Securities Mosaic® Blogwatch
February 25, 2021
Lifting Labor’s Voice: A Principled Path Toward Greater Worker Voice and Power Within Corporate Governance
by Leo E. Strine, Jr., Aneil Kovvali and Oluwatomi O. Williams

Many public policymakers and economists believe that American workers’ sharply declining share of corporate profits over the past few decades has been a major cause of increasing income inequality in the United States.  To some, the explanation for this profound change in the division of the corporate pie is simple.  Since the 1980s, the power of stockholders to demand corporate policies favoring their interests has drastically increased, while the leverage of working people in the corporate power structure has drastically decreased.  As a result, stockholders have grabbed much more of the pie, and left workers with crumbs.

Leading public officials concerned for working people have responded by introducing legislation to provide workers with more voice within the corporate power structure.  These proposals reflect a growing fear that external reforms such as reinvigorating the National Labor Relations Board, strengthening enforcement of the National Labor Relations Act, and raising the minimum wage are insufficient in isolation to restore American workers’ fair share of corporate gains.  Thus, advocates for workers are demanding internal reforms to corporate and securities laws that would require corporations to give more power to workers.

In a new paper, we focus on advocates’ interest in a single element of an overall scheme of economic organization known as “codetermination”: the right of workers to elect a certain percentage of a company’s board of directors.  This element may fairly be called “board codetermination.”  It is in the “Reward Work Act” bill introduced by Senator Tammy Baldwin and in the “Accountable Capitalism Act” introduced by Senator Elizabeth Warren, and it is supported by Senator Bernie Sanders.

In our paper, we address the practical issues that must be addressed if board codetermination is to be introduced in the United States and the immediate steps that could help American workers gain a strong voice in American corporations.  One central observation animates our discussion.  In nations that practice codetermination, there is a coherent, legally required internal framework within which management and labor must work together to govern companies for the benefit of all stakeholders.  That internal framework is backed by robust laws that reinforce the need for corporations to treat workers fairly and that provide workers with additional support to reduce inequality and promote economic security.

To show this, we explain how codetermination operates in key market-based economies. In Germany, for example, top-down representation on corporate boards is accompanied by ground-up worker representation through works councils that collaborate with management on decisions about issues like employee leave, terminations, working conditions, and relocation.  Codetermination also exists in nations where levels of unionization are higher than in the U.S., and where labor unions play a supportive role to both worker representatives on works councils and boards of directors.  Put simply, codetermination is a comprehensive system that culminates, and does not begin, with board representation.  As important, it is accompanied by corporate law that requires stakeholder-focused governance, meaning all directors, be they elected by stockholders or workers, must advance the interests of all stakeholders and not just stockholders.

We then describe the issues that must be confronted to implement a minimal form of codetermination in the U.S.  They include: a) which workers would be eligible to vote for directors; b) who would be permitted to serve as a worker director; c) how campaigns for board seats would be conducted; d) how elections would be administered; and e) how a board with worker directors would function.

Finally, we discuss policy initiatives that would benefit American workers now and that would be useful in creating an effective system of board codetermination.  These include: a) requiring all large corporations in the U.S., public or private,  to respect the interests of all stakeholders, including workers, and to focus on sustainable growth; b) mandating the Securities and Exchange Commission to require employee, environmental, social, and governance disclosure from all large companies and institutional investors; c) transforming  board compensation committees at all large companies into board workforce committees with a broader responsibility to ensure fair pay and working conditions for all employees, not merely select officers and directors, and to oversee policies on pay, workforce diversity, equity, inclusion, and safety and corresponding disclosure requirements; d) authorizing these workforce committees to institute European-style works councils to increase worker voice and provide information to the board; e) enacting labor law reform to reinvigorate workers’ rights to join a union and authorize sectoral bargaining; and f) undertaking complementary reforms designed to ensure that the institutional investors who collectively control public companies behave in a manner aligned with the interests of the people whose capital they deploy.  These measures would create a regulatory and business context allowing an eventual board codetermination system to function effectively, while improving conditions for American workers right now.

This post comes to us from Leo E. Strine, Jr., the Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School, the Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School, of counsel at the law firm of Wachtell, Lipton, Rosen & Katz, and the former chief justice and chancellor of the State of Delaware; Aneil Kovvali, a Harry A. Bigelow Teaching Fellow and Lecturer in Law at the University of Chicago Law School; and Oluwatomi O. Williams a corporate associate at Wachtell, Lipton, Rosen & Katz. The post is based on their recent article, “Lifting Labor’s Voice: A Principled Path Toward Greater Worker Voice and Power within American Corporate Governance,” available here.

February 25, 2021
What Do the Data Reveal About (the Absence of Black) Financial Regulators?
by Chris J. Brummer

As has been remarked many times, yet still never enough, Black history is America’s history – and if anything, financial regulation proves the point.   When calamity hits the stock market, Black people feel it too, if not always in terms of lost savings, then certainly in terms of lost jobs when firms resort to layoffs.  When charlatans peddle dangerous or risky financial products, whether stocks or mortgages, they tend to do so in our communities first. When rules are written concerning how and under what conditions individuals can access credit, or the obligations financial institutions have to their communities, we, like our fellow Americans, see the impact play out in the economic lives of our families, friends, and neighbors.   America’s lifelines are our lifelines.

And down through the decades, African Americans have profoundly shaped American financial regulation – through that alphabet soup of agencies from the Federal Reserve to the FDIC to the SEC and CFTC and beyond.  We walk in the steps of giants.  From Andrew Brimmer, the son of sharecroppers who earned a PhD at Harvard and a seat on the Federal Reserve Board, to Sharon Bowen, one of the first Black women to become a Wall Street partner and the first Black person ever to serve as a commissioner on the CFTC.  Their work, from Raphael Bostic’s historic presidency in Atlanta to a Head Start teacher from Watts now chairing the U.S. House Financial Services Committee, is the work of our ancestors.  Work to agitate.  To educate.  To protect.  To make our union more perfect, and the markets that drive it a little fairer.

And it is your work as well.  The work of so many Black history makers – American history makers – who may not be in the papers every day  but whose work often is.  Those of you watching who earn the satisfaction of knowing that you are part of something special and essential for our great American family.  And for the Black community.

Now I’ve said many times that financial regulators write the rules of capitalism.  Their decisions determine how capital and opportunity are allocated.  Who enjoys the protections of the government. The information about companies that is shared with very diverse stakeholders.  They also make decisions that directly impact assets, their prices and value, and the gains and losses of those who hold them.

Yet despite its importance, or perhaps because of it, Black Americans, for all of their great history, have been singularly excluded from fully participating in the regulatory process.

I highlighted the problems in my working paper, What do the Data Reveal about (the Absence of Black) Financial Regulators?  I intentionally kept the parentheses in the title, because the data tell us just as much about financial regulators generally, and the legitimacy of the system that empowers them, as it does Black regulators themselves.   But the working paper brought to light headline numbers that were stark:  As of July 4, 2020, of the 327 people who had been appointed to regulatory posts, only 10 had been Black.  A number that represents roughly 3 percent of 327 appointees, and a statistic that since then has actually gotten even worse.

Today, as we reflect on where we’ve been – and how much further we have to go – I’d like to share some of my new data:  information relating to not only leadership at the top of agencies, but also some historical data on how leadership within agencies has for generations been foreclosed to many of the best and brightest in the Black community.

As many of you may recall, the working paper highlights that there has never been a Black chairman of the SEC, CFTC, Federal Reserve, or FDIC.  It also highlighted that there has never been a Black comptroller of the currency or director of the CFPB.  It noted that indeed, there have only been two Black heads of financial regulatory agencies – Mel Watt, who served as the director of the FHFA, and Rodney Hood, who was until recently the head of the NCUA.

Context, though even here, is important.  We know that many of our agencies and mandates were born of the New Deal – a time period when Black Americans saw the best and worst of financial regulation.  A period in which great institutions like the Securities and Exchange Commission were created to protect investors, and a time where practices like redlining and segregated housing and lending discrimination became government policy and were financed by banks and U.S. capital markets.  So nuance is important.  There is always more to a story.

And so numbers are, I’ve found, quite helpful in putting into proper context just how severe the barriers have been for the Black community.   We all see lots of missing diversity in regulatory leadership, but how significant is it?  Well, we have new numbers to help provide some perspective.  According to our preliminary data compiled November 24, 2020, there had by that point been approximately 129 heads of the major regulatory agencies since the founding of the Federal Reserve in 1913.

Two have been black.

Table A.1

Black Leadership of Financial Regulatory Agencies


  Total Historical Number of Black Agency Leaders Total Historical Number of Agency Leaders Percent of Black Agency Leaders
CFPB 0 2 0.00%
CFTC 0 13 0.00%
FDIC 0 21 0.00%
FHFA 1 3 33.33%
Fed 0 16 0.00%
NCUA 1 11 9.09%
OCC 0 31 0.00%
SEC 0 32 0.00%
Total 2 129 1.55%

Statistically, this translates to 1.55 percent of all financial regulatory leaders.  Notably our data do not include heads of defunct agencies like the OTS, where none of its half dozen Directors (0 percent) were Black.  It also doesn’t reflect changes we have already seen since July.

Now, these numbers are sobering in and of themselves.  But the original Working Paper also highlighted how the inequality and absence of opportunity reflected in political appointments has replicated itself internally in our agencies—a point underscored in a near absence of Black people in the critical policy leadership roles and positions in Commissioner and Chairman offices.

We emphasized in our analysis at that point that our data only represented a snapshot of one moment in time, just one day.  And we did not have any information as to how representative that data were when compared to the historical norm.  But since releasing the paper, I decided to do a broader sweep of history to see how many divisional heads there have been at either the SEC or CFTC.  As you know, for all of the importance of chairmen and commissioners, it’s the division heads that are relied on to get things done.  They execute agendas.  Prepare documents and litigation for review and voting by commissioners.  They give speeches, prepare guidance, and provide moral and legal leadership for the team.

This, I figured, would be valuable information  and could demonstrate that perhaps we were unlucky in our original snapshot.

But the data remain unambiguous.

Table A.2

Black Divisional Directors at the SEC and CFTC


  Title Total Number of Black Directors of Division in History of Agency
SEC (1934-2020) Division, Corporation Finance 0
  Division, Economic and Risk Analysis 0
  Division, Enforcement 0
  Division, Investment Management 1 (1998-2005)
  Division, International Affairs 1 (2018-2020)
  Division, Trading and Markets 0
CFTC (1975-2020) Division, Clearing and Risk 0
  Division, Enforcement 0
  Division, Market Oversight 0
  Division, Market Participants 0
  Division, Data 0

The findings above add yet more evidence of, and context to, a multi-generational absence of Blacks from financial regulatory leadership posts.

Now, I am not presenting this data to discourage.  Now is not a time to quit. America is, as President Obama eloquently stated, a nation that is a constant work in progress.  “That’s why we are exceptional,” he said. “We don’t stop. There’s a gap – there always will be – between who we are and the ‘perfect union.’”  But what makes this country exceptional, what makes us Americans, is that we speak out against injustice – regardless of our race – for those who can’t or have no voice, and make the sacrifice necessary to shrink that gap, to make it smaller, over time.

It is work that the heroes of Black history – America’s history – know too well.  Not just the legends of our history books like Frederick Douglas and Dr. King, but also the countless Black, white, brown American heroes whose names may not have been recorded but even today march, as Obama recognized, to change this country for the better.

But I will be honest. The obstacles here, in our industry and field, are enormous.  The democratic deficit in regulatory policy is not a Black problem, it’s an American problem.  And it’s one we’ve seen before.  Fixing it will require the same singularity of attention and focus as was the case when breaking down barriers decades ago in country clubs, lunch counters, swimming pools, and water fountains.

That said, the politics facing what is essentially the integration of our regulatory leadership ranks are complex.  For all of our talk on the racial, wealth, and income gaps, the importance of regulators – which you know and understand – is only now beginning to be properly appreciated in the broader public. Obviously, the major catalyst has been the death of George Floyd and a growing awareness that social injustice is rooted in or amplified by economic injustice.  But any time new faces enter a conversation, they will face resistance from entrenched interests who are happy with the status quo and their own privilege – interests that span ideologies and parties.

I have observed far too many times how Black Americans face not only higher standards for leadership roles, but also double standards.  My data show that, as a group, Black political appointees to regulatory agencies have been better educated than their nonblack peers and frankly have had to be to even be considered.  And it’s my sense that not just the would-be politicians face elevated or unjust expectations:  Black civil servants have complained for years of the need to be twice as good for the same job as their white peers – from the early days of the CFPB to the great chambers of the Federal Reserve, where only two of 400 economists are Black.

Meanwhile, Black nominees or prospective nominees to regulatory agencies are almost uniformly attacked by critics for having corporate ties, or supporting corporate interests, whereas a blind eye is cast to white nominees who have made millions on Wall Street or Silicon Valley.  Meanwhile, critics fail to fully contemplate the disparate impact such logic holds for those Americans who often find themselves the first in their families to secure education and do not have the luxury of family inheritance or connections to build their financial lives.  And they ignore the serious ethical and moral questions that arise when agencies are dominated by former Senate staffers as patronage rewards in a system where few congressional aides are Black.

It’s for reasons like these I believe that the process by which leadership appointments are made to regulatory agencies requires dramatic reform.  The talent pool for our federal regulatory system is limitless.  There are thousands of heads of CDFIs and MDIs, law firm associates and partners, academics, financial services professionals, and state and local regulators – and federal civil servants – ready to serve and lead.  The pipeline myth of Black talent is as disingenuous as it is insidious.

Given the obstacles, policymakers need to go big on democratizing our financial agencies.  In the wake of a collapse in public trust in government, sprawling inequality, and persistent historical inequalities, diversity goals should be formulated not only in the context of hiring going forward, but also in light of the existing makeup of institutions.  There are virtually no appointed Black or Latino financial regulators, anywhere, in the U.S. government right now.  Wall Street is more diverse than the leadership of our regulatory agencies.  As we work to right-size decades of neglect – and structural racism – agencies should aspire to achieve workforce outcomes where institutions and their leadership reflects the great heterogeneity and diversity of the country. One or two appointments even at the highest levels of leadership won’t begin to change the overall level of representation.  We need a “democratic stimulus” in our agencies, from the top down.

The stakes couldn’t be greater.  Financial regulation has been critical to Black people in this country since the Panic of 1873, and the failure of the Freedman’s Bank which, due to risky investments in railroad companies and real estate, wiped out the first generation of wealth created by newly freed African Americans.  Since that failure, which underscored in part a failure of the all-white trustees of the bank to understand the nuances, vulnerability, and needs of the communities they served, Black people have sought to bend the arc of history and gain a footing into a system where they have long been ignored.

Over the years, the concerns of the community have percolated up from time to time, asking questions that may seem peripheral for some but in fact lay at the heart of our agencies’ regulatory mission.  Like who is a “reasonable” investor – and what is “significant” given the total mix of information?  What does disclosure mean in a world where transparency about corporate conduct concerning diversity, equity, and inclusion can have widely disparate economic repercussions for investors’ personal lives?  When Federal Reserve interventions prop up assets, what does this mean for the racial wealth gap?  Do Black farmers and Latino ranchers have needs for hedging and risk mitigation tools, or stronger protections, that may depart from multinational end users and large corporations?

I can’t imagine how to address these and countless other questions without everyone around the table, with experiences from all our communities taking part in our great American journey.

The promise of our institutions rests on the bravery, judgment, and thoughtfulness that so many of our regulators bring to the table.  Regulators of every background – Black, white, Latino, Asian – come to work to make a difference.  But it is time to ensure that in our mission to create ladders of opportunity we do not embed infrastructures of inequality.  Together, we can create a new chapter of Black history – and American history – that our posterity will be proud of.  It’s time to take those first steps.

These remarks were delivered on February 17, 2021, by Chris J. Brummer, the Agnes N. Williams Research Professor and director of the Institute of International Economic Law at Georgetown University Law Center and visiting senior fellow at Columbia Law School’s Millstein Center, as the keynote address at the SEC Black History Month Celebration.

February 25, 2021
2020: An Overview
by Josh Black, Insightia

At the peak of proxy season 2020, many activists halted or dialed back campaigns where they feared a sudden change of shareholder perspectives or of irrecoverable value destruction. That led to a sluggish year—a 10% decline in companies publicly subjected to activist demands, a median Total Follower Return of 2%, and about a 16% decline in board seats won worldwide thanks mainly to fewer settlements.

Since then, however, activists have acted ruthlessly to shake up both their own operations and the management of portfolio companies. If 2019 was the year that ended the secular expansion of activist investing, 2020 was a reminder to focus on first principles—subpar valuations due to fixable problems with a quick path to change. All would agree; leadership matters in a pandemic.

Hindsight 2020

Chiding activists for their lack of optimism is easy after the fact. Central bank support leading to a broad market recovery helped put a shine on activist portfolios. The market’s response to stocks in a process of transition has since become exuberant and funds that doubled down on their convictions were rewarded handsomely.

Also unexpected, control slate victories for Starboard Value and Bow Street Capital helped the number of board seats won at contested meetings in the U.S. to the highest level for at least six years. There were shareholder meetings in Europe and Japan that were so unexpectedly close that rematches against weakened incumbents are inevitable. By the fourth quarter, activists had started to think big about ways of demonstrating underperformance and about whole industries that need to adapt, including media, energy, and active fund management.


Impatience could set the stage for a busy proxy season. COVID-19 has created new laggards and left some CEOs that might have been the right choice a year ago ill-suited to their roles. Experienced activists have started to identify those discrepancies and, if they are not distracted by innovations such as special purpose acquisition companies (SPACs), their example will inspire others to join the fray. Opportunistic M&A could also heighten confidence in activist investing, by giving investors more ways to win.

Reasons to Be Cautious

Each year we ask whether activism will continue to make inroads into relatively new markets, most recently with a focus on Europe and Asia. Activity was down sharply in 2020, particularly in the U.K. But the relatively strong showing of France and Japan indicated that there is life in these markets yet. Even if persistent restrictions on travel hinder activism’s rebound outside of the U.S. in 2021, the long-term trend does not appear to have changed.

A bigger structural challenge is ESG. A wide swathe of activists has now demonstrated the ability to incorporate environmental and social issues into their campaigns. Fewer have scaled the practice into a working business model and Jeff Ubben’s Inclusive Capital Partners and Chris James’ Engine No. 1 will be scrutinized in 2021 on precisely this objective. Given the pace of change in the stewardship community, which not long ago lagged active managers but is now setting the agenda and priorities of public companies, activists will have to be smart not to look like relics.

Activists could choose to take their time exploring new markets and sectors before investing, in case the recovery starts to falter. Fundraising for single-purpose vehicles and time-consuming takeover attempts could limit the number of campaigns some funds can undertake.

More likely, companies themselves will warn their investors that the recovery is too fragile and the situation too grave, while playing hardball by keeping activists off ballots through invalidated nominations or more restrictive poison pills. Proxy season 2021 may be attritional, especially for newcomers or inexperienced activists. Choosing the right targets, advancing credible solutions, and displaying tactical nous will be more important than ever for dissidents.

February 25, 2021
Corporate Adolescence: Why Did ‘We’ not Work?
by Donald Langevoort, Hillary Sale

In academic and public commentary, entrepreneurial finance is usually portrayed as a quintessential American success story, an institutional structure whereby expert venture capitalists with strong reputational incentives channel much-needed equity to deserving entrepreneurs, then subject them to intense monitoring to assure they stay on the path to hoped-for success in the form of an initial public offering or public company acquisition. Yet, in recent years there have been gross embarrassments and allegations of outright criminality, at companies like Uber, Theranos, and the subject of our paper, WeWork. In short, we argue, fiduciary deficits and rent-seeking behaviors abound and the costs are borne not just by the venture capitalists or other investors.

Although we do not quarrel with the historical record of success, we are focused on the changes in the market for start-up capital that may well have contributed to the recent bouts of rent-seeking and extreme. Indeed, our title’s reference to corporate adolescence underscores the ever-lengthening period of time that high-tech start-up companies have before undergoing the so-called rites of passage to public adulthood. We argue that the private privileges allow for a build-up of bad choices and testy behaviors commonly observed in human adolescents, e.g., risk-taking and rule-breaking, thereby embedding in the firm’s habits and culture problems that may later be hard to fix.


We deploy a business-school like case study drawn from the extensive reporting on the WeWork story and its eight rounds of private financing before a failed IPO. It starkly poses a question that many—investors, board members, lawyers, and regulators, among others—will find difficult to answer. How could this happen as against all the high-powered incentives and smart-money discipline that supposedly exists in venture finance? And what if anything could or should have been done differently to overcome the pitfalls of start-up adolescence?

We examine the array of conflicts at WeWork and in start-up financing more generally that reveal not only that the situation is a risky one, but also that it is one where the risks and costs fall on less sophisticated investors, retail and institutional, and with unfortunate spillovers to the capital markets generally. The WeWork board, like many others, exhibited multiple fiduciary deficits resulting in what is a cautionary story about private governance failures. Our frustration extends to the recent pushes by Congress and the SEC to increase the number of retail investors eligible to invest in this space, in the name of “opportunity” that is more likely to turn into opportunism.

We conclude by arguing that current funding and governance systems are not designed for long-term “startup” governance, and WeWork reveals the systemic slack and flaws. Our exploration of the motivations, incentives and opportunities in start-up financing reveals an accumulating set of deficits that makes the current state of affairs more problematic than the conventional account would suggest. From founder control enabling self-centered, biased and risky behaviors, to funders with diverse incentives and capital sources, to start-up market “valuations” issues, the result is failed information-forcing systems and governance safeguards and directors who focus on constituent protections and not on their fiduciary duties. Truly sophisticated upstream investors may be savvy enough to negotiate this thicket; those less sophisticated who are increasingly being invited to take part will face more opportunism than opportunity.

The complete paper is available for download here.

February 25, 2021
QualityScore: Methodology Guide
by Sam Osea, Sean McPhillips, Institutional Shareholder Services Inc.


ISS ESG Governance QualityScore (GQS) is a data-driven scoring and screening solution designed to help institutional investors monitor portfolio company governance. At both an overall company level and along topical classifications covering Board Structure, Compensation, Shareholder Rights, and Audit & Risk Oversight, scores indicate relative governance quality supported by factor-level data. That data, in turn, is critical to the scoring assessment, while historical scores and underlying reasons prompting scoring changes provide greater context and trending analysis to understand a company’s approach to governance over time.

With the continued and growing focus on investor stewardship and engagement, alongside the global convergence of standards and best practices, governance plays an increasingly prominent role in investment decisions. As an extra-financial data screening solution, the Governance QualityScore methodology delivers several key benefits.

Employs robust governance data and attributes. Governance attributes are categorized under four topical categories: Board Structure, Shareholder Rights & Takeover Defenses, Compensation/Remuneration, and Audit & Risk Oversight. Governance QualityScore calls upon a library of more than 230 governance factors across the coverage universe, of which up to 127 are used for any one company (defined by region). Governance QualityScore highlights both potentially shareholder-adverse practices at a company, as well as mitigating factors that help tell a more complete story. The underlying dataset is updated on an ongoing basis as company disclosures are filed, providing the most-timely data available in the marketplace.


Incorporates Company Disclosures. Information included in Governance QualityScore includes that drawn from the annual filing of companies’ proxies, annual reports, 10-Ks, circulars, meeting notices, and other publicly disclosed materials related to a company’s annual general meeting (AGM). Those data are augmented by proprietary analytics and information stemming from ISS analyses, interpretations, and proxy voting policies and subsequent recommendations to our clients for these shareholder meetings. While companies have the ability most of the year to submit changes to Governance QualityScore answers, this ability is restricted between the dates when the company files its proxy or meeting materials and the publication of ISS’ proxy analysis for the company’s annual meeting. During the blackout period, the company’s online Governance QualityScore profile and data is frozen and does not reflect the latest information being gathered for the proxy analysis. Once the proxy research report is published and released to ISS’ clients, companies are once again able to review their Governance QualityScore data profiles and provide updates through the Data Verification tool.

The Governance QualityScore profiles available online are updated once daily, at approximately 5am ET (10 AM UTC). Therefore, when the ISS proxy analysis is released containing the updated Governance QualityScore scores after the daily update, the online website will not yet reflect these updated scores and information. The updated online score and profile will be viewable the following day after the next daily update.

Leverages ISS’ global footprint and industry leadership. Governance QualityScore leverages ISS’ industry leading global footprint, which includes deep legal and language expertise across key global capital markets, including many of those within the coverage universe. Factors used to assess risk-related concerns for a given company in each market are based on the same principles that form the foundation of ISS’ global benchmark voting policy. Developed through an extensive, transparent, and inclusive process, these policies reflect best practices across jurisdictions, as well as the views of institutional investors, issuers, and governance practitioners worldwide. The Governance QualityScore factor methodology is aligned with ISS’ benchmark proxy voting policy to ensure it is up-to-date and tailored to address appropriate variations in governance practices across global capital markets. (For more on ISS benchmark policies and their formulation, visit

Presents at-a-glance governance rankings relative to index and region. Governance QualityScore features company-level decile scores, presented as integers from 1 through 10, plus underlying category scores using the same scale that together provide a clear understanding of the drivers of a company’s governance risk. A score in the 1st decile indicates higher quality and relatively lower governance risk, and, conversely, a score in the 10th decile indicates relatively lower quality and higher governance risk. These scores provide an at-a-glance view of each company’s governance risk relative to their index and region. The individual factor breakdown takes a regional approach in evaluating and scoring companies, to allow for company-level comparisons within markets where corporate governance practices are similar.

Provides global governance factor comparability. In 2017, Governance QualityScore refined its in-depth regional focus to include more factors that are applicable across all markets. The number of global core factors currently stand at over 30 overall, applicable to at least 29 countries. The global core factors provide more data to assess and benchmark governance risk, allow for an increased gradation in scoring, and results in more comprehensive governance profiles. The methodology ensures that companies within a given region/country have a core base of factors that are comparable to other companies globally, to provide greater benchmarking capabilities.

Summary of Updates

The Governance QualityScore annual methodology review ensures the approach remains closely aligned with the ISS’ benchmark voting policies and reflect developments in regulatory and market practices.

January 2021 Methodology Updates

Governance QualityScore methodology will be enhanced to provide users with deep insights into the governance of information security risk through the introduction of eleven new factors across two new subcategories, Information Security Risk Management and Information Security Risk Oversight, within the Audit category. Additionally, ISS ESG is enhancing the Diversity and Inclusion subcategory with a factor that examines ethnic and racial diversity on the board. The Compensation category will include a new factor that evaluates the level of disclosure of diversity and inclusion performance metrics and two new factors that will assess the presence and proportion of special grants awarded to executives. Within the Board category, a new factor will evaluate the independence of the sustainability committee as more companies begin to delineate responsibilities for environmental and social oversight within the board. Moreover, another factor will evaluate the presence of familial relationships between directors. In total, seventeen new factors will be added, making this the largest Governance QualityScore methodology release in recent years.

Governance QualityScore has also rebalanced certain existing factors into the new Board Commitments subcategory, largely themed around director overboarding and attendance issues, and into the new Litigation Rights subcategory.

New Factors as of January 29, 2021:

Audit (Information Security Risk Oversight)

  • What percentage of the committee responsible for information security risk is independent? (Q403)
    • Market Applicability: All regions excluding Japan and South Korea
  • How often does senior leadership brief the board on information security matters? (Q404)
    • Market Applicability: All regions excluding Japan and South Korea
  • How many directors with information security experience are on the board? (Q405)
    • Market Applicability: All regions excluding Japan and South Korea

Audit (Information Security Risk Management)

  • Does the company disclose an approach on identifying and mitigating information security risks? (Q402)
    • Market Applicability: All regions excluding Japan and South Korea
  • What are the net expenses incurred from information security breaches over the last three years relative to total revenue? (Q406)
    • Market Applicability: U.S.
  • Has the company experienced an information security breach in the last three years? (Q407)
    • Market Applicability: All regions excluding Japan and South Korea
  • What are the net expenses incurred from information security breach penalties and settlements over the last three years relative to total revenue? (Q408)
    • Market Applicability: U.S.
  • Has the company entered into an information security risk insurance policy? (Q409)
    • Market Applicability: All regions excluding Japan and South Korea
  • Is the company externally audited or certified by top information security standards? (Q410)
    • Market Applicability: All regions excluding Japan and South Korea
  • Does the company have an information security training program? (Q411)
    • Market Applicability: All regions excluding Japan and South Korea
  • How long ago did the most recent information security breach occur (in months)? (Q412)
    • Market Applicability: All regions excluding Japan and South Korea

Board Structure (Diversity and Inclusion)

  • Does the board exhibit ethnic or racial diversity? (Q390)
    • Market Applicability: U.S.

Board Structure (Board Practices)

  • What percentage of the sustainability committee is independent? (Q396)
    • Market Applicability: All Regions except Japan and South Korea

Board Structure (Board Composition)

  • What percentage of the board has familial relationships with other directors? (Q401)
    • Market Applicability: All regions* except Japan, AsiaPac, India, and Latin America

Compensation (Communications and Disclosure)

  • What is the level of disclosure on diversity and inclusion performance measures for the short-term or any long-term incentive plan for executives? (Q398)
    • Market Applicability: All Regions except Japan and South Korea. Unscored in India.

Compensation (Compensation Controversies)

  • Has the company made special grants to executives excluding the CEO in the most recent fiscal year? (Q399)
    • Market Applicability: U.S.
  • What percentage of the CEO’s total compensation was due to special grants in the most recent fiscal year? (Q400)
    • Market Applicability: U.S.

Application of Existing Factors to New Markets:

Board Structure

  • How many executive directors serve on an excessive number of outside boards? (Q36)
    • Add: U.S., Canada
  • Does the Board Chair serve on a significant number of outside boards? (Q39)
    • Add: U.S., Canada

Shareholder Rights

  • What is the percentage of multiple voting rights or voting certificates relative to total voting rights? (Q57)
    • Add: Australasia*, AsiaPac*, India*, Latin America*, Russia*, S. Europe, U.S., Canada
  • What is the free float percentage of multiple voting rights or voting certificates? (Q58)
    • Add: Russia*, S. Europe
  • What percentage of issued share capital is composed of non-voting shares? (Q63)
    • Add: Australasia*, AsiaPac*, India*, Latin America*, U.S., Canada
  • Does the company have a controlling shareholder? (Q290)
    • Add: Anglo*, Canada*, Germanic*, Nordic*, W. Europe* (Now global)

*Indicates this factor is not scored for the respective region

The complete publication, including footnotes and appendix, is available here.

February 25, 2021
Nasdaq Rebuked by GOP Senators for Board Diversity Requirements
by Tom Gorman

Nasdaq filed a proposal with the Securities and Exchange Commission on December 1, 2020 to modify its listing standards to embrace diversity (here). Specifically, the exchange proposed to require companies listed on Nasdaq Global Select Market and Nasdaq Global Market to have two diverse directors within four years of the time the Commission approves the proposed rule. Firms listed on Nasdaq Capital Market would be expected to have two diverse directors within five years of the approval by the agency.

The purpose of the proposed rule is to “champion inclusive growth and prosperity to power stronger economies,” according to Nasdaq CEO Adena Friedman. To facilitate the goals of the proposal Nasdaq has entered into a partnership with Equilar, a leading provider of corporate leadership; data solutions. The platform afforded by Equilar will “enable Nasdaq-listed companies that have not yet met the proposed diversity objectives to access a larger community of highly-qualified, diverse board-ready candidates to amplify director search efforts,” according to a release by the exchange.

With this proposal and others, Nasdaq is attempting to strengthen corporate governance. There are numerous studies demonstrating that greater diversity improves decision making and governance. As Nasdaq President Nelson Griggs stated “Corporate diversity, at all levels, opens up a clear path to innovation and growth. We are inspired by the support from our issuers and the financial community . . .”

Not everyone is pleased with the proposal by the exchange. The Republican members of the Senate Banking Committee urged the SEC in a February 12, 2021 letter to reject the “proposed rule from Nasdaq that requires publicly traded corporations adopt new racial and gender diversity standards for boards of directors,” according to a press release posted on the Committee website (here). In a letter directed to SEC Acting Chair Allison Herren Lee, the Senators detailed multiple concerns about the proposal, noting that it “interferes with a board’s duty to follow its legal obligations to govern in the best interest of the corporation and its shareholders.”


The proposal of Nasdaq is not only consistent with the current initiatives of many companies, but is also supported by recent studies demonstrating that diversity improves decision making. The Senators’ claim that mandating diversity interferes with the duty of the board while seemingly consistent with the idea that the board must act in the best interest of the enterprise is actually an out of step bromide that ignores current best practices in governance.

February 25, 2021
ESG: Corp Fin to Scrutinize Climate Change Disclosures
by John Jenkins

In news that may throw an 11th hour monkey wrench into the finalization of a number of 10-K filings, Acting SEC Chair Allison Herren Lee issued a statement yesterday in which she directed Corp Fin to take a hard look at companies’ climate change disclosures.  Here’s an excerpt:

Today, I am directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. The Commission in 2010 provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters.

As part of its enhanced focus in this area, the staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks. The staff will use insights from this work to begin updating the 2010 guidance to take into account developments in the last decade.

You may recall that a few years ago, the GAO took a look at the SEC’s actions since it issued climate change disclosure guidance. The GAO report expressed some concern with the Staff’s level of training on climate related disclosures, so that may present some challenges for everyone involved in the review process. Those training shortcomings may well have been addressed in the years following the GAO report, but there’s still the matter of the lack of uniformity in climate change disclosures that the GAO report also noted.

Finally, the SEC hasn’t exactly been cracking the disclosure whip on climate change in recent years, so the Staff’s likely to find a fairly target rich environment when it reviews existing climate disclosures.  Add all of that up, and, well, in the words of Bette Davis, “fasten your seat belts, it’s going to be a bumpy night.”

Now is probably a good time to refresh yourself on the SEC’s 2010 guidance, and to review the other resources in our “Climate Change” Practice Area.  If you want to get a sense for where the SEC may be heading in this area and the broader ESG disclosure category, check out this blog from Cooley’s Cydney Posner.

Disclosure: ESG Top Priority for Corp Fin’s Acting Director

Acting Chair Lee & Corp Fin’s Acting Director John Coates are clearly “singing from the same hymnal” when it comes to increasing the agency’s emphasis on climate change and other ESG disclosures. In fact, according to this Bloomberg Law article, ESG is Coates’ top disclosure priority. Here’s an excerpt:

A Harvard Law School professor who has pushed the SEC to update its corporate disclosure requirements on climate change and other ESG issues is now planning to turn his words into action as an agency insider. John Coates, who joined the Securities and Exchange Commission on Feb. 1 as acting director of its Division of Corporation Finance, is poised to play a leading role in any agency action to boost companies’ environmental, social, and governance disclosures, following his work on the issues at Harvard and on an SEC advisory panel.

Under his guidance, the SEC’s Division of Corporation Finance could enhance its focus on climate disclosures when it reviews companies’ filings. It also could start working on rules to mandate more corporate reporting on climate change and other ESG matters. He may even play a role in requiring disclosures on companies’ political spending, if Congress allows the SEC to act.

“If I were to pick a single new thing that I’m hoping the SEC can help on, it would be this area,” Coates said about ESG in an interview with Bloomberg Law.

A recent Reuters article also quotes Coates as saying that the SEC “agency ‘should help lead’ the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations.”

Zoom Etiquette: No Jammies in Chancery Court!

It turns out that “Cat Lawyer” wasn’t the only member of the bar who fumbled a Zoom hearing in recent months.  Francis Pileggi recently provided some guidance on his blog about “protocols & professionalism” for remote hearings. He included a number of helpful links to information from the Delaware courts, but it was a link to a recent letter from Vice Chancellor Slights that caught my eye.  This excerpt from that letter suggests that one lawyer involved in a hearing would have been better off using a cat filter instead of taking a “come as you are” approach:

Mr. Weisbrot’s email states that I would not consider an application from him because he was “not wearing a tie.” That is true, as the record reflects.  What the record also reflects is that Mr. Weisbrot appeared in court for trial (via Zoom) on Tuesday in either a printed tee-shirt or pajamas (it was difficult to discern).

Egads! Look, we long ago established that I don’t know much about fashion, but even I would think twice about showing up for a Chancery Court hearing in my “Dragnet” tee-shirt.

John Jenkins

February 25, 2021
Resistance to Corporate Diversity Initiatives is Likely Futile
by Miriam Robin

After two decades, you could make a strong case that the dominant story in corporate America of the 21st century has been the growing influence of environmental, social and governance issues. Recent pushback against corporate diversity and inclusion proposals show that the change has not come without its discontents.

Take the efforts by Nasdaq Inc. to promote board diversity, for instance. In December, the stock exchange issued an ultimatum to companies, threatening them with delisting if they fail to meet certain thresholds regarding the makeup of their boards of directors.

Republicans on the Senate Banking Committee wrote to the Securities and Exchange Commission this month calling on the agency to shoot down Nasdaq’s plan. The senators ran though some familiar objections to the proposed rule: it’s inconsistent with companies’ obligations to shareholders; it doesn’t provide material information to investors; it would hurt economic growth. “We commend individual firms for the proactive efforts they have already made in recruiting, promoting, and maintaining diverse talent,” the GOP politicians wrote. “However, it is not the role of NASDAQ, as a self-regulatory organization, to act as an arbitrator of social policy or force a prescriptive one-size-fits-all solution upon markets and investors.”

In other cases, companies are taking exception to outside attempts to dictate practices for promoting diversity and inclusion. For example, the AFL-CIO recently submitted a shareholder proposal for new hiring policies to companies in which the labor union owns shares. A handful of the companies involved, including Amazon and the video game maker Activision Blizzard, have petitioned the SEC to nix the proposal from their proxy statements. Notably, Activision and Amazon said they support the AFL-CIO’s goal, but indicated they feel their current practices are adequate.

The objections to the AFL-CIO proposal accept the premise that racial and gender diversity is a positive for employers, and instead debate how companies should go about promoting diversity within their ranks. The Republican senators’ complaints regarding the Nasdaq’s proposal, meanwhile, feel like a repudiation of the project altogether. While their letter takes care to say that “corporations benefit from boards that avoid groupthink and offer a diversity of perspectives,” the wording deftly skirts explicit mention of racial and gender diversity.

If the senators are questioning the value of diversity, they won’t find many willing to join them. For starters, advocates of diversity mandates can point to a growing body of research that gives credence to the argument that diversity boosts performance. As we said in our Proxy Season Playbook, citing that evidence: “It is no longer a valid position—if it ever was—to dispute the benefits of board and workforce diversity.”

Meanwhile, corporate disclosures culled from the Intelligize database demonstrate the degree to which high-profile brand names have embraced increasing diversity as a worthwhile objective. Fast food giant McDonald’s Corp. has made “improving diversity representation for women and underrepresented groups and creating a strong culture of inclusion among employees” part of its executive compensation metrics. (Even as it faces discrimination lawsuits from Black franchisees.) The same goes for Starbucks Corp., which has set targets to bring about “improvement in Black, Indigenous and LatinX representation at the manager level and above.” Qualcomm Inc. also includes considerations for diversity and inclusion initiatives as part of its incentive packages. The Walt Disney Co. is giving diversity and inclusion objectives some of the heaviest weighting among the factors tied to executive compensation at the entertainment company.

In the context of such corporate policies, arguments against diversity proposals feel increasingly out of step with the direction of the country, and its public companies, in the 21st Century.

February 25, 2021
Atomic Trading
by Hester Peirce, U.S. Securities and Exchange Commission

Thank you, Reni [Saula] for that introduction. It is a pleasure to be with all of you today. I will start with the usual disclaimer that my views are my own and not necessarily those of the Securities and Exchange Commission or my fellow Commissioners. The momentous market events of several weeks ago are relevant to the theme of this year’s conference—regulating the digital economy—and thus motivate my remarks.

The market events to which I am referring are, of course, the Reddit-threaded run-up in the prices of a number of meme stocks, the subsequent run-down in prices, and the many attendant colorful stories. At the top of the non-financial news feed were the market volatility, trading volumes, regular Joe-to-riches stories, hedge fund losses, short squeezes, gamma squeezes, glee at sticking it to the “suits,” anger at trading limitations, a jumble of emotions as stock prices fell from their highs, and debates about the intricacies of market structure. Movies to elucidate these events are on their way. [1]

The Securities and Exchange Commission, along with other regulators and market watchers, is still sorting through the many layers of those events, so I cannot give you a definitive assessment of what took place, let alone whether any significant regulatory changes or enforcement actions will result. Instead, I will offer some musings on the challenges that lie before the Commission as we decide whether and how to react to these events with new or modified regulations and, more generally, as we think about stepping up our game as a regulator of the digital economy.


The digital economy enabled the past month’s remarkable market events—trading strategies crowdsourced in real time on widely available social media platforms, instant retail access to the capital markets through handy mobile trading apps, institutional high frequency trading enabled by powerful computing and communications technology responding to and interacting with the retail flows, and sophisticated technology at trading venues and clearinghouses capable of handling record trading volumes. Add some primal emotions into the mix, and the regulator’s job in the digital economy can be a difficult one.

Before turning to the challenges of regulating the digital economy, though, I think it is helpful to recognize that, even as our markets undergo technological transformation, our jobs in many ways will remain much as they always have been. After all, the economy, whether analog or digital, is driven by people; even regulators, at least until the robots replace us, are people. People, with their swirling mix of rationality and emotions are unique, interesting, and complicated. People are also fallible, frail, and often tempted to abuse power. People respond to incentives. Any effective and fair regulatory framework has to start with a recognition and understanding of people.

A book I read recently about a very different set of market events in a very different time brought the constancy of people’s peopleness home to me. [2] These events, like the ones of last month, featured a colorful cast of characters whose fortunes rose and fell and who made their way onto the big screen. The book tells the story of the uranium markets in the mid-twentieth century, the flames of which were stoked, choked, and revived by the changing policy of the U.S. government’s Atomic Energy Commission. The book’s principal author had a bad case of uranium fever, which led him to engage in all sorts of daring adventures to stake uranium claims in the western desert and to raise money to finance them. He describes to his wife, as she lies in the hospital recovering from an operation, his plan to sell claims to the public in what he explains might be “a real estate deal, a security deal, something similar to an oil lease,” or something else. [3] His wife raises the possibility of jail time, which the author takes as evidence that he “should have known better than to talk business with my wife; she never has the positive-thinking attitude.” [4] His other family members, however, were more positive-thinking; one brother explained:

I’ve already got blue-chip stock. I’ve got gilt-edge bonds. I’ve got my house and car paid for. I’ve got insurance. If I’d wanted to invest, I know where I could have put my dough. But this was a gamble! I don’t want another sure thing. I want to go for the big bundle! [5]

That, the author explained, showed that his family “had the fever. Make it or lose it, but nothing safe, sound, and secure.” [6] You may find this hard to believe, but I promise you, I did not pull these lines off Reddit.

A lot of other people had the fever too. The author found them and, through a mailing campaign, got them to send him money:

In mailing, I’d aimed at ordinary Joes, not the professional class, not the ones who were constantly being approached with the deals. I wanted the little people who might never again in their lives have a chance to go for the big bundle for ten dollars down. And the little people liked my deal. [7]

The author reminisces about “the big boom in penny uranium stocks,” [8] during which “everyone in the frantic game of trading penny stocks knew that most of them were wallpaper, but that one of them—which one, he didn’t know—would be struck by lightning. So buy, buy, buy, and wait for the thunderbolt from the blue.” [9] He further observed that “[w]hen a company admitted that it didn’t own its claims and there was absolutely no evidence of uranium, the public rushed to buy stock from such honest people.” [10] The boom went bust when the Atomic Energy Commission pulled its support for further uranium production, [11] which did not trouble the author too much: “There’d be another deal. . . Except for the stockholders. I’d used other people’s money.” [12]

The book, despite a labyrinth of detours into wholly unrelated topics, contains many other insights into investor psychology, but I think you get the point. People love participating in hot markets, often do so with eyes wide open to the potential for losses and fingers crossed for big gains, and frequently lose real money in the process, and not always money they can afford to lose.

Because the human participants in the digital economy are people, some aspects of regulating the digital economy look a lot like regulating any other kind of economy. One of our regulatory obligations that does not change much with the times, for example, is—while respecting people’s right and capacity to make their own decisions—to remind people of some basic truths about participating in the markets. The medium may change, but the message is the same. The Commission’s Office of Investor Education and Advocacy, for example, issued an investor alert at the end of January to help investors “understand the significant risks of short-term trading based on social media.” [13] The alert contained tips that also would have been helpful for the uranium investors of last century, including a warning about “the rapid rise in the price of an investment, reflecting a high degree of collective enthusiasm or exuberance regarding the investment’s prospects [that] is usually followed by a wide-scale selling of the investment that causes a sharp decline in the investment’s price” and reminders that you should “[n]ever feel pressured to invest right away” and that you should “not let short-term emotions about investments disrupt your long-term financial objectives.” [14] Although the Commission’s delivery method has changed with the times, [15] our investor empowerment message is pretty much the same in the digital world as it was before the digital era. Mr. Taylor’s uranium investors would have benefited from such a message as much as today’s investors.

So too, our role in policing the markets for fraud has not changed much. As in the past, people often use lies to induce buys, and we bring a lot of enforcement actions to pursue these fraudsters. Although the means of disseminating the lies are digital, the nature of the conduct is not new. The projects for which funds are being raised may be crypto mining rather than uranium mining, but the fraudsters’ plans for the funds raised are generally the same as always—a nice house, fine dining, private school tuition, and maybe some plastic surgery just in case there is a parallel criminal action and a mug shot.

Digital economy regulators are also susceptible to the same incentives and temptations regulators always have faced. Unchanged in the digital world is our obligation to balance our enforcement mission with the need to respect Americans’ civil liberties. We may have new digital tools that make it easier than ever to find bad actors, but they also make it easier to trample over individual rights while doing so. As we put these tools to work for us, we need to bear in mind that when the government watches too much of what a free people do, those people are no longer free. We have greater and faster insight into trading activity. We can store massive amounts of data. We have computing power and sophisticated software to analyze and work with the data we collect. [16] Technology enables us to examine individual registered entities remotely, rather than through in-person visits. Structured data allows us to analyze particular registrants or look for trends or patterns across many registrants with the click of a button. [17] We have access to effective blockchain analytics. And, we have people expert in the use of these tools and the data they generate. One day we may even have easily machine-readable rulebooks, which will foster compliance by regulated entities.

Our regulatory mission will remain the same even as technological developments bring new ways for the capital markets to achieve their core objectives: capital formation and investor enrichment. To translate that into something more tangible, the goal of our markets is facilitating the flow of investors’ money to real companies so they can serve other people’s needs and then return money to investors so they can build wealth for themselves and their families. Technology has the potential to turbocharge the capital markets’ ability to achieve this objective. Technological turbocharging is not about speeding up this virtuous cycle. Technology that facilitates unpredictable volatility can undermine the markets’ ability to serve investors and companies. After all, building companies into societally beneficial ventures and building investment nest eggs are slow processes that demand patience, deliberation, and self-discipline. Rather, technology can help markets to deploy capital well, in part by encouraging more of the population to benefit both from contributing capital and using capital to build companies. But technology does not change our regulatory objectives of protecting investors, facilitating capital formation, and fostering market integrity.

For technology to have its maximum benefit, we will need to change our attitude. Specifically, we tend to look at technological innovation in the markets with deep suspicion, and that mindset has to change. Attempts to create a good experience using an attractive, easy-to-navigate interface run headlong into a dusty set of regulations written with paper, snail mail, and precise legalese in mind. We have designed these rules to provide us with static records that are easy to examine rather than to provide actual investors with information in a format they can digest. Investors, conditioned by their experiences with companies in all other sectors, expect more, and our rules should not prevent financial institutions from meeting these expectations. As one commentator explained, regulators ought not to complain when “online broker-dealers provide an attractive user experience” just as other tech firms do. [18] Embracing, rather than frowning upon, technology is the only way to achieve our objective of ensuring that investors receive, absorb, and take into account the information they need to make wise investment decisions.

Another part of ensuring that we are not hamstringing the ability of technology to make markets work better for more people is remembering that our role is to protect investors and markets, not incumbents. Incumbents by definition have adapted themselves well to the existing regulatory framework, market infrastructure, and established technological tools. They may be slower to adopt new technology; indeed, it may not be in their interest to do so. Resisting regulatory changes that would permit new ways of doing business (or insisting on regulatory changes to forestall technological innovation) may be a matter of life or death for some of these legacy firms. We regulators should refuse to allow ourselves to be used to block new firms from coming into the industry with fresh, new ways of doing things. We must do what is best for investors and markets.

Decentralized finance will provide a very good test for our ability to regulate with an eye toward protecting the interests of investors and markets, not incumbents. The anti-Wall Street sentiments coursing through the market events of recent weeks and the growing realization of the power that private and public centralized entities wield in our lives have inspired some to call for throwing the legacy financial system out entirely. In its place, they would put decentralized finance (“DeFi”). The nascent DeFi industry—a rapidly growing corner of the crypto world with significant money involved—is working on building an alternative to the legacy centralized financial system (“CeFi”) run through smart contracts rather than financial intermediaries. DeFi facilitates lending, trading, and investing in crypto-assets. DeFi users trust in smart contracts rather than counterparties. Although a work in progress with all the growing pains and rough edges that implies, DeFi’s promises of democratization, open access, transparency, predictability, and systemic resilience are alluring. The Federal Reserve Bank of St. Louis recently published a primer on the complicated, multi-layered, fascinating DeFi landscape, which warns of risks including security vulnerabilities, scaling problems, and faux decentralization, but concludes that there is promise in the innovation happening in DeFi. [19] We regulators, mindful of the potential upsides and downsides, need to provide both legal clarity and the freedom to experiment so that DeFi can compete with CeFi to offer investors financial services.

So what do all of these principles for regulators in the digital era mean for how we will respond to the events of the last several weeks? Some of the sentiment driving the meme stock events seemed to have been rooted in a suspicion that the markets are not for everyone, but that their purpose is to serve only wealthy individuals and institutions. Some participants seem to have viewed these price rallies and attendant short and gamma squeezes as a way to serve Wall Street a poisonous meal of its own making. Popular antipathy toward Wall Street fueled by bailouts in the financial crisis of 2007-2009 is still raw, aggravated by ongoing government policies that are viewed as disproportionately benefiting large asset holders now in exchange for an inflationary tab in the future that will hit working Americans hardest.

As securities regulators, we cannot address those concerns directly, but we do need to look for ways to ensure that the markets are working for everyone. Technology is already being used to draw new investors into the markets and to bring capital to companies and entrepreneurs for whom capital raising has until now been difficult. Increased participation in our markets is beneficial for the markets themselves because, as one commentator explained, “[i]t creates a number of atomized agents providing hopefully unique stimuli and insights to create a more effective and efficient market.” [20] We need to be open to technological improvements that make the markets work better and encourage and equip more people to participate in them. Some commentators have criticized broker-dealers for making investing too easy, or even worse, too much fun, [21] and fun does not necessarily sit well with securities regulators either. [22] Of course, an appealing user interface is no substitute for ensuring that investors have access to the information that they need to invest wisely in light of their objectives and circumstances, but the same technology that makes investing fun can be used to educate and inform. Indeed, as one commentary on the GameStop events suggested, regulators should be using these same technologies to reach and teach retail investors. [23]

We also could be more proactive in embracing technology to address some of the other concerns that the events of the past month brought to light. While the market machinery worked extremely well under the weight of record trading and high volatility even in the work-from-home COVID world, additional integration of technology into all aspects of the post-trade process might make the system work even better.

Although trading in the digital economy is fast, the process for settling trades is not. Indeed, until 2017, settlement did not occur until three days after the trade date, known as T 3. A regulatory change brought the settlement cycle down to T 2. [24] As many have been discussing in recent days, further shortening the cycle to T 1 or T 0 could yield additional benefits, including lower risk associated with open positions and reduced collateral demands. [25] In last week’s Congressional hearing, the CEO of Robinhood went even further and called for real-time settlement. [26] After all, crypto transactions settle quickly and effectively without a central counterparty. [27] Smart contracts and distributed ledger technology could make the entire clearing and settlement process in the equity markets faster and more efficient. [28]

While new technology may make real-time settlement possible, before deciding whether it is the right solution, we should fully analyze the costs and benefits. Real-time settlement would address many of the concerns around central clearing and margin calls that we saw late last month. Widespread adoption of real-time, or at least near real-time, settlement of transactions in equity securities, however, would require a major overhaul in the way equity markets work and could harm liquidity by raising the cost of making markets. Certain elements of our financial system as it is currently structured work precisely because of the delay between execution and settlement. [29] An expected drop in margin requirements might not make up for the inability to net transactions, much less the operational risks—and ensuing costs—of settling transactions on a gross basis and transferring large amounts of cash and securities throughout the day. [30] In addition, the time built into the settlement cycle now makes error correction easier and allows for human intervention, a feature that a smart contract is designed to eliminate. [31] These uncertainties suggest that a less ambitious approach, focusing on less immediately exciting technological improvements—such as modernizing the post-trade settlement process, which is still excessively dependent on manual intervention and non-standard practices [32]—may allow us to reduce settlement times and clearing costs in a more incremental, yet still significant, way.

Another use for technology is in improving transparency. Many retail investors avail themselves of commission-free trading. Most broker-dealers that offer this benefit to customers offset it with payments from market makers in exchange for the opportunity to interact with retail order flow. On balance, this practice likely has benefited retail investors, as it has reduced the cost of making a trade and often results in a small improvement of their execution price over the official national best bid or offer. At the same time, critics are correct when they point out the potential for conflicts of interest on the part of the broker, who may be tempted to send trades to a market-maker who offers worse execution pricing (which hurts the investor) but better payment for order flow (which benefits the broker). The way to address this potential conflict, though, is not to ban the practice—which would eliminate a potential conflict at the cost of a likely increase in costs to the investor—but to require better disclosure. [33] As the cost of data processing, presentation, and delivery continues to plummet, our priority should be to leverage technology to ensure that investors receive accurate disclosures about these practices and their effect on execution quality.

Whether we are talking about trading uranium claims for the atomic energy of the past, building communities of atomized retail investors on social media today, or enabling atomic swaps in the DeFi of the future, people’s ingenuity and enthusiasm keep us regulators on our toes. In many ways, the regulator’s job is unchanged even though the stage is set with more modern scenery. The digital economy does pose some new regulatory challenges, but it also gives us new tools to meet those challenges. We should use those tools with genuine care for the freedom of the people we regulate. We should welcome the new technology’s potential to improve the way markets work and to make them work for more people. The payoff is high: a successful regulatory framework for the digital economy will unleash its ability to empower individuals to build better futures for themselves, their families, and their communities.



See, e.g., Erich Schwartzel and Akane Otani, Reddit’s WallStreetBets Founder Sells Life Story to Movie Producer RatPac Entertainment, Wall St. J. (Feb. 4, 2021, 7:00 AM),; see also Chris Lee, Inside Hollywood’s Rush to Make the First GameStop Movie, Vulture (Feb. 17, 2021), back)


Raymond W. Taylor & Samuel W. Taylor, Uranium Fever; or, No talk under $1 million (Macmillan 1950).(go back)


Id. at 226.(go back)


Id.(go back)


Id. at 236.(go back)


Id.(go back)


Id. at 238.(go back)


Id. at 240.(go back)


Id. at 241.(go back)


Id.(go back)


Id. at 252.(go back)


Id. at 254 (ellipsis in the original).(go back)


Investor Alerts and Bulletins: Thinking About Investing in the Latest Hot Stock?, U.S. Sec. & Exch. Comm’n (Jan. 30, 2021), back)


Id.(go back)


For example, the investor alert referenced above was distributed to the public through social media platforms such as Twitter. “Thinking About Investing in the Latest Hot Stock? Understand the Significant Risks of Short-Term Trading Based on Social Media:” SEC Investor Ed (@SEC_Investor_Ed), Twitter (Jan. 29, 2021 7:48 PM), back)


See, e.g., Market Structure Analytics, U.S. Sec. & Exch. Comm’n (Nov. 13, 2019), back)


See, e.g., What is Structured Data?, U.S. Sec. & Exch. (Mar. 26, 2016),,by%20both%20humans%20and%20computers.(go back)


Steven Lofchie, Kyle DeYoung, Conor Almquist, & Sebastian Souchet, GameStop: Regulators Should Focus Less on “Solving the Problem”; More on “Improving the Situation, Cadwalader Cabinet Commentary, 7 (Feb. 16, 2021), Newsletter.(go back)


Fabian Schär, Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets, Fed. Reserve Bank of St. Louis (Feb. 5, 2021), back)


Lawrence Goodman et al, Robinhood and GameStop: Essential issues and next steps for regulators and investors, Center for Financial Stability, 3 (Feb. 4, 2021),; see also Angel at 26 (“It is far more socially beneficial for someone to speculate on stocks than for them to go to a casino or to buy lottery tickets. Their close attention to the market helps to bring in more information, and this benefits all investors.”).(go back)


Annie Massa & Edward Robinson, Robinhood’s Role in the ‘Gamification’ of Investing, Bloomberg L.P. (Feb. 2, 2021, 3:52 PM EST), (“Some say Robinhood and other platforms that have turned investing into an online social activity — such as when readers of a Reddit board bid GameStop Corp. shares into the stratosphere — are making it too easy, and too fun, to wager money on stocks and more complicated investments.”); see also Richard Nieva, Even before GameStop stock frenzy, Robinhood raised a lot of red flags, CNET (Feb. 1, 2021, 6:19 AM PT), (quoting a UC Berkeley professor explaining that “[Robinhood] makes [trading] seem fun and easy, but the market is really complicated…[t]hat can be dangerous”).(go back)


See Lofchie, supra note 18 (noting that FINRA has issued a report warning about risks of broker-dealer apps featuring “interactive and game-like features”); see also Administrative Complaint at ¶¶ 20, 22, In the Matter of: Robinhood Financial, LLC, No. E-2020-0047 (Mass. Sec. Div. filed Dec. 16, 2020) available at (citing as an example of an advertisement used to “lure young, inexperienced investors into using its platform to make investments” an advertisement by a “young adult [who] says, ‘I didn’t know anything about investing before I started using Robinhood. As soon as I set up my account I had a free stock, so I immediately was an investor. From there I was learning stuff as I went along. It was really simple. Download the app and see for yourself.’”).(go back)


See Lofchie, supra note 18; I argued for permitting similar innovation in the disclosures broker-dealers and investment advisers are required to make to their customers and clients under recently adopted Form CRS. See Hester M. Peirce, Commissioner, U.S. Sec. & Exch. Comm’n, Remarks before the NAPA DC Fly-In Forum: What’s in a Name? Regulation Best Interest v. Fiduciary (July 24, 2018), available at back)


Explaining T 2 to Clients and End Users, DTCC (Mar. 1, 2017), back)


See, e.g., Jim Angel, GameStonk: What Happened and What to Do about It, 25 (Feb. 10, 2021), (“Shortening the settlement cycle to T 1, or better yet, T 0, will result in a substantial reduction in this risk along with the collateral requirements in the settlement system.”).(go back)


Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide: Hearing Before the H. Fin. Serv. Comm. 117th Cong. (2021) (statement of Vladimir Tenev, CEO, Robinhood Markets, Inc.); see also GameStop Hearing: Robinhood CEO, Reddit Co-Founder & Others Testify on GameStop Stock, C-SPAN, at 21:55, available at (“The existing two-day period to settle trades exposes investors and the industry to unnecessary risk. There is no reason why the greatest financial system in the world cannot settle trades in real time. I believe we can and should act now to deploy our intellectual capital and our engineering resources to move to real-time settlement.”).(go back)


There is work being done in this area. See, e.g., Morten Linnemann Bech et al., On the future of securities settlement, BIS (Mar. 1, 2020), back)


See, e.g., Paxos Trust Company, LLC, SEC No-Action Letter (Oct. 28, 2019), available at (granting no-action relief to permit a trial “to conduct simultaneous delivery versus payment settlement of securities and cash for trades submitted to the Paxos(go back)

Settlement Service for clearance and settlement”).


See, e.g., Ken Monahan, Steampunk Settlement: Deploying Futuristic Technology to Achieve an Anachronistic Result, Greenwich Associates, 2 (2019),; see also Mark Wetjen, The Risks and Rewards of DLT, DTCC (Jun. 20, 2019), back)



See, e.g., Interview by DTCC Connection Staff with Michael McClain, DTCC Managing Director and General Manager of Equity Clearing and DTC Settlement Services (Feb. 18, 2021), available at back)



See, e.g., DTCC Connection Staff, DTCC Statement to House Financial Services Committee, DTCC (Feb. 18, 2021), (explaining that discretion played a significant role in leading the clearing agency to reduce the margin amounts generated by rule-based formulas to amounts more appropriate to the actual risks being carried by the clearing agency).(go back)


See, e.g., DTCC, Re-Imagining Post-Trade: No Touch Processing Within Reach, 4 (Sept. 2019),; see also Broadridge, Future of Operations: Simplify, Innovate, Transform, 2 (Sept. 2019), back)


See, e.g., Angel at 29 (recommending that brokers “be required to display execution quality statistics, not just routing Information”); see also Press Release, SEC, SEC Charges Robinhood Financial with Misleading Customers about Revenue Sources and Failing to Satisfy Duty of Best Execution (Dec. 17, 2020), back)
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