Eyes On Wall Street : Executive Compensation Lawyers & Attorneys : Labaton Sucharow Law Firm : Class Action Litigation, Shareholder Rights

Although the Wall Street Reform Bill has just been signed, the real battle over reform of the financial sector has only begun. In order to implement the sweeping changes outlined in the new statute, agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission will be drafting more than 200 rules affecting nearly every area of the financial sector. It is these rules that will determine how the new legislation actually affects Americans.

Knowledgeable of this fact, companies intent on softening the coming blow have hired hundreds of lobbyists in an attempt to influence the final rules. Many of the lobbyists are themselves former regulators, who not only have long experience navigating Washington bureaucracies, but also know the pressure points and weaknesses of current regulators. As early as 2008, when the financial crisis was still new, lobbying firms anticipating reform began to prepare by interviewing former regulators.

Investors who want their voices to be heard have the opportunity to participate in this process. The S.E.C. is seeking public comments on numerous regulatory topics related to the new legislation. Such topics include regulation of advisers to hedge funds, Wall Street transparency and accountability, and improvements to the regulation of securities.

Contributed by James Jackson

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In a new Concept Paper, the Securities Exchange Commission has announced that it is investigating whether the U.S. proxy system needs to be drastically updated. It has been nearly 30 years since the Commission last conducted a comprehensive review of the proxy voting infrastructure, and there have been significant changes since then in shareholder demographics and technology.   The SEC’s inquiry focuses on, among other things, proxy voting by institutional securities lenders and the role of proxy advisory companies.

Institutional investors often lend their securities, and these lent shares lose their vote until recalled by the lender. Without sufficient advance notice of the issues to be voted on, lenders may not be able to recall shares in time to vote on key matters like executive compensation. Thus, the Commission is trying to find out whether shareholders would be helped by requiring the agenda items at shareholder meetings to be identified earlier, so that lenders can make a decision to recall their shares and vote on issues important to them.

The SEC is concerned that proxy advisory firms may be subject to conflicts of interest or may fail to conduct adequate research to support their recommendations. To remedy these problems, it is proposing improving disclosure of potential conflicts of interest, enhancing regulatory oversight over the formation of voting recommendations, and requiring eventual public disclosure by proxy advisory firms of their voting recommendations in SEC filings.

Interested investors should take the opportunity to send the SEC their comments.

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On July 8, the European Parliament approved the world’s strictest rules on bankers’ bonuses. The rules apply to banks and investment firms, but not to hedge-fund managers.

The new rules ensure that bonuses provide less incentive for risky practices that increase executive compensation in the short term, at the expense of long term corporate financial stability.

Under the new regime, no more than 30% of bankers’ bonuses can consist of up-front cash, and, in the case of very large bonuses, no more than 20% can be cash. More importantly, about 70% of total bonus value would be deferred for up to three years and would paid in a new class of security called “contingent capital”.

Ordinarily, bonuses can be paid in the form of a note or “IOU” from the Company. Under the contingent capital scheme, however, in the event of financial difficulties, this debt is converted into equity, which, like stock, falls in value with declining company fortunes.

The new rules are likely to be formally adopted at a meeting of EU finance ministers this week, allowing them to come into effect at all banks operating in the European Union before this year’s bonus season. American policy-makers eager to prevent future financial crises would be wise to look closely at these overseas developments.

Contributed by Yoko Goto

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The G-20, an international group of banking policy makers, have elected to delay the adoption of a uniform set of banking regulations requiring member nation banks to hold more capital—measures necessary to forestall the kind of bank runs that recently brought down several finance sector giants.  This new set of banking regulations is designed to increase banks’ capital and liquid assets, improving their ability to absorb losses and to weather severe short-term market declines.  However, the G-20 avoided issuing a mandate that would have required uniform adoption of the new capital requirements by the end of 2012.  Instead, the G-20 committed to permitting countries to phase in the adoption of these new capital requirements. 

By permitting a transitional period for the adoption of a new set of capital requirements, the G-20 enabled member nation banks to hold different levels of capital and liquid assets.  This approach poses risks to investors everywhere.  As seen in the recent financial crisis, risk migrates to the path of least resistance.  In light of the G-20’s delay, banks can be expected to shift risk to offshore entities in countries that have yet to adopt the more stringent capital and liquid asset requirements prescribed by the G-20.  Until all countries fully implement the G-20’s capital requirements, investors are still exposed to significant losses as banks, instead of mitigating risk, shift exposure to countries with less onerous capital requirements.

Contributed by Craig Martin

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