SECURITIES & FINANCIAL REGULATION
NEW MARGIN REQUIREMENTS FOR UNCLEARED SWAPS
Craig Stein
One of the fundamental changes that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) made in the financial markets has been to force most over-the-counter swap transactions onto exchanges and impose regulations on transactions that remain uncleared by a central counterparty. At the same time, laws and regulations adopted by the European Commission and other nations have imposed similar, but by no means identical, requirements on swap markets outside the United States. This article reviews one aspect of these changes in the over-the-counter swap markets: the new margin requirements for uncleared swaps. Because margin for uncleared swaps has to date been set by each dealer in negotiations with individual customers, the transition to margin requirements imposed by regulators is likely to be difficult.
BANKRUPTCY & RESTRUCTURING • BANKING
WHY THE LACK OF INTEREST IN INTEREST? ANOTHER LOOK AT PREFERENCES AND SECURED CREDITORS
Samuel D. Krawiecz
The Bankruptcy Code (sometimes referred to herein as the Code) disallows preferential payments made to creditors. Preference law is “designed to prohibit insolvent debtors, on the eve of filing for bankruptcy, from paying off their debts held by ‘preferred’ creditors—those creditors whom the soon-to-be bankrupts wish to favor.” The preference rule has five elements. The payment must be (1) a transfer to a creditor, (2) for the benefit of an antecedent debt, (3) while the debtor was insolvent, (4) within ninety days of the filing of the petition (unless the creditor is an insider), and (5) the payment must “enable[] such creditor to receive more than such creditor would receive” in a Chapter 7 liquidation. This Article will analyze how the fifth and last element is applied, particularly with regard to fully secured creditors.
SECURITIES & FINANCIAL REGULATION • CORPORATE LAW & GOVERNANCE
THE SARBANES OXLEY PRIVILEGE FOR PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD MATERIALS: ITS IMPLICATIONS FOR SEC ENFORCEMENT PROCEEDINGS
Andrew J. Morris
In 2002, a wave of high-profile accounting scandals led Congress to pass the Sarbanes-Oxley Act—“SOX.” In SOX, Congress created the Public Company Accounting Oversight Board—the “PCAOB”—and charged it to oversee the auditors of public companies. Recent developments, however, threaten to undermine one of the critical foundations of the PCAOB oversight program: the “SOX privilege.” This statutory privilege ensures that the details of PCAOB inspections and investigations remain confidential. The problem is that some private litigants, some SEC staff, and at least one court do not read this simple mandate to mean what it says. They find it counterintuitive—and therefore hard to accept—that a statute would restrict the SEC’s use of information it obtains from the PCAOB. This resistance to the statutory language is apparent in Securities & Exchange Commission v. Goldstone, 301 F.R.D. 593 (D.N.M. 2014), the first judicial opinion on the issue. In Goldstone, the United States District Court for the District of New Mexico concluded that when the SEC brings enforcement actions, it can disclose privileged information received from the PCAOB. This article explains how Goldstone misreads SOX.
BANKRUPTCY & RESTRUCTURING
LOSING MOMENTIVE: A ROADMAP TO HIGHER CRAMDOWN INTEREST RATES
Evan D. Flaschen, David L. Lawton & Mark E. Dendinger
There has been a lot of press regarding the lengthy Momentive, bench ruling delivered in late 2014. In Momentive, the Bankruptcy Court for the Southern District of New York held that debtors could satisfy the “cramdown” requirements of section 1129(b) of the Bankruptcy Code by distributing to secured creditors replacement notes paying below-market interest rates based on small margins. Several months later, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) issued an unpublished decision in which it took a more nuanced approach to cramdown interest rate calculation. Instead of identifying a defined range for acceptable margins, as was the case in Momentive, the Ninth Circuit BAP concluded that creditors should shoulder the evidentiary burden to prove the risk factors used to determine the appropriate cramdown rate. In the wake of Momentive, the Ninth Circuit BAP has offered undersecured creditors a roadmap to higher cramdown interest rates under the right circumstances.
ENVIRONMENTAL, SOCIAL, & GOVERNANCE
WHEN IS RENEWABLE NOT RENEWABLE? THE CONSTITUTIONALITY OF STATE LAWS DENYING NEW LARGE CANADIAN HYDROELECTRIC PROJECTS TREATMENT AS RENEWABLE RESOURCES
Harvey L. Reiter
Over the past fifteen years, many states—twenty-nine at last count—have adopted renewable portfolio standards (RPS) as a means both to reduce their dependence on imported fossil fuels and to combat climate change. To comply with these standards, electric utilities must demonstrate that a significant minimum percentage of their supply portfolios will consist of renewable resources by the various target dates specified in state law. Most states affirmatively describe what counts as renewable resources—wind, geothermal, and solar energy are commonly referenced in RPS legislation. But some state RPS laws also contain negative provisions, excluding from eligibility what otherwise would surely be considered renewable resources. Laws of this type amount to hidden barriers to power imports from Canada, the only source of electricity from new large-scale hydroelectric facilities. This article explains why the restrictions are unconstitutional under the Commerce Clause and bad for consumers and the environment, and why other states should follow the lead of Vermont and Wisconsin and modify their statutes to permit power from large hydroelectric projects to be treated as a renewable resource under their RPS laws.
CORPORATE LAW & GOVERNANCE
CHANGING MANAGEMENT IN THE FACE OF SHAREHOLDER ACTIVISM: ISSUES TO CONSIDER
Melissa Sawyer and Matt Friestedt
Recently it has become relatively common for shareholder activists to advocate for changes in senior management, not just changes in board composition. In the face of this pressure, some companies have announced changes to their leadership teams. These changes can create strife in the boardroom and tension among employees. Leadership transitions also raise a number of disclosure and other legal issues that companies should take into account if a board decides to respond to activism in this manner. This article provides a checklist of issues that regularly arise in these situations.
BANKRUPTCY & RESTRUCTURING
FATALLY FOREIGN: EXTRATERRITORIAL RECOVERY OF AVOIDABLE TRANSFERS AND PRINCIPLES OF COMITY IN THE MADOFF SECURITIES SIPA LIQUIDATION PROCEEDING
Timothy Graulich, Brian M. Resnick & Kevin J. Coco
Extraterritorial application of the Bankruptcy Code and international comity require courts to examine congressional intent while balancing the competing interests of different jurisdictions. Absent contrary intent within the statute, debtors and trustees in cases under both SIPA and the Bankruptcy Code likely face an uphill battle in overcoming the presumption against extraterritoriality. The recent gravitation toward universalism and respect for foreign laws reinforces that presumption and seeks to establish international deference as the governing baseline.
SECURITIES & FINANCIAL REGULATION • ENVIRONMENTAL, SOCIAL, & GOVERNANCE
THE STATUS OF ENVIRONMENTAL COMMODITIES UNDER THE COMMODITY EXCHANGE ACT
Matthew F. Kluchenek
This article examines the role of the Commodity Futures Trading Commission (“CFTC”) in regulating transactions in environmental commodities, such as renewable energy certificates (“RECs”), emissions allowances, carbon offsets and carbon credits. The article examines the general role of the CFTC, the types of products subject to the CFTC’s jurisdiction, the basis for and scope of exclusions to the CFTC’s jurisdiction, and how commodity option transactions could be converted into swaps subject to the CFTC’s jurisdiction.
LEGAL & REGULATORY COMPLIANCE • INDUSTRY
INEVITABLE: SPORTS GAMBLING, STATE REGULATION, AND THE PURSUIT OF REVENUE
Anastasios Kaburakis, Ryan M. Rodenberg, & John T. Holden
Balancing the protection of private business interests against governmental regulation is one of the most significant legal frictions of the modern era. Over the course of the past twenty-eight months, this conflict has manifested itself through a federal sports gambling lawsuit involving New Jersey. However, the ongoing lawsuit between a plaintiff quintet of the most powerful sports entities in the United States—the National Collegiate Athletic Association (“NCAA”), the National Basketball Association (“NBA”), the National Football League (“NFL”), the National Hockey League (“NHL”), and the Office of the Commissioner of Major League Baseball (“MLB”) (collectively “sports leagues”)—and the Governor of New Jersey over the possibility of regulated sports wagering in the state is not about gambling. It is about control: control of events, control of data, control of marketing opportunities, and control of current and future revenue streams.
BANKRUPTCY & RESTRUCTURING
MAKE-WHOLE CLAIMS AND BANKRUPTCY POLICY
Douglas P. Bartner and Robert A. Britton
Although the payment of make-whole amounts clearly may be enforced under applicable state law in many instances, there appears to be tension between a claim in bankruptcy for such a payment and public policies underlying the bankruptcy code, including maximizing recoveries and the fair treatment of all creditors. In this article, we will discuss the state of the law regarding the enforceability in bankruptcy proceedings of make-whole provisions, as well as policy considerations that suggest the beneficiaries of make-wholes may be unfairly enriched at the expense of other creditors.
ENTREPRENEURSHIP & STARTUPS
VENTURENOMICS: ADJUSTING FOR THREE STANDARD PRACTICES MAY REDUCE VENTURE-BACKED COMPANY PRE-MONEY VALUATIONS BY 90%
Jeff Thomas
While recent valuations attributed to venture backed companies may be shocking, the VC Math used to calculate the valuations is flawed. This is because VC Math: (i) treats unissued, and even non-existing, stock options as outstanding shares of stock; (ii) ignores the fact that much of the common stock and options to purchase common stock have not yet been earned; and (iii) values common stock and convertible preferred stock equally despite the fact that convertible preferred stock was intentionally created to be worth more.