September 22, 2009

Can We Overcome Short-Termism?

A few weeks ago, the Aspen Institute released a report (here is the press release) entitled “Overcoming Short-Termism: A Call for a More Responsible Approach to Investment and Business Management,” signed off by a number of well-known governance experts on all sides of the governance debate. It’s short (6 pages) and comes when high-frequency and flash trading have come under regulatory attack (as I blogged about recently – and last week, the SEC proposed rules to ban flash trading).

The Aspen report makes recommendations for three basic problems:

1. Fees – High rate of portfolio turnover harms investor returns.

2. Short-Term Focus Harmful in Long Term – Short-term traders have little reason to care about long-term corporate performance – so are unlikely to exercise a positive role in promoting corporate policies and can lead to market failures, social and environmental degradation.

3. To Whom Do Executives/Boards Owe Duties? – If managers and boards pursue strategies to satisfy short-term investors, they can put the interests of shareowners seeking long-term growth and sustainable earnings and Corporate America’s future at risk.

This is a noble effort and should be helpful to assist the SEC and other regulators push investors towards longer-term thinking, if that is possible given how “buy and hold” investors got crushed in the recent downturn…

SEC Adopts (and Proposes) Rules to Further Strengthen Oversight of Credit Rating Agencies

Last week, at an open Commission meeting, the SEC adopted (and proposed) a bunch of rules changes designed to strengthen their oversight of the credit rating agencies (specifically, these rules). Here are Chair Schapiro’s opening remarks. Some of the proposals could impact the disclosure obligations that companies have – so this is not just news for rating agencies (I’ll leave it to Dave to blog about this point in the near future).

Some aren’t convinced that the SEC’s approach to reform of the rating industry is sound – they worry that the inherent conflicts of interest will continue to entice the agencies to give more favorable ratings than deserved since the SEC’s rule changes don’t alter that dynamic at all. For example, see Steve Pearlstein’s column from Friday’s Washington Post.

Full Steam Ahead: SEC Decides to Pursue BofA Bonus Disclosure Trial

Last week, I blogged about US District Court Judge Jed Rakoff’s refusal – with a stinging rebuke to both the SEC and Bank of America – to approve a $33 million settlement between the SEC and BofA over allegations of misleading proxy materials because the bonus obligations due to Merrill Lynch employees were not fully disclosed. I noted how the SEC had limited options because it argued before Rakoff that that there was insufficient evidence to charge individuals – and that the SEC’s best bet may be to dismiss the case and file an administrative claim that wouldn’t be heard in federal court.

Well, what do I know. Yesterday, the SEC filed a case management plan in Rakoff’s court and issued a statement that it would proceed “vigorously” to pursue its case against Bank of America, including:

“As we alleged in our complaint last month, Bank of America did not provide investors with complete and accurate information about the bonuses to be paid by Merrill Lynch to employees. We believe that this disclosure failure violated the federal securities laws.

We firmly believe that the settlement we submitted to the court was reasonable, appropriate and in the public interest. As we consider our legal options with respect to the court’s ruling, we will vigorously pursue our charges against Bank of America and take steps to prove our case in court. We will use the additional discovery available in the litigation to further pursue the facts and determine whether to seek the court’s permission to bring additional charges in this case.

In deciding how to proceed, we will, as always, be guided by what the facts warrant and the law permits.”

As part of it’s announcement, as noted in this Washington Post article, the SEC intends to broaden its investigation into alleged wrongdoing at the company and may seek additional charges as it prepares for the trial…

– Broc Romanek