rules to better ensure the reliability of key market infrastructures. According to a Sunshine Act notice issued yesterday, the Commission will hold an open meeting on Wednesday, November 19, 2014 to mull adoption of Regulation Systems Compliance and Integrity (Regulation SCI).

Proposed Regulation SCI would replace the existing Automation Review Policy or ARP (developed in the late 1980s and early 1990s) and related Exchange Act rules for some alternative trading systems (ATSs) with an updated regime for monitoring SCI systems and reporting any problems.

This past June, SEC Chair Mary Jo White said Regulation SCI, which the staff was then finalizing, would play a key role in a larger effort to improve the structure of equity markets. “And last March, the Commission proposed Regulation SCI to put in place stricter requirements relating to the technology used by exchanges, large alternative trading systems, clearing agencies, and securities information processors -- the SIPs.”

Soon after Chair White's speech, Stephen Luparello, director of the SEC's Division of Trading and Markets, explained the goals of Regulation SCI in his testimony to the U.S. House of Representatives Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services.

“The proposed rule would require these entities to have in place policies and procedures reasonably designed to help ensure that their systems are robust, secure, and compliant; and require their key members to participate in business continuity and disaster recovery testing,” said Luparello.

In addition to written policies and procedures, the proposal would require periodic testing of systems in coordination with other SCI entities. SCI events and material systems changes would be reported on proposed Form SCI. Entities subject to the rules also would need to take corrective actions in response to identified problems.

SCI systems are those computer and other electronic systems operated by (or for) an SCI entity that directly support trading, clearance and settlement, order routing, market data, regulation, or surveillance. SCI entities include several entities further defined in the proposal, including SCI self-regulatory organizations, SCI ATSs, plan processors, or exempt clearing agencies under the ARP. SCI events include systems disruptions, compliance issues, and intrusions.

Thursday, November 13, 2014

Panel Sees Good Chance for Dodd-Frank Corrections Legislation in 114th Congress

A post-election financial services federal legislative analysis conducted by the Greenberg Traurig firm concluded that there will be an opportunity for Dodd-Frank Act legislative corrections in the 114th Congress. The panelists, who included Former Rep. Albert Wynn, Democrat of Maryland and former Senator Tim Hutchinson, Republican of Arkansas, noted that the key will be to get 60 Senators to agree to the corrections. Assuming that the Republicans have 54 seats in the new Senate, panelists thought it will be possible to get six Senate Democrats to agree to corrections so long as they do not fundamentally alter the Dodd-Frank Act. For example, there could be legislation exempting non-financial end users from Dodd-Frank derivatives provision s, as well as broadening the definition of points and fees under the risk retention qualified mortgage rule. Other changes that could happen would be adjusting the threshold for designating banks as SIFIS, and giving the Fed more discretion in setting prudential standards for non-banks designated as SIFIs.

According to former Rep. Wynn, there could also be Democratic support for financial institutions bankruptcy legislation, but not for the elimination of Title II of Dodd-Frank. In addition, he said that some Democrats are willing to have a conversation on the issue of collateralized loan obligations and the recently adopted risk retention rules.

There was a discussion of the dynamics between Rep. Jeb Hensarling (R-TX), Chair of the House Financial Services Committee, and the expected incoming Chair of the Senate Banking Committee, Senator Richard Shelby (R-AL). While Chairman Hensarling has a conservative view of what financial reform legislation should look like, panelists believe that he will tailor financial reform legislation out of the committee to work with Senator Shelby in order to pass the legislation in the Senate. It was also noted that Senator Shelby is term limited as Chair for two years and has an incentive to get things done in the 114th Congress.

Panelists also feel that the 114th Congress will attempt to pass legislation to change the CFPB to a Commission form of governance and bring the agency under congressional appropriators. But accountability is viewed as a proxy for weakening the CFPB and would be opposed by Senate Democrats. While Democrats might agree to an Inspector General for the CFPB, panelists thought that the President would veto any change in the CFPB funding stream.

The differences in philosophies of Rep. Hensarling and Senator Shelby was discussed, with Shelby seen as more of a populist. The regulatory philosophical differences between the two oversight Chairs was cast into stark relief by the issue of mortgage securitization reform legislation in the 113th Congress. Chairman Hensarling reported a bill out of the Financial Services Committee, the Protecting American Taxpayers and Homeowners (PATH) Act that would end Fannie Mae and Freddie Mac and the federal government’s role in the securitization process. Senator Shelby believes that the government should continue to play a role and does not want to go as far as eliminating Fannie and Freddie. But he also did not agree with the Johnson-Crapo legislation, the Housing Finance Reform and Taxpayer Protection Act, voting against it in the Senate Banking Committee. Senator Shelby was concerned that the legislation would have established the Federal Mortgage Insurance Corporation (FMIC) as an new, independent federal agency to develop standard form credit risk-sharing mechanisms, products, and security agreements that require private market holders of a covered security insured under the Act to assume the first loss position with respect to losses incurred on such securities.

Cayman Islands Crowdfunding Platform Settles SEC Charges

[This story previously appeared in Securities Regulation Daily.]

By Amanda Maine, J.D.

A firm operating as an offshore crowdfunding platform agreed to pay a $25,000 civil monetary penalty to settle SEC charges. The SEC alleged that the firm failed to implement measures reasonably designed to prevent U.S. investors from using its website to invest in securities and failed to verify that the investors in the unregistered securities were accredited investors (In re Eureeca Capital SPC, November 10, 2014).

Eureeca’s crowdfunding platform. Eureeca Capital SPC, which is incorporated in the Cayman Islands, operates an online, securities-based crowdfunding platform. Its website hosts offerings of securities from non-U.S. companies. Visitors to the website could obtain information about these offerings without registering with the website, which constituted a general solicitation. Users could also register on the website to gain additional information and to invest in the offerings. Users who registered were required to provide some basic information about themselves. However, no representation regarding accredited investor status was requested.

U.S. investors. Although Eureeca’s website had a disclaimer stating that its services were not being offered to U.S. persons, that disclaimer appeared in its Terms of Use document, which was not required by the website to be accessed prior to viewing the contents of the website. Even with the disclaimer, users who selected “United States” as their country were allowed to register on the website. At least 50 persons who selected “United States” as their country were allowed to register, and of those, three U.S. residents invested in unregistered offerings of securities by using the Eureeca website, according to the SEC.

Accredited investor status. In addition to not implementing procedures reasonably designed to prevent U.S. investors from using its services, the SEC alleged, Eureeca did not take reasonable steps to verify that the U.S. investors were accredited investors. The firm allowed two of the U.S. investors to self-certify their accredited investor status without explaining what the term met or taking further action to determine whether they were, in fact, accredited investors. Eureeca did not request any verifying information from the third U.S. investor prior to allowing him to invest in the offerings on Eureeca’s website. The three investors invested approximately $20,000 in four separate offerings for securities through the website.

Charges and settlement. In an order instituting administrative proceedings, the SEC charged Eureeca with violating Securities Act Secs. 5(a) and 5(c) for selling unregistered securities that were not eligible for exemption from registration. The SEC also charged the firm with violating Exchange Act Sec. 15(a) for effecting the purchase or sale of a security without being a registered broker-dealer or associated with a registered broker-dealer.

Eureeca settled the matter with the SEC, agreeing to a cease-and-desist order and to be censured. Eureeca also agreed to pay a civil penalty of $25,000. The SEC acknowledged that remedial acts taken promptly by Eureeca were considered in its determination to accept Eureeca’s offer of settlement. Eureeca neither admitted nor denied the SEC’s charges.

The SEC’s order is Release No. 33-9678.

Tuesday, November 11, 2014

Gender Diversity Increases on U.K. Boards in Wake of Corporate Governance Code Changes

Gender diversity has increased on the boards of directors of U.K. companies in the wake of changes to the Corporate Governance Code, which were spurred by the seminal Davies Report. A report issued by the Cranfield University School of Management found that since the Davies Report in March 2011, the percentage of female-held directorships on FTSE 100 boards has increased by 82% to 22.8% and on FTSE 250 boards by 124% to 17.5%. The percentage of appointments now going to women has varied over the three years, but in the FTSE 100 companies is now just averaging at the rate required (33%) to reach Lord Davies’ target of 25% during 2015. In order for the same target to be met by FTSE 250 companies, the pace of change still needs to increase.

The Davies Report recommended that the Financial Reporting Council (FRC), which is the custodian of the Corporate Governance Code, as well as being the regulator of accounting and auditing, should amend the Code to require companies to establish a policy on boardroom diversity, including measurable objectives and annual disclosure of their progress. Lord Davies was U.K. Minister for Trade and Investment from January 2009 until May 2010. Lord Davies noted that corporate boards perform better when they include the best people who come from a range of perspectives and backgrounds. The Davies Report found, among other things, that female directors enhance board independence.

The FRC did amend the Code to require companies to annually report on the board’s policy on boardroom diversity, including gender, on any measurable objectives that the board has set for implementing the policy, and on the progress it had made in achieving the objectives.

The Cranfield report analyzed all FTSE 100 companies’ annual reports in the wake of the Code change and found that 85% of FTSE 100 companies had stated a clear policy on boardroom diversity; 58% of companies had set measurable objectives to increase the percentage of women on their board; but only 38% of companies addressed diversity in their board evaluation process. However, 98% reported on succession planning, with 32% specifying gender.

Sir Win Bischoff, FRC Chair, noted that the report highlights that the Corporate Governance Code’s requirement for the annual report to include gender diversity policy information has encouraged companies to look at how they are managing their talent pipeline. He said that diverse boards, and by that he included not only gender diversity, but also race, background and experience, encourage better leadership and governance, contribute to better performance, engagement and innovation, and ultimately improved performance for the company and its shareholders. Companies must also pay attention to effective succession planning, which should be informed by a clear business strategy. This will ensure that boards have the right blend of skills and experience. The FRC is continuing to assess the focus on succession planning and the role of the Nominations Committee in this process. He said that the FRC plans to publish a discussion document on this topic next spring.

E.U. Directive. The report noted that E.U Directive 614 on gender balance among non-executive directors of public companies calls for a quantitative objective for gender balance on corporate boards. The Directive is currently blocked in the E.U. Council by a number of member states including the UK government. The objection is not to the principle of more equitable representation of women on boards, but on the grounds of proportionality and subsidiarity. However, the new law would give Member States the possibility of reaching the target by different means. Member States that have measures in place (legislative or otherwise) to ensure a more balanced representation in company boards would not need to change those measures, if they show that they can reach the objective of 40% non-executive directors (or 33% in the case of unitary boards such as in the UK). Those Member States could opt to maintain their existing measures instead of the procedural requirements under the proposed Directive. If in 2020 it emerges that those Member States do not manage to achieve the 40% objective, the procedural obligations under the proposed Directive would kick in.

In the E.U., some countries, such as Germany and the Netherlands, have a two-tier board structure, with an Executive Board and a Supervisory Board composed of non-executive directors.

New E.U. Financial Services Commissioner Will Consult on Capital Markets Union

As the new European Commission charts a path towards equity funding through securities offerings and away from the dominant bank funding, Financial Services Commissioner Lord Jonathan Hill said that he will launch a wide public consultation on the creation of a Capital Markets Union. In one of his first speeches since his confirmation, Lord Hill said that he favors the use of crowdfunding, angel investing and private securities placements to jump start jobs and growth, which is the Commission’s No. 1 priority.

As part of this effort, he plans to develop an E.U. framework for high-quality securitization, building on work already underway in the E.U. and globally. The current tax code must also be examined since they have a strong bias against equity and favor both corporate debt and mortgage debt.

He noted that mid-sized companies in the U.S. have five times as much funding from capital markets as their counterparts in the E.U., which get about 80% of their financing from banks, and 20% from debt securities. In the U.S., the ratios are reversed. The Commission must unlock the capital around Europe that is currently frozen, he said, and put it to work in support of businesses, particularly SMEs. And that is where the Capital Markets Union, which the Commissioner called ``a new frontier of Europe’s single market’’, comes into play.

The Capital Markets Union is a centerpiece of the new Commission as its President, Jean-Claude Juncker, readies a legislative package of measures designed for job creation and growth.

The introduction of the term Capital Markets Union has become the catalyst for developing the non-banking equity sector. A precise description is not yet available. The Capital Markets Union is a concept under construction, recently noted Stephen Maijoor, Chair of the European Securities and Markets Authority (ESMA). However, the first sketches are in the direction of an accelerated integration of E.U. capital markets encompassing all 28 Member States. As the E.U. securities markets authority, ESMA is very willing to contribute to achieving a truly integrated capital market and the development of the Capital Markets Union.

Monday, November 10, 2014

Justices Fear that Sarbanes-Oxley Anti-Shredding Statute May Lend itself to Overbroad Enforcement

The U.S. Supreme Court expressed concern that the anti-shredding statute of the Sarbanes-Oxley Act may be too severe, relies too much on prosecutorial discretion, and may even be void for vagueness. The Court was hearing oral argument in a case posing the question of whether Section 1519 reached the conduct of a commercial fisherman who was convicted under this Sarbanes-Oxley anti-shredding statute for destroying undersize fish after a federal officer issued him a citation and instructed him to bring the fish back to port. Section 1519 prohibits the destruction of any record, document, or tangible object with the intent to obstruct a federal investigation. The Court had to wrestle with the issue of the statutory meaning of the phrase ``tangible object.’’ Yates v. U.S., Dkt. No. 13-7451.

Assistant Federal Defender John Badalamenti argued that the phrase tangible object is confined to records, document and devices designed to preserve information, the very matters involved in the Enron debacle. Roman Martinez, Assistant to the Solicitor General, contended that the statute’s key phrase ``any record document or tangible object’’ unambiguously encompasses all types of physical evidence.

While the fisherman got a sentence of 30 days, Justices were concerned that the maximum penalty under the statute is 20 years. Justice Antonin Scalia suggested that this was not a sensible prosecution, given that the defendant could have gotten 20 years under the statute, but in fact got 30 days.

Chief Justice John Roberts was concerned that, given the severe possible 20-year maximum sentence, and given prosecutorial discretion, the statute gives federal prosecutors extraordinary leverage to obtain plea agreements for lesser time, like one year. Mr. Martinez noted that Congress decided that a violation of the statute would carry a 20-year penalty.

Justice Samuel Alito said it is hard to swallow that the statute can be applied to really trivial matters and yet each of those would carry a potential penalty of 20 years.

Justice Elena Kagan noted that Congress gives very strict penalties to lots of minor things, that is what Congress does, said the Justice.

Mr. Martinez argued that it is not plausible that Congress used the broad term tangible object when it really wanted to refer narrowly to information storage devices. Chief Justice Roberts mentioned the Bond v. U.S. case that the Court decided last term in which the Court held that, while the text could be read broadly, Congress did not intend for the Chemical Weapons Treaty to cover a minor dusting with toxic irritating chemicals.

Justice Stephen Breyer hinted that the statute could be void for vagueness, although this issue was not addressed below. But Justice Scalia was not buying that point, noting that the statute may be incredibly expansive, but it is not vague. In an unusual move, Justice Breyer addressed Justice Scalia’s comment by noting that an otherwise clear statute could be void for vagueness if it encourages arbitrary and discriminatory enforcement. While clear, the statute can be far too broad, going well beyond what any sensible prosecutor would ever want to prosecute. Justice Breyer noted that if prosecutors can’t draw a line, there is a risk of arbitrary and discriminatory enforcement. And, if that’s a real risk, the statute falls within the vagueness doctrine.

Allergan Shareholders Get No Comfort on Proxy-Contest Strategy

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

The Delaware Court of Chancery declined to issue declaratory relief blessing a hypothetical strategy by Allergan stockholders to replace the entire board at a special meeting, as the challenge to Allergan’s interpretation of the “similar item” provision in its governing documents was not ripe for review (In re Allergan, Inc. Stockholder Litigation, November 7, 2014, Bouchard, A.).

Background. A joint entity created by the Pershing Square hedge fund and Valeant Pharmaceuticals to further those entities’ efforts to acquire Allergan is currently engaged in a proxy contest to remove six of Allergan’s nine directors. Other shareholders believe that a better strategy for the would-be acquirers would be to remove and replace the entire Allergan board, but a “similar item” provision in Allergan’s certificate of incorporation and bylaws could foreclose that tactic. In a supplemental proxy statement issued earlier this year, Allergan clarified that the similar item provision would allow stockholders to remove directors by written consent, but not to elect their successors by written consent. The shareholders requested declaratory relief essentially blessing the strategy of complete board replacement.

Ripeness. The court distinguished the cases cited by the plaintiffs in which challenges to stockholder rights plans and proxy put provisions were held to be ripe for review. In those cases, the court explained, the key consideration to the finding of a ripe controversy was the present deterrent effect of the provisions on stockholders. In contrast, the similar item provision could not be characterized as a significant deterrent to the ability of Allergan stockholders to exercise their franchise rights. In fact, the court noted, Allergan’s stockholders are currently engaged in a proxy fight for control of the board, which will be decided at the special meeting on December 18.

In the court’s view, it is appropriate to heed now-Chief Justice Strine’s caution, issued in a Chancery Court opinion cited by the plaintiffs, against deciding issues that may not have to be decided or that create hypothetical harm. Here, the court wrote, the plaintiffs’ request for declaratory relief does not implicate issues of statutory validity; the need to resolve the claim may never arise; and Allergan stockholders have not been deterred from pursuing a proxy contest. Under these circumstances and given the strong policy considerations against issuing advisory opinions, the motion for summary judgment was denied for lack of ripeness.

Breach of fiduciary duty. While the plaintiffs’ claim that the Allergan directors breached their fiduciary duty of “candor” in connection with the supplemental proxy was ripe for review because it involved a historical event, the court held that the plaintiffs failed to present a factual record concerning that event that would warrant entry of a judgment. A duty of disclosure is not an independent duty under Delaware law, but rather derives from the duties of care and loyalty. The plaintiffs failed to establish a factual record concerning the issuance of the proxy that would establish a breach of fiduciary duty, such as by demonstrating that the Allergan board acted in a grossly negligent manner or knowingly made a false statement.

The case is No. 9609-CB.

Friday, November 07, 2014

Chairman Massad Identifies Focus on Cybersecurity, Cross-Border Issues

[This story previously appeared in Securities Regulation Daily.]

By Lene Powell, J.D.
In remarks at a futures industry conference, CFTC Chairman Massad discussed progress on key G-20 derivatives reform commitments and highlighted areas the CFTC looks at in system safeguards examinations regarding cybersecurity and business continuity disaster recovery. Also, Commissioner Sharon Bowen talked about her priorities for the CFTC as it works to prevent future financial crises, including finalizing rules on margin for uncleared swaps and position limits.
Cross-border progress. Chairman Massad pointed to progress on four key commitments agreed to by the leaders of the G-20 nations and embodied in the Dodd-Frank Act. First, there is increased oversight of major market players, with 106 swap dealers and two major swap participants provisionally registered and subject to strong risk management practices. Second, clearing is now required for most interest rate and credit default swaps. An estimated 16% of outstanding transactions were cleared in December 2007, while about 74% were cleared in September 2014. There is also a significant move to transparent trading of standardized transactions on regulated platforms, with 22 swap execution facilities (SEFs) registered and two more registrations pending. Volume on SEFs continues to rise. Swap data reporting is a work in progress, but the public now has much more information regarding the swaps marketplace, allowing more competition and better oversight.
Although there is concern about possible inefficiencies due to differences in derivatives regulatory regimes across different jurisdictions, it’s important to have perspective, said Chairman Massad. The rules for securities offerings are not the same in all G-20 nations, and rules for securing bank loans aren’t even the same in the 50 states. There will be differences in derivatives reform among the G-20 nations. The CFTC wrote its rules faster than other jurisdictions, and while it made many substituted compliance determinations last December and expects to make more, you can’t make those determinations until the other jurisdictions have passed their laws and written their rules.
The CFTC cross-border guidance issued last November 14 relating to when a foreign swap dealer that engages in certain conduct in the United States it is subject to U.S. transaction requirements will expire at the end of the year. Staff has recommended extending the relief for the time being. In addition, the CFTC is continuing to work on cross-border harmonization of clearinghouse regulation. Chairman Massad is pleased that the European Commission has decided to postpone imposing higher capital charges on banks clearing through U.S.-based central counterparties, since it was the threat of higher capital charges that was going to fragment the market, not dual registration of clearinghouses.
Cybersecurity. The need to strengthen the security and resilience of our financial markets is clear, said the chairman. The CFTC has modernized its Core Principles and updated its regulations in recent years to address cyber and information security. 
Clearinghouses, exchanges, and other market infrastructure entities are required to have the following: (1) a program of risk analysis and oversight to identify and minimize sources of cyber and operational risk; (2) automated systems that are reliable, secure, and have adequate scalable capacity; (3) emergency procedures, backup facilities, and a business continuity-disaster recovery plan; and (4) regular, objective, independent testing to verify that the system safeguards program is sufficient to fulfill its regulatory responsibilities.
 Key areas that the CFTC looks at in exams include:
  • Governance. Is the board and top management paying sufficient attention to cybersecurity and taking appropriate steps? Does the board have the expertise, and does it devote the time, to do so? Is it setting the right tone as to the importance of these issues

  • Resources. Is the entity devoting sufficient resources and capabilities to monitor and control cyber-related risks across all levels of the organization? 

  • Policies and procedures. Are adequate plans and policies in place to address information security, physical security, system operations, and other critical areas? Is the regulated entity actually following its plans and policies? Is it considering how plans and policies may need to be amended from time to time in light of technological, market or other security developments? 

  • Vigilance and responsiveness to identified weaknesses and problems. If a weakness or deficiency is identified, does the regulated entity take prompt and thorough action to address it? Does it not only fix the immediate problem, but also examine the root causes of the deficiency?

The chairman said that limited CFTC resources have constrained its ability to conduct compliance exams in this area.

Commissioner Bowen priorities. In her first address as CFTC commissioner, Sharon Bowen shared her priorities for the agency. She noted that the CFTC has entered the post-financial crisis world, with all sitting commissioners all confirmed after the fall of Lehman Brothers and the passage of the Dodd-Frank Act. Her biggest fear, always at the back of her mind, is that the agency won’t do enough to prevent a future crisis. The CFTC needs to act in such a way that the 2008 financial crisis is regarded as an extraordinary break from typical financial stability, not the first in a series of crises.
In identifying and managing risk, the CFTC must allow financial actors to take reasonable risks, to allow firms to take a chance on an idea, even if it might mean the end of the firm if it fails, said Commissioner Bowen. However, there must be protections, including position limits, margin requirements, and well-run clearinghouses, to make sure that one company’s risky bet doesn’t throw the entire system into chaos. The CFTC proposed a rule for margin requirements for uncleared swaps in September, and she looks forward to reviewing the many comments received and finalizing the rule in the “near future.”
 A rule regarding position limits was finalized in 2011, vacated by the D.C. district court in 2012, and re-proposed in 2013. The comment period on the re-proposed rule was reopened this summer and staff is reviewing comments. The rule seeks to fix the issues flagged by the court, and Bowen hopes it can be finalized in a way that realizes congressional intent in mandating position limits and also maintains companies’ ability to manage their commercial risks. At this point these rules have been discussed for years now, and it is time for the Commission to make the decisions it needs to make to get the rules finalized, she said.

Wednesday, November 05, 2014

Senate Oversight Leaders Concerned about SEC Data Gap

Senate Banking Committee Chair Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) are deeply concerned over reports that company filings electronically submitted to the SEC are made available to private subscribers before the general public. In a letter to SEC Chair Mary Jo White, they said that this disparity raises significant concerns regarding the management of the data systems that provide investors with access to important and potentially market-moving information. The oversight Senators asked the SEC for an explanation of the steps being taken to eliminate this disparity and prevent this issue from happening in the future. In addition, the SEC is asked to outline what it has previously done to address similar issues.

Ensuring a fair marketplace is one of the SEC’s most important objectives, emphasized Chairman Johnson. He urged the SEC to quickly investigate this timing disparity for company filings and take the necessary steps to eliminate it. Senator Crapo noted that the SEC is tasked with protecting investors and maintaining fair and efficient markets. Thus, it is important that the agency, arguably more than anyone, ensures that its systems do not provide preferred access to certain parties rather than the broader market.

Company That Self-Reported FCPA Violations Settles with Authorities for $55M

[This story previously appeared in Securities Regulation Daily.]

By Matthew Garza, J.D.

A California-based maker of medical diagnostic and life science equipment will pay $40.7 million in disgorgement to the SEC and $14.35 in penalties to the Department of Justice (DOJ) to settle violations of the Foreign Corrupt Practices Act (FCPA). The SEC said Bio-Rad Laboratories, Inc. lacked sufficient internal controls to prevent or detect approximately $7.5 million in bribes paid to foreign officials during a five-year period and improperly recorded the bribes as legitimate expenses like advertising and training fees. The company allegedly reaped $35 million in illicit profits (In re Bio-Rad Laboratories, Inc., November 3, 2014).

SEC Enforcement Director Andrew Ceresney said Bio-Rad was credited for self-reporting the misconduct and extensive cooperation, but the settlement “reiterates the importance of all companies ensuring they have the proper internal controls to prevent FCPA violations.”

The SEC said that from 2005 to 2010, the company demonstrated “conscious disregard” for the high probability that one of its foreign subsidiaries was paying Russian businesses a commission that was used to pay Russian government officials to gain government contracts. The SEC said the general manager of the company’s emerging markets sales division ignored red flags and permitted the activity to continue for years. The same type of scheme used agents and distributors to funnel money to government officials in Vietnam and Thailand. The payments were not accurately recorded, but rather reflected in the subsidiaries’ books as commissions, advertising, or training fees.

Red flags. Company managers knew that the Russian agents were foreign companies that did not have the resources to perform contracted-for services, the SEC alleged. They knew that “excessive” commissions were paid to banks in Latvia and Lithuania. The company also encouraged secrecy surrounding the Russian agents. One employee of the company’s emerging market division sent an email to another employee instructing her to “talk with codes” when communicating about the Russian invoices.

The manager with the emerging markets division also ignored the fact that the Russian country manager often requested commissions in installments of less than $200,000, which bypassed an additional approval tier by the corporate controller. They also pre-paid commissions in violation of the contracts with the Russian agents, which should have caught the company’s attention, according to the SEC.

Cooperation. The SEC and DOJ credited the company for making an initial voluntary self-disclosure of potential FCPA violations in May 2010. The company’s audit committee thereafter retained independent counsel and conducted a investigation, which was expanded voluntarily to cover other high-risk territories. The SEC said the company produced documents, summarized company findings, translated key documents, produced witnesses from foreign jurisdictions, provided reports on witness interviews, and made employees available to the Commission staff to interview.

The company also undertook extensive remedial efforts, including terminating employees who were involved, re-evaluating and supplementing anticorruption policies across the globe, enhancing its internal controls and compliance functions, developing and implementing FCPA compliance procedures, and conducting extensive anticorruption training.

In exchange for a non-prosecution agreement the company will report periodically to the DOJ about its compliance efforts and progress in implementing enhanced internal controls. “Public companies that cook their books and hide improper payments foster corruption,” said Assistant Attorney General Caldwell. “The department pursues corruption from all angles, including the falsification of records and failure to implement adequate internal controls. The department also gives credit to companies, like Bio-Rad, who self-disclose, cooperate and remediate their violations of the FCPA.”

Tuesday, November 04, 2014

ISS Issues Proxy Voting Policy Proposals for 2015

[This story previously appeared in Securities Regulation Daily.]

By Amy Leisinger, J.D.

Institutional Shareholder Services Inc. (ISS), provider of corporate governance solutions, has issued draft proxy-voting policies on select topics for 2015. To ensure that the policies consider the perspectives of all interested parties, ISS requested feedback on several policy changes to its guidelines: (1) independent chair shareholder proposals and equity plan scorecards (U.S.); (2) former CEO cooling-off periods and advance notice provisions (Canada); (3) board independence and factoring capital efficiency into director elections (Japan); (4) board independence (Portugal); (5) share issuance limits (Singapore); and (6) the impact of the Florange Act (France). In a press release, ISS stated that it expects to release final versions of the draft policies in early November.

U.S. changes. In terms of U.S. policy changes, ISS proposed to implement a broader methodology for evaluating new equity plans, to employ a balancing approach as opposed to a series of pass/fail tests concerning plan cost, stock option repricing, and change-in-control provisions. The “equity plan scorecard” would evaluate plan costs and features, as well as grant practices. Specifically, evaluations of shareholder value transfer relative to peers, vesting authority and requirements, liberal share recycling, burn rate, and plan duration would be required. Under the draft proposal, the weight of the factors would be based on unique company characteristics, and certain “egregious” features would automatically result in negative voting recommendations.

In addition, ISS proposed a change concerning evaluation of independent chair proposals to provide for a more holistic review process. The proposal would add new governance factors for consideration in recommendations, including the existence of an executive chair and leadership transitions and tenure, and no single factor would automatically result in a positive or negative voting recommendation. “[A] more holistic review of each company’s board leadership structure, governance practices, and financial performance will strengthen the application of this policy,” according to ISS.

Foreign changes. For Canada, ISS proposed to subject a former CEO to a five-year cooling off period after which the individual may be deemed independent for the purposes of board service, unless another relationship exists that could interfere with the exercise of independent judgment. This change is designed to reinforce that, over time, an individual may become sufficiently distant from corporate operations so as to qualify as independent. ISS also proposed to update current policy to identify certain advance-notice provisions as unsupportable by Canadian shareholders. The proposed policy would consider recommendations on proposals to change these provisions on a case-by-case basis, taking into consideration, among other things, deadlines for notice of shareholders' director nominations, filing requirements, and board inability to waive advance-notice provisions.

As to Japan, ISS proposed to implement a new policy to recommend voting against top executives for board seats if the board does not include multiple outside directors. ISS noted that Japan’s Corporate Governance Code, to be announced in 2015, is expected to require multiple independent directors on boards and that, for large companies, this policy change “is in line with this market development.” ISS also proposed a policy to recommend against top executives at companies that have exhibited returns on equity of less than 5 percent in each of the last five fiscal years. Leadership should be held responsible for poor capital efficiency and financial performance, and this amount and timeframe represents the minimum acceptable level, according to ISS.

In addition, ISS proposed to increase the independence threshold for Portuguese boards from 25 percent to 33 percent and will recommend a vote against a candidate if the board-independence level does not meet recommendation. To reduce the risk of dilution while providing flexibility to raise capital, ISS also proposed to alter the share-issuance limits for companies for proposals to increase share capital without preemptive rights in the Singapore market. ISS also proposed to address the Florange Act’s impact on French governance by principles by limiting its recommendations in relation to the granting of double voting rights and by limiting application of current anti-takeover measures.

Monday, November 03, 2014

Say-on-Pay More Empowering to Small Shareholders, Study Finds

[This story previously appeared in Securities Regulation Daily.]

By Anne Sherry, J.D.

An academic study on say-on-pay patterns suggests that small shareholders are more likely than large shareholders to use the nonbinding vote to govern their companies, although larger shareholders must still be present to compel the board to take action when support for the compensation plan is low.

The paper by Miriam Schwartz-Ziv of Michigan State University and Russ Wermers of the University of Maryland details the professors’ finding that companies with more shareholders holding at least 5 percent of outstanding shares are more likely to secure favorable say-on-pay votes. Furthermore, the larger the fraction of shares held by such larger shareholders, the more likely that shareholders support a longer interval between say-on-pay votes. The professors interpret these results to mean that large shareholders prefer to confront management directly and privately, perhaps because they wish to avoid a share price decrease that may result from a negative say-on-pay vote.

The paper also investigates voting by mutual funds and the impact on the advisory say-on-pay vote of executive holdings. In particular, the larger the fraction of shares held by executives, the more likely shareholders are to support the compensation plan and to support a biennial or triennial say-on-pay vote, as opposed to annual. Mutual funds do not follow this pattern, however, suggesting that institutional investors differentiate between tying compensation to performance versus already having a large fraction of shares held by executives.

Finally, the paper concludes that when ownership is concentrated, companies are likely to award less excessive compensation in the year after an unenthusiastic say-on-pay vote and tend to choose peer companies more closely resembling their own. The authors infer from this that boards are especially anxious to quell perceived shareholder dissatisfaction in order to avoid a confrontation with large shareholders.

Friday, October 31, 2014

E.U. Parliament Approves New Commission, with Lord Hill as Financial Services Commissioner

The E.U. Parliament has approved the new European Commission, with Lord Hill as Financial Services Commissioner, by a vote of 423 to 209, with 67 abstentions. The Commission, which will take office on November 1, 2014, is headed by Jean-Claude Juncker. In a statement ahead of the vote, President-designate Juncker said that he will introduce in the first three months of his mandate a legislative package to spur jobs and investment growth. Noting that the level of investment in the E.U. dropped by just under €500 billion, or 20%, after its latest peak in 2007, he warned that the E.U. is facing an investment gap and must work to bridge that gap. In that spirit, the Commission will create a Capital Markets Union designed to create vibrant equities funding through securities offerings and decrease the E.U.’s heavy reliance on bank funding. He vowed to oppose too prescriptive, too detailed and burdensome regulations, notably when it comes to small and medium sized enterprises (SMEs), which he said are the backbone of the economy, creating more than 85% of new jobs in Europe.

Lord Jonathan Hill will replace Michel Barnier of France as the E.U.’s top securities and banking regulator. Similar to Commissioner Barnier, Lord Hill emphasized that the avoidance of regulatory arbitrage is a paramount concern, both within the E.U. and with the United States. He will continue Commissioner Barnier’s fight to achieve financial regulatory convergence with the U.S. He has emphasized that the free flow of capital, to which he is totally committed, greatly depends on restarting a private, high quality securitization market. This will be one of his top priorities. He said the choice between regulation and growth is a false dichotomy. Regulators can encourage better securitization without increasing risk.

SEC Notes Passing of Former Chair Hills, Champion of Strong Corporate Governance

Former SEC Chair Roderick Hills, a strong proponent of sound corporate governance, has passed away. In a statement, SEC Chair Mary Jo White praised Chairman Hills as a true champion for America’s investors. The SEC has lost a strong leader and friend, she noted. Roderick Hills served with distinction as SEC Chairman from 1975 to 1977.

His lifelong commitment to sound corporate governance was strong and consistent. For example, in 2006, Mr. Hills chaired a subcommittee on corporate governance as part of an effort by the Committee for Economic Development to restore public trust in U.S. corporations. The Committee issued a report addressing corporate governance issues that then SEC Chair Christopher Cox said was of vital importance to the SEC's mission of investor protection.

As part of his commitment to corporate governance, former Chair Hills was a strong proponent of independent audit committees. In 2002, in the run up to the passage of the landmark Sarbanes-Oxley Act, he testified before the Senate Banking Committee and urged Congress to clarify that audit committees have the responsibility of protecting the independence of the outside auditors of company financial statements. He noted that appointment to an audit committee is not a "passive assignment."