Sunday, September 28, 2008

Was that Horse, Barndoor?

On the 26th, the SEC announced that it was terminating the Consolidated Supervised Entity (CSE) program of 2004. All the former CSEs are either defunct or have become banks regulated by the Fed.

Cox lays blame for the failure of CSE at the door of Congress. He says Gramm-Leach-Bliley should have given his agency the power to regulate companies that own investment banks more, though the SEC appears to have chosen to regulate them less.

CSE let highly capitalized broker-dealers use mathematical models, like Value-at-Risk, to value swaps and derivatives for purposes of the Net Capital Rule (15c3-1). The Net Capital Rule ensures that if a broker dealer goes under it will be able to pay its debts.

The CSEs were:

Bear Stearns
Goldman Sachs
Lehman Brothers
Merrill Lynch
Morgan Stanley


Friday, September 26, 2008

Buy This Bank

Per this article in today's special edition of SEC Currents: the Fed has revised its policy statement to allow hedge funds and private equity funds to acquire larger stakes in banks and bank holding companies.

The Bailout's Paper Trickle

We've been treated to an avalanche of talk, but there's been precious little paper memorializing the proposed bailout. A few things have appeared in the last couple of days. Hopefully this means that a resolution is close behind?

Yesterday afternoon the Senate Banking Committee circulated a one-page, bipartisan document called "Agreement on Principles." The Treasury has been showing its proposed bill since last week. The latest iteration even has a title: The Troubled Asset Relief Act of 2008 (via Corporate Counsel).

Monday, September 22, 2008

GS Explainer

I can't stop talking about banking law! Today, I offer an outline of what Goldman Sachs is up to.

Goldman Sachs Group (GS) owns a Utah-chartered industrial bank called Goldman Sachs Bank USA (Bank). GS wants to convert Bank into a regular Utah-chartered bank. However, before it can ask Utah to change Bank it needs approval from the Federal Reserve to own a regular bank.

So, GS and its subsidiary Goldman Sachs Bank USA Holdings LLC (Holdings) applied to the Fed under section 3 of the Bank Holding Company Act to be recognized as bank holding companies. The Fed approved the application immediately, but that caused another problem ...

GS also owns a registered broker-dealer called Goldman Sachs & Co. (Co.). Section 21 of the Bank Holding Company Act forbids bank holding companies from owning securities dealers.

Therefore, GS has to make another application to the Fed to be recognized as a financial holding company (for more about the relationship between bank holding companies and financial holding companies, see yesterday's post).

In the end GS will be adding a bunch of new regulatory layers to their already crowded dance card. GS is a publicly traded company and a consolidated supervised entity under the alternative minimum capital rules of rule 15c3-1. Co., as a broker-dealer, is regulated by the SEC. Bank is presently regulated by the State of Utah and the FDIC.

Banks to Become Banks!

This morning I found myself in unfamiliar territory. Yesterday, the Federal Reserve Board of Governors granted the applications of the Last Two Independent Investment Banks to become bank holding companies. The orders can be found here and here.

For those as at sea as I am, I offer the following primer.

1) Bank holding companies were developed by bankers, at the turn of the century, to avoid state bank branching laws.

2) The Bank Holding Company Act of 1935 (12 USCA s. 1842 et seq, also called Glass-Steagall) created federal agencies to regulate them.

3) Section 21 of Glass-Steagall (12 USCA 378) forbids bank holding companies from involving themselves in the securities business.

4) The Financial Services Modernization Act of 1999 (PL 106-102, also called the Gram-Leach-Bliley Act) amended the Bank Holding Company Act by creating a new regulated entity called a financial holding company.

5) Bank holding companies meeting the requirements of sections 4(k) and 4(l) of the Bank Holding Company Act (12 USCA 1843(k) and (l)) and section 225.24 of the Fed's Regulation Y (12 CFR 225.24) may elect to be recognized as financial holding companies.

6) Financial holding companies may engage in any business that is “financial in nature,” or “complementary,” to a financial activity.

A list of financial holding companies can be found here.

Wait! There's more! Banks can be either chartered nationally or by a state. State-chartered banks are regulated by the state's financial services agency. Nationally chartered banks are regulated by the Office of the Comptroller of the Currency.

Banks can also be regulated by the Federal Reserve, if they are members of the Federal Reserve System, and/or FDIC if they have FDIC insured deposits.

Fed actions (FFIN-FRBACT), agreements (FFIN-FRBACT) and interpretive letters (FFIN-FRBIL) may be found on Westlaw - along with FDIC institution letters (FFIN-FDICFIL), interpretive letters (FFIN-FDCIL) and enforcement decisions (FFIN-FDICED). The FFIN-ADMIN database combines the regulatory output of both agencies.


Friday, September 19, 2008

... Short Joke Here ...

In a short sale you sell something, wait a bit, and then buy it back. Thus, you have made a bet that the thing will decrease in value between when you sell and when you buy again. For instance: you sell Lehman for $10, wait a couple of hours and buy it back for $5 and you have twice as much Lehman for the same money. Notice that you bought it back. What you're betting is that Lehman is going down, not bust.

Short sales can be simple like that, or they can involve borrowing the stock or negotiating an option to buy it in the future.

Naked shorting is when you sell "borrowed" stock without bothering to check if anyone will loan it to you (what do you mean you don't want to sell your car!)

Back in July, the SEC banned most naked shorting. Yesterday it banned any short selling of financial institutions. You are now only allowed to bet that these stocks will go up. Anyone care to take that bet?

Monday, September 15, 2008

Greedy Guys Wreck Economy!

If only we'd had some way of seeing it coming! Goldman Sachs and Morgan Stanley are now all that remain of the five largest independent investment banks.

Lehman Brothers carried out its promise to file for bankruptcy on September 15th (SDNY file # 1:08-BK-13555). The Merrill Lynch / B of A merger agreement was filed as an exhibit to a Merrill Lynch 8-K filed on September 18th.

If you're looking for the Bear Stearns merger agreement, it is attached to an S-4 filed by JP Morgan Chase on March 17th.

Reuters League Table for Global Equity Underwriting
JP Morgan
Citi
Goldman Sachs
Morgan Stanley
Merrill Lynch
Lehman Bros.
UBS
Banc of America Securities
Credit Suisse
Deutsche Bank

Saturday, September 13, 2008

SON OF THE CLAWBACK!

Section 304 of Sarbanes-Oxley was supposed to create a mechanism allowing the SEC to recapture executive compensation distributed based on fishy accounting. As this article notes, 304 has never been used.

The Corporate Library recently reported that 300 companies had adopted private clawback mechanisms. For a thorough discussion, have a look at this post by Amy L. Goodman of Gibson Dunn on the Harvard Corporate Governance Blog.

If you seek precedents, Westlaw Business has canned searches to help find (a) recently adopted clawbacks and (b) 14a-8 challenges to shareholder clawback proposals.

If it wasn't for bad faith ...

In 1985, the Supreme Court of Delaware held that the business judgment rule doesn't protect directors who make, "an unintelligent or unadvised judgment." (Smith v. Van Gorkam, 488 A.2d 858) In the words of Chancellor Strine, "After Van Gorkom met an unenthusiastic reception, the General Assembly adopted § 102(b)(7)." 102(b)(7) allows a company to insert into its certificate of incorporation a provision, "limiting personal liability of a director ... for monetary damages for breach of fiduciary duty ..."

In three recent cases the Chancery Court has given shape to the jurisprudence of section 102(b)(7).

The cases are:

McPadden v. Sidhu, 2008 WL 4017052
Ryan v. Lyondell Chemical, 2008 WL 4174038
In Re Lear Corp. Shareholder Litigation, 2008 WL 4053221

For detail about the holdings look at this post on the Delaware Corporate and Commercial Litigation Blog.

To help you find precedents, here's the exculpatory provision from Lear Corp.'s certificate of incorporation:


(e) No director shall be personally liable to the Corporation
or any of its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the
director's duty of loyally to the Corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174
of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.



Westlaw Finding Tips

Finding securities documents can be difficult. We at West have not always been hep to this particular facet of the job. Recently however, we've cobbled together a much improved collection of finding aids for securities types. Some are obvious enough (Find a No-action Letter, for instance). I won't bother with them. I will try to point out a couple you may have missed.

* You need to go directly to the beginning of Regulation S-K:

the Tables of Contents pull-down (well pull-up, actually) on the Securities Practitioner Tab links directly to the TOC for the CFR or the USCA.



* You need to find SAB 99.
This is two tips, actually. First, if you enter "release-no" followed by a release number in the find box you can retrieve any SEC release. Second, if you append "SAB No __" after the release code you can use Find to pull a Staff Accounting Bulletin (you knew what SAB meant, right?) So, "release-no SAB No 99," retrieves SAB 99. That's almost simple, isn't it?



* You need to find SEC Rule of Practice 402. The SEC Rules of Practice are probably the most exotic thing that can be accessed through the Find a Securities Document link on the Securities Practitioner Tab. The templates on this link ask for common citations instead of the USCA and CFR citations.


Friday, September 12, 2008

More Teeth at SEC

The Securities Act of 2008 (HR 6513)
continues its gallop through Congress. Among other things, the new law makes SEC subpoenas enforceable nationwide without resort to the courts. The SEC is also given the power to levy penalties in cease and desist proceedings. A nice summary may be found in this Bingham McCutchen memo.

No More GAAP in Can ada

In February, the Canadian Securities Administrators issued Concept Paper 52-402 announcing that on January 1st, 2011 Canadian issuers must stop using Canadian GAAP and switch to International Financial Reporting Standards. More recently, they issued Staff Notice 52-321 which allows issuers to voluntarily adopt IFRS before 2011.

The SEC is officially thinking about adopting IFRS. In 2007 it removed the requirement that foreign issuers using IFRS reconcile their financials to US GAAP.