Jill E. Fisch C URRENT D EVELOPMENTS I N U.S. S ECURITIES R EGULATION CONFERENCE MEETING OF CHINESE FINANCING DEVELOPMENT AND FINANCIAL LAW ENVIRONMENT October 14, 2011

Reverse Mergers & IPOs in US More than 400 Chinese companies have entered US public capital markets by using reverse mergers, 260 in 2010 alone Chinese companies accounted for 41 US IPOs in 2010, 1/3 of all US IPOs Cultural and legal differences are creating regulatory and accounting issues

How do we advise Chinese companies? Differences in securities regulation Differences in corporate governance Differences in business structure Underlying norms and expectations Possibility of regulatory arbitrage? Challenges for global gatekeepers Dynamic legal environment – example of Dodd-Frank

Dodd-Frank and trends in US Securities Regulation Regulatory response to the Financial Crisis Extensive scope includes limited changes in securities regulation Conceptual change – increased federal regulation of corporate governance Regulatory perspective – perceived deficiency in shareholder power

Background Distinction between securities regulation and corporate law –Securities regulation focuses on investor protection –US corporate law focuses on reducing managerial agency costs Securities regulation traditionally has been focus of the SEC and federal government

Dodd-Frank Proxy Access Say on Pay Independent compensation committees & claw-backs Disclosure-based governance provisions –Separation of Chair and CEO –Policy on incentive-based compensation –Golden parachutes –Pay parity

Say on Pay What was the problem? –Excessive executive pay - maybe What was the solution? –Advisory shareholder vote Has it worked? –Executive pay has increased but –Shareholders voted no on 2% of pay packages last year Problems –Shareholder competence, ISS, compliance costs, litigation

Proxy Access SEC adopted Rule 14a-11 – the Proxy Access Rule – in August 2010 Designed to increase role of minority shareholders Rule 14a-11 is a terrible rule –Provides no meaningful access –Lack of SEC justification –Tension with state law regulation of shareholder voting

Proxy Access Court invalidated the rule this past summer Ironically, the court rejected the rule for process failures – finding the SEC had conducted a “flawed economic analysis” Potentially far-reaching effects of the court’s analysis on the SEC’s power to adopt future rules

Merits of Increasing Shareholder Power Is this an improvement in corporate governance? Should a securities regulator make these judgments Compare to Delaware corporate law Who are the shareholders?

Intermediation in US Capital Markets Growing intermediation of the markets –Institutions own over 50% of public equity –Percentage is closer to 80% at the largest public companies Range of US institutional investors –Public pension funds and unions –Mutual Funds –Sovereign Wealth Funds –Hedge Funds

Effect of intermediation on investor protection Growing percentage of retail investors are “in the stock market” But US investors invest primarily through intermediaries – mostly mutual funds and pension funds Regulation of investment products and sales practices Limited SEC involvement in these issues More than half of all US households own stock, but most of them own it indirectly One third of US household assets are invested in retirement accounts Recent Morningstar study showed negative returns to investors over the last decade in many large mutual funds

Effect of intermediation on corporate governance Do institutions enhance long term firm value? Do institutions reflect “special interests”? –Short-termism –Herding –Political or other agendas How do we limit the potential for abuse?

Rethinking the goals of securities regulation Shareholder wealth maximization versus broader societal goals Dodd-Frank’s regulation of executive compensation as a solution to wealth and income disparities Does shareholder empowerment facilitate this process?