Securities Mosaic® Blogwatch
December 7, 2018
How Arbitrators Interpret Contracts
by Alan Scott Rau

I suspect that most issues of contract interpretation call for the application of what Stefan Vogenauer has termed “universal hermeneutic truths”—that is, the search for meaning by going no further than “common sense” and how language is “commonly and naturally deployed.”  An arbitrator does this not only by worrying the text of an agreement, but more broadly by attempting to identify the underlying narrative—the sense of the transaction. These are universal lawyerly skills.  And should an agreement run out of guidance for settling a dispute, a further step would move from interpretation, as commonly understood, to the process of filling a gap in a responsible way. When we are in the realm of default rules, or presumptions, or burdens of proof—similar if not identical notions—recourse has to be made to the contract law of the legal system governing the contract.

In doing so, we need first to dispense with some lingering red herrings—for example, the supposed dichotomy between subjective and objective standards of interpretation, over which so much ink has been spilled, or the supposed preference in some legal systems for a textual or literal rather than purposive style. In the interest of offering contracting parties commercially sensible results, our modern law of agreement has evolved to create a carefully calibrated structure, one that seamlessly moves back and forth between the realms of the internal and the external, the so-called subjective and objective, incorporating a subtle dialectic between them. The result will defy labeling and neat theoretical classification, which is hardly a reason to detain us, as such exercises are rarely of much functional interest. So when English judges occasionally say that we shouldn’t pay attention to the subjective intentions of the parties, it’s important not to over-read this.

The main event, though, is to consider the particular ethos and peculiar contribution to all this of arbitral justice. However framed, the questions we are addressing begin very much to look as if they belonged to the realm of appreciation of context and of commercial reality—questions that arbitrators are thought particularly well placed to answer and which are routinely entrusted to them.

As they are not organs of the state in which they sit, arbitral tribunals are liberated, first, in their choice of the appropriate governing law.  This is a point that has been tediously rehearsed in the literature and I find it hard indeed to believe, or even pretend, that it presents any serious intellectual interest.

Whether an arbitral tribunal is given (in the absence of party choice) the power to choose “the law determined by the conflict of laws rules which it considers applicable” or, alternatively, the power to choose directly “the law which it determines to be appropriate” or “the law or rules of law which it considers to be most appropriate” is I gather a matter of intense conceptual and theoretical interest.  But I very much doubt that it is likely to lead to any substantial functional differences in application.

(a) To say that arbitrators may choose appropriate rules does not mean that they can legitimately reason in a manner such as this:

“Looking at the various interests in conflict in the case before us, we find an elegant solution, an ingenious and sensible balancing, contained in the Civil Code of Eritrea [or the Civil Code of Lilliput or the Code of Hammurabi].”

Such an approach would be most ill-advised, because even under the so-called voie directe (that is, giving the arbitrators the power to determine the appropriate law), some underlying analytical framework, some heuristic—even if unstated—leading them to the appropriate law must be in play. What remains critical throughout is the expectation of the parties and the fairness of binding them to a particular body of laws. And that is precisely the work that a conflict of law analysis is expected to perform:  Just as the parties’ own choice of law is a surrogate for the conflict of laws analysis that a court would perform in its absence, so the reverse must be equally true so that tribunals should be expected to choose the same laws that the parties themselves might have chosen had they been willing or able to settle on an agreed choice of law.

(b) Conversely, it seems naïve to assume that a conflict of law analysis mandated by the voie indirecte (that is, first instructing arbitrators to determine what conflict-of-law rules are applicable and then determine the applicable law under those rules) can really be pursued by tribunals in two distinct stages sealed off from one another like watertight compartments.  No adjudicator whose mission is to achieve a fair result in accordance with party expectations can be presumed to act with blank indifference, neutral to and in abstraction from the practical results of the choice: The choice of law is likely to be tendentious and teleological, the process conducted with a view to the outcome that the applicable law will generate.

Second, (and a far more interesting subject), is arbitrators’ freedom in the appreciation and application of the law. To suggest that arbitral tribunals are to be mediums channeling the voice of state courts, or parrots mimicking them—applying the law strictly in the manner of the courts of a particular jurisdiction—is I believe misguided. How naïve  would it be to take as a self-evident premise the unfailing and continuing ability of judges (let alone juries) to produce, over time, reliable results that remain responsive to the needs either of participants in the market or of the general polity? It may in fact be the peculiar contribution of arbitrators to test these rules of law, questioning and qualifying them, reconstructing commercial law incrementally by realigning arbitral decisions with changing practices.

By contrast, distinguished commentators have written that the arbitral tribunal’s “insulation from consequences is not the same thing as conferral of discretion.” But I fear that such a proposition could only be seriously advanced by those quite untouched by any notion of  Legal Realism.

This post comes to us from Professor Alan Scott Rau at the University of Texas at Austin School of Law. It is based on his recent paper, “Arbitrators and the Interpretation of Contacts,” available here.

December 7, 2018
Opening Remarks at the Municipal Securities Conference
by Jay Clayton, U.S. Securities and Exchange Commission

Good morning and welcome. I am delighted to help kick off the inaugural Municipal Securities Conference, although I regret that because of other meetings and commitments, I am doing so from our New York office. Before going any further, I want to make it clear that my remarks are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.

I would like to thank Rebecca Olsen and the staff in our Office of Municipal Securities (“OMS”) for organizing and hosting the conference. The theme of today’s agenda—disclosure in an evolving market—is particularly appropriate. I am pleased to see the broad participation and diversity of perspectives here today, including panelists representing the views of investors, issuers, [1] broker-dealers, municipal advisors, and the MSRB, among others.

 

I would also like to take this opportunity to congratulate Rebecca, who was named Director of OMS in September. Rebecca has a deep knowledge of this market and is an exceptional leader.

Reflections on the Importance of the Municipal Securities Market

Today’s [Dec. 6, 2018] conference—which our staff intends to host annually—marks yet another step in our continued focus on this critical market. As I have said before, it is difficult to overstate the importance of this market to our Main Street investors and our state and local governments and national infrastructure.

First, a few statistics that illustrate the enormous size of this market.

  • There is currently over $3.853 trillion—that’s with a “T”—in principal outstanding. [2]
  • In 2017 alone, there were approximately $448.0 billion of new municipal securities issuances in the United States. [3]
  • There are approximately 50,000 state and local issuers of municipal securities, including states, counties, cities, towns, villages and school districts. [4]
  • It is estimated that there are over one million different municipal issuances outstanding. [5]

The municipal securities market is also a retail market. At the end of the second quarter of 2018, Main Street investors held—through professionally managed products (such as mutual funds) and direct bond holdings—over 66 percent of the market, or approximately $2.579 trillion of outstanding municipal securities. [6]

And as I noted, the municipal securities market is essential for our national infrastructure. Municipal securities provide critical funding for public projects and day-to-day government needs. More than two-thirds of all infrastructure projects in the United States are financed by municipal bonds. [7]

The Need for Continual and Proactive Regulatory Focus

For all of these reasons, I have long believed that there should be close regulatory focus on this market. I am pleased that the Commission, Commission staff, and the Municipal Securities Rulemaking Board (“MSRB”) have in recent years completed several meaningful regulatory initiatives in this space. Just to name a few:

  • In 2012, the Commission issued a landmark report on the municipal securities market, which helped draw much-needed attention to this regulatory area and served to frame many key issues. [8]
  • In 2014, the MSRB proposed and the SEC approved new MSRB Rule G-18 to require dealers to seek best execution of retail customer transactions in municipal securities. [9]
  • In 2016, the MSRB proposed and the SEC approved new MSRB rules concerning the disclosure of municipal bond mark-ups and new MSRB requirements for determining the prevailing market price for a municipal security. [10]
  • In August of this year, the Commission adopted amendments to Rule 15c2-12 to enhance transparency in this market. [11]

Notwithstanding these important regulatory developments, we know that, like all financial markets, the municipal securities market is ever-changing. Therefore, as regulators, we must strive to identify emerging risks and issues, including developments in other areas that affect the municipal securities market. This includes staying abreast of relevant macroeconomic trends and other factors, such as interest rate changes and changes in tax laws. We must also monitor the state of the issuer community and relevant risks that they are facing, including recognizing that many state and local governments are contending with budget issues stemming from pension obligations and deferred capital expenditures.

Our Office of Municipal Securities appreciates that this national, regional and local risk landscape is ever-changing. The staff works closely with the Commission and our Divisions of Risk and Economic Analysis and Trading and Markets and other colleagues across the agency—as well as our fellow regulators—to proactively monitor well known and emerging risks.

In recognition of our important market oversight function, when I became SEC Chairman last year one of the first initiatives that I pursued was the establishment of our Fixed Income Market Structure Advisory Committee—which we refer to as FIMSAC. [12] FIMSAC’s initial focus included our municipal bond markets, and the FIMSAC recently created a Municipal Securities Transparency Subcommittee.

Timeliness of Municipal Issuer Financial Reporting

Before I close, I would like to make a few comments about an aspect of the municipal securities market that I believe can and should be improved for the benefit of our Main Street investors: disclosure about the timeliness—or lack thereof—of municipal issuer financial information.

Timely and accurate financial information is essential for investors and analysts. Without that, it is challenging to accurately evaluate the current financial condition of a municipal issuer (or any issuer for that matter). However, despite the importance of timely financial information, some municipal issuers make their annual financial information available significantly after the end of their fiscal year or fiscal period.

  • In the secondary market, for example, MSRB data shows that issuers who file either annual financial information or audited financial statements within 12 months of the end of their fiscal year do so in an average of 188 and 200 days after the end of their fiscal year, respectively. [13]
  • If we take a broader view and consider all submissions of annual financial information and audited financial statements to the MSRB’s EMMA system (regardless of when they were filed), the average time between the end of the issuer’s fiscal year and the date of submission to EMMA increases to 276 and 349 days after the end of the fiscal year, respectively. [14]

Let me pause now to make an important point.

Congress intentionally chose not to create a federal regulatory registration regime governing municipal issuers. Statutory provisions known as the Tower Amendment expressly limit the SEC’s and the MSRB’s authority to require municipal issuers to file any document with the SEC or MSRB prior to any sale of municipal securities by the issuer. Therefore, the Commission’s investor protection efforts in this market have focused primarily on the regulation of broker-dealers and municipal advisors, Commission interpretations, enforcement of the antifraud provisions of the federal securities laws, and oversight of the MSRB.

To be clear: I believe that there are potential steps that the SEC and the MSRB can take—that would be wholly consistent with the words and spirit of the Tower Amendment—to improve transparency around the age and type of financial information.

Accordingly, I have asked our Office of Municipal Securities to work with the MSRB and other stakeholders to explore potential approaches in this space. I have asked staff to explore with the MSRB ways in which broker-dealers—whether acting as an underwriter in a primary offering or recommending a transaction in the secondary market—can increase transparency concerning the timeliness and scope of issuer financial information. I have also asked staff to work with the MSRB to examine whether there is a role for the MSRB’s EMMA system in facilitating greater transparency regarding the age of issuer financial information.

To summarize, my broad view is that providing greater clarity regarding existing municipal issuer financial disclosure practices will provide investors and the market with better access to valuable information. This transparency, and consequent adjustments in investor preferences, may also incentivize some issuers to make financial disclosures on a more timely and consistent basis.

Conclusion

In closing, I would like to express my appreciation to the panelists and everyone in attendance. I hope you have a productive conference.

Thank you.

Endnotes

 

The term issuer, as used throughout these remarks, includes obligated persons.(go back)

 

See Federal Reserve Board, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts (Second Quarter 2018) (Sept. 20, 2018), available athttps://www.federalreserve.gov/releases/z1/20180920/z1.pdf.(go back)

 

See SIFMA, SIFMA Fact Book 2018 (Sept. 6, 2018), available at https://www.sifma.org/wp-content/uploads/2017/08/US-Fact-Book-2018-SIFMA.pdf.(go back)

 

See MSRB, Self-Regulation and the Municipal Securities Market (Jan. 2018), available at http://www.msrb.org/Market-Topics/~/media/8059A52FBF15407FA8A8568E3F4A10CD.ashx(go back)

 

See MSRB, Self-Regulation and the Municipal Securities Market (Jan. 2018), available athttp://www.msrb.org/MarketTopics/~/media/8059A52FBF15407FA8A8568E3F4A10CD.ashx(go back)

 

See Federal Reserve Board, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts (Second Quarter 2018) (Sept. 20, 2018), available athttps://www.federalreserve.gov/releases/z1/20180920/z1.pdf.(go back)

 

See MSRBMunicipal Market by the Numbers (Mar. 2018), available at http://www.msrb.org/msrb1/pdfs/MSRB-Muni-Facts.pdf.(go back)

 

See Securities and Exchange Commission, Report on the Municipal Securities Market (July 31, 2012), available at https://www.sec.gov/news/studies/2012/munireport073112.pdf.(go back)

 

See Exchange Act Release No. 78777 (Sept. 7, 2016), 81 FR 62947 (Sept. 13, 2016); Exchange Act Release No. 73764 (Dec. 5, 2014), 79 FR 73658 (Dec. 11, 2014).(go back)

 

See Exchange Act Release No. 34-78777 (Sept. 7, 2016), 81 FR 62947 (Sept. 13, 2016); Exchange Act Release No. 34-79347 (Nov. 17, 2016), 81 FR 84637 (Nov. 23, 2016).(go back)

 

See Exchange Act Release No. 34-83885 (Aug. 20, 2018), 83 FR 44700 (Aug. 31, 2018).(go back)

 

See “SEC Announces the Formation and First Members of Fixed Income Market Structure Advisory Committee,” SEC Press Release (Nov. 9, 2017), available at https://www.sec.gov/news/press-release/2017-209.(go back)

 

See MSRB, Timing of Annual Financial Information by Issuers of Municipal Securities (Feb. 2017), available athttp://www.msrb.org/msrb1/pdfs/MSRB-CD-Timing-of-Annual-Financial-Disclosures-2016.pdf.(go back)

 

Id.(go back)
December 7, 2018
This Week In Securities Litigation (Week ending Dec. 7, 2018)
by Tom Gorman

The Supreme Court was the focus this week with oral argument in Lorenzo v. SEC, an action centered on ascertaining the dividing line between primary and secondary liability under Exchange Act section 10(b). The arguments were based on the application of two prior decisions of the Court, Janus regarding liability for false statements under Rule 10b-5(b) and Central Bank of Denver which held that if the conduct falls within the language of section 10(b) there is a primary violation of the statute.

The Commission filed enforcement actions this week based on insider trading and business development entities. The former centered on an the misappropriation of inside information by a foreign national at a Singapore entity. The latter two cases were based on the mischaracterization of distributions and a failure properly allocate expenses.

Supreme Court

The Supreme Court heard argument on the question frequently referred to in the circuit and district courts as scheme liability on Monday, December 3, 2018. Lorenzo v. SEC, No. 17-1077. Specifically, the question as framed by Petitioner Francis Lorenzo is “whether the D.C. Circuit erred in concluding a misstatement claim that does not meet the elements set forth in Janus [Janus Capital Group, Inc., v. First Derivative Traders, 564 U.S. 135 (2011)] can be repackaged and pursued as a fraudulent scheme claim under Section 10(b) of the Exchange Act . . . and Section 17(a)(1) of the Securities Act.” The D. C. Circuit and the Securities and Exchange Commission rejected the contention.

Frank Lorenzo was a director at investment bank Charles Vista, LLC in February 2009. The firm’s largest investment banking client was start-up W2Energy Holdings, Inc. Its business depended largely on the success of certain technology which failed. The firm attempted to raise about $15 million through the sale of convertible debentures with the assistance of Charles Vista. Mr. Lorenzo emailed two potential investors “several key point” about W2E’s pending debenture offering at the behest of his boss who settled. The emails failed to mention the recent devaluation of the firm’s assets.

Petitioner Lorenzo relied on Janus for the proposition that “only the maker of a misstatement can be held liable for that misstatement under Section 10(b) and Rule 10b-5.” While the lower court agreed that is the law under Janus, and that Mr. Lorenzo was not the “maker” of the statements, it found him liable. To reach that conclusion the D.C. Circuit concluded that Mr. Lorenzo “engaged in a deceptive act, artifice to defraud, or practice, for purposes of liability under Section 10(b) . . .” That was error since it directly undercuts the holding of Janus Petitioner argued.

Counsel for the Government focused first on the facts and then the holding of Central Bank. “Petitioner’s decision to send emails that grossly misrepresented the financial prospects of his client and to give illusory promises designed to deceive investors into backing a business that he knew was failing constitute a quintessential securities fraud. His conduct falls within the plain text and the common-sense meaning of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and subsections (a) and (c) of Rule 10b-5.” Since Central Bank held that if the conduct fell within the language of the statute, as here, there is primary liability counsel for the Government claimed.

SEC Enforcement – Filed and Settled Actions

Statistics: Last week the SEC filed 2 civil injunctive case and 2 administrative proceedings, excluding 12j and tag-along proceedings.

Insider trading: SEC v. Gannamaneni, Civil Action No. 18 CV 11390 (S.D.N.Y. Filed Dec. 6, 2018) is an action which names as a defendants Rajeshwar Gannamaneni, a citizen of India, his wife, Deepthi Gandra, and his father, Linga Gannameneni. Mr. Gannameneni was the information technology contractor at a prominent investment bank in Singapore. Over a period of about three years, beginning in late 2013, Mr. Gannameneni misappropriated inside information about 40 times and used it to trade while sharing it with his wife and father. About $600,000 in illicit profits resulted. The complaint alleges violations of Exchange Act sections 10(b) and 14(e). The case is pending.

Fraudulent trading: SEC v. Litvak, No. 313-CV-00132 (D. against Conn.) is a previously filed action against Jefferies & Co. Inc. trader Jesse Litvak. In a parallel criminal action Mr. Litvak was twice convicted. The convictions were reversed by the Second Circuit Court of Appeals in each instance. In August the U.S. Attorney’s Office dismissed the charges against Mr. Litvak. The Commission also elected to dismiss its compliant. See Lit. Rel. No. 24368 (Dec. 6, 2018).

Misappropriation: SEC v. Rothenberg, Civil Action No. 3:18-cv-05080 ((N.D. Cal.) is a previously filed action in which the Commission alleged that investment adviser defendant Michael Rothenberg misappropriated about $7 million from his clients, in part by overcharging them, to fund his other business ventures. The complaint alleged violations of Advisers Act sections 206(1) and 206(4). Defendant has agreed to resolve the charges. The settlement included a bar from the brokerage and investment advisory business with the right to reapply after 5 years. The court will determine the amount of the disgorgement. See Lit. Rel. No. 24367 (Dec. 6, 2018).

Misappropriation –EB5: SEC v. Chen, Civil Action No. 2:17-cv-06929 (C.D.C.A.) is a previously filed action which named as defendants Edward and Jean Chen, a husband and wife who promoted an EB-5 project. The complaint alleged that they raised about $22.5 million from 45 investors in China for the development of an EB-5 project. More than $12 million was misappropriated. Defendants settled with the Commission. The Court entered a final judgment resolving all claims which enjoins the defendants from violating Exchange Act section 10(b) and Securities Act section 17(a) as well as from participating in the offer and sale of any security which constitutes an investment in a commercial enterprise under the USCIS EB-5 visa program. The order also directs the disgorgement, on a joint and several basis, of $24,655,000 along with prejudgment interest of $1,273,098 and the payment of a penalty of $1,077,500. The final judgement also directs Paradise Investment Center LLC to pay, on a joint and several basis with the other defendants, disgorgement of $2,155 million along with prejudgment interest of $119,583 which is deemed satisfied by amounts already collected. See Lit. Rel. No. 24366 (Dec. 6, 2018).

Improper distribution: In the Matter of KCAP Financial, Inc., Adm. Proc. File No. 5-18912 (Dec. 4, 2018) is a proceeding which names as a Respondent the firm which is a closed end investment company that is regulated as a business development firm. As such the firm distributed about 98% of its investment income. Over a four year period, beginning in 2010, the firm distributed about $35.8 million received from its wholly-owned Asset Manager Affiliates. The distribution was inappropriate because it was paid from current or accumulated tax basis earnings and profits. A restatement resulted. During the process the firm concluded its internal controls were not effective. The Order alleges violations of Exchange Act sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Investment Company Act section 19(a). To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order.

Misallocation: In the Matter of Fifth Street Management, LLC, Adm. Proc. File No. 3-18909 (Dec. 3, 2018) is a proceeding which names as a Respondent the previously a registered investment adviser. In 2013 and 2014 the Order alleges that the adviser improperly allocated rent and overhead expenses to the business development clients as well as certain compensation expenses. The adviser also failed to conduct quarterly valuation models for illiquid assets which ultimately resulted in the overvaluing of two portfolio companies and incorrect financial statements. The adviser did not properly implement written policies and procedures. The Order alleges violations of Securities Act section 17(a)(2) and Exchange Act sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Advisers Act sections 206(2), 206(4), 207 and 204A. To resolve the proceedings the adviser consented to the entry of a cease and desist order based on the sections cited in the Order and to a censure. The Adviser also agreed to pay disgorgement of $1,999,115.86, prejudgment interest of $334,545.65 and a penalty of $1,650,000.

Offering fraud: SEC v. Suleymanov, Civil Action No. 18-68545 (E.D.N.Y. Filed Dec. 3, 2018). Mark Suleymanov, operating under the business name SpotFN, offered and sold binary options to customers throughout the United States on a series of websites over a period of four years beginning in 2012. The binary options offered by SpotFN were short term contracts tied to the price of stocks and stock indexes or other financial assets. The options offered and sold required an investor to choose if the given stock’s price, for example, would be above or below a specific price at a certain time. If the investor made a correct determination, he or she won a specified amount. If not, the investor received nothing. Mr. Suleymanov represented that the binary options sold were legitimate, using the NASDAQ logo. In fact they were rigged so that investors could almost never win. Not only were the returns not 88% in favor of the investor as claimed, Mr. Suleymanov manipulated the software that ran the options program so that the chance for investors to secure a favorable result were diminished. In addition, while investor funds were supposedly held in segregated accounts, in fact they were not. Rather, investor funds were co-mingled and at times used for the payment of expenses by Defendant. The complaint alleges violations of Securities Act sections 5 and 17(a) and Exchange Act section 10(b). Defendant Suleymanov agreed to the entry of a permanent injunction based on the sections cited in the complaint. Issues regarding disgorgement, prejudgment interest and a civil penalty will be considered by the Court. See Lit. Rel. No. 24364 (Dec. 3, 2018).

Anti-Corruption Cases

U.S. v. Ho, No. 1:17-cr-00779 (S.D.N.Y.) is an action in which defendant Chi Ping Patrick Ho, A/k/a Patrick C.P. Ho, was found guilty by a jury of participating in a multi-year multimillion dollar scheme to bribe top officials of Chand and Uganda to obtain certain business advantages for CEFC China Energy Company Limited. Mr. Ho was found guilty of conspiracy to violate the FCPA, conspiracy to engage in international money laundering, violating the FCPA and engaging in international money laundering. The scheme had two facets designed to aid CEFC China, a Shanghai-based multibillion business conglomerate that operates in oil, gas, and banking. Mr. Ho was at the center of the scheme as the head of a non-governmental based Hong Kong and Arlington, Virginia based China Energy Fund Committee which held “Special Consultative Status” with the U.N. Economic and Social Council. It was funded by China. Under both facets of the scheme Mr. Ho payed bribes to government officials to secure benefits.

U.S. v. Jiminez Aray, No. 9:18-cr-80054 (S.D. Fla. Sentenced Nov. 29, 2018). Gabriel Arturo Jimenez Aray, a Venezuelan business man and the former owner of Banco Peravia, was sentenced following his earlier guilty plea under seal to one count of conspiracy to commit money laundering. Mr. Jamenez admitted as part of the plea to participating in the scheme with Mr. Gorrin and others to acquire Banco Peravia. He then used the bank to launder bribe money. Mr. Jimenez admitted facilitating illegal transactions and bribe payments to foreign officials using bank issued credit cards, cash disbursements, wire transfer and through other transactions, according to his admissions. U.S. v. Jiminez Aray, No. 9:18-cr-80054 (S.D. Fla. Sentenced Nov 29, 2018).

December 7, 2018
ESG: The State of Sustainability Reporting
by John Jenkins

According to this recent study from IRRC & the Sustainability Investment Institute (Si2), sustainability reporting has come a long way, but only a few companies have taken the next step and started to issue “integrated reports.” Integrated reporting is intended to provide “a holistic look at material information that goes beyond corporate financial disclosures and gives investors insight on a company’s risk and value creation potential.”

Here are some of the study’s highlights (also see this Davis Polk blog):

– 78% of S&P 500 companies issue a sustainability report.

– 40% of S&P 500 companies include voluntary sustainability discussions in annual financial reports or other regulatory filings. This is a key signal that an increasing number of companies believe sustainability issues are financially material. The reporting, however, varies widely.

– Among companies that issue sustainability reports, 95% offer quantified, annually comparable environmental performance metrics; two-thirds set quantified and time-bound environmental goals. Some 86% offer social performance metrics, but only 40% set quantified social goals.

– Only 14 S&P 500 companies issue what Si2 considers to be fully integrated reports, though this is a 100 percent increase from five years ago.

So which companies are providing integrated reports? According to the study, they include GE, Intel, Pfizer, Allstate, Medtronic, Eli Lilly, Southwest Airlnes, AEP, Ingersoll Rand, Praxair, Entergy, Clorox, NiSource & Dentsply Sirona. While the concept has been slow to catch on, it has been endorsed by the Principles for Responsible Investment (PRI),whose signatories have $82 trillion in assets under management.

ESG: Unifying Non-Financial Reporting Standards

One of the reasons that companies may be slow to adopt integrated reporting is that there are a whole bunch of competing reporting standards. So it’s welcome news that a group of the standard-setters – including the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Standards Board (CDSB), FASB (as an observer) and the Global Reporting Initiative (GRI) – has announced a project to unify their sustainability & integrated reporting frameworks. The FAQs elaborate:

Participants will work together to refine overlapping metrics with the same intent. Where their objectives do not require differences, we will look to achieve and maintain the highest possible alignment. Such alignment is subject to the due process considerations of each organization’s governance procedures.

The initial output, expected in Q3 2019, will be a publication available on www.corporatereportingdalogue.com – the document will show the linkages of the TCFD Recommendations with the respective reporting frameworks and the linkages between the frameworks. This work will include identifying how non-financial metrics relate to financial outcomes, explain how the TCFD recommendations should be integrated in mainstream reports and outline preparations for a next phase during which the framework providers will align their metrics where possible across all their reporting frameworks.

The new project is being led by the IIRC’s Corporate Reporting Dialogue. Note that the IIRC, which is leading this effort, is different than the IRRC, which co-issued the sustainability report discussed in today’s first blog. I want to be clear about that, first because the IRRC is dissolving at the end of this year (into the Weinberg Center), but also in case the two organizations have some sort of a “People’s Front of Judea” / “Judean People’s Front” thing going on.

ESG: Coming Soon to a Debt Deal Near You?

According to this “Institutional Investor” article, European institutions have a strong appetite for ESG debt investments – and that appetite may drive more product to market over the next several years.  Here’s an excerpt:

Environmental, social, and governance investing is taking root in the debt markets, where demand for ESG offerings is outstripping supply, according to consulting firm Cerulli Associates. The inclusion of ESG factors in fixed income is becoming more widespread, but opportunities for socially responsible investing remain scarce, Cerulli said in a statement Monday on its European research. The firm expects strong demand from institutional investors in Europe will drive the creation of ESG offerings in fixed income over the next five years.

John Jenkins

December 7, 2018
Benefit Corporations and Delaware Law
by Francis Pileggi

We have referred to Delaware legislative developments regarding benefit corporations previously on these pages, but a recent article in Forbes provides helpful background information about the history and genesis of the Delaware statutory provisions regarding this rather new aspect of Delaware corporate law. The article features a prominent Delaware lawyer who is a major player in promoting benefit corporations. In essence, the relatively new statute allows a corporation to be formed in order to have as its legitimate and explicit purpose more than only the maximization of profit for stockholders. The article linked above should be of interest to anyone who wants to know more about this developing topic.

The post Benefit Corporations and Delaware Law appeared first on Delaware Corporate & Commercial Litigation Blog.

December 7, 2018
Is Brexit a Done Deal?
by Davina Garrod & Lennart J. Garritsen

The Court of Justice of the European Union’s (CJEU) Advocate General provided an advisory opinion that Article 50 of the Treaty on European Union allows for the unilateral revocation by the United Kingdom of its Article 50 withdrawal notification, provided certain conditions are met. The CJEU is expected to confirm this view in a formal judgment before the U.K. House of Commons is scheduled to vote on the Withdrawal Agreement on December 11, 2018, raising the prospect of the U.K. Parliament voting to revoke its intention to leave the European Union. 

Please click here to read Akin Gump’s alert on what this means for the future of Brexit.

December 7, 2018
GM’s Disclosures Hinted at Trouble
by Erin Connors

After announcing plans to shutter four production plants, halt production of various car models, and eliminate as many as 15,000 jobs, GM is taking heat from Washington. CEO Mary Barra has been summoned for two days of meetings with lawmakers this week. Meanwhile, the White House has been lobbing insults at GM and Barra via Twitter. It’s an unwelcome situation for any public company. One criticism that Washington pols won’t be able to make of Barra, however, is that she didn’t warn them this was coming.

Indeed, the company’s public statements over the past half year clearly indicate that tariffs borne from the current administration’s trade war could necessitate action very much like the cuts the company just announced. A check of the Intelligize platform, in fact, reveals that the company was talking about the threat of tariffs all the way back in February. In a 10-K filed then, GM specified the U.S.’s withdrawal from NAFTA and “new or higher tariffs” as a material risk factor for its business. In July, after the administration announced its steel and aluminum tariffs, GM wrote in a 10-Q that “we . . . anticipate higher costs associated with tariffs.” (Signaling its recently announced move away from cars and toward SUVs, the company also said that it was “focusing on a greater mix of crossovers relative to passenger cars compared to 2017.”) GM reiterated this concern in a late October 10-Q.

The company spelled out things even more plainly in June commentary that it filed with the Commerce Department, in which it made a case against tariffs. Broad tariffs on autos, GM said, “could lead to a smaller GM.” They would raise the prospect of “less—not more—U.S. jobs,” while “undermining GM’s competitiveness against foreign auto producers.” While GM has responded diplomatically to the Twitter broadsides coming from 1600 Pennsylvania Avenue, and has not specified a figure, it is widely believed that the tariffs have cost GM about $1 billion, roughly equivalent to what Ford has incurred.

Of course, when she meets with lawmakers, Barra’s task won’t be as simple as pointing to Trump’s tariffs and GM’s statements warning of their dangers. The backstory here is more complicated. Certainly, the changing taste of the American consumer—away from sedans, and toward SUVs and trucks—is one of many other forces that have driven the company’s difficult choices. So too, incidentally, are tariffs that have long protected U.S. truck manufacturers against foreign competition. The 1962 “chicken tax” (which gets its name because it was passed in retaliation against a European tariff on U.S. chickens) places a 25 percent tariff on foreign-made trucks and SUVs. That tariff helps explain why American manufacturers dominate the truck market.

But then every story in Washington, and business, is complicated. We can expect that GM will try to simplify it for politicians by referring to the warnings it sounded as early as February.

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