The week in GRC: SEC issues 2018 exam priorities, and Wynn Resorts’ board faces pressure

Feb 09, 2018
This week’s governance, compliance and risk-management stories from around the web

The Wall Street Journal reported that the Federal Reserve’s unprecedented move to curb growth at Wells Fargo sent a message that boards of directors, not just management, will be held accountable when big banks fail to manage risks. The Fed said Wells Fargo would be replacing four board directors in 2018 and announced an enforcement action that limits the size of the bank by assets, potentially limiting revenue and profit growth. Wells Fargo is barred from growing past the $1.95 trillion in assets it had at the end of 2017, unless it gets regulators’ permission.

‘The Fed just put the fear of God into bank boardrooms across the country,’ Ian Katz, an analyst at Capital Alpha Partners, said in a note. ‘And that’s exactly what it wants to do.’ The Fed, which cited ‘widespread consumer abuses’ at Wells Fargo, has never before imposed such a broad restriction as part of an enforcement action. Wells Fargo said it was ‘confident it will satisfy the requirements of the consent order.’

– Sam Woods, deputy governor of the Bank of England and the UK’s top banking supervisor, has warned against a ‘bonfire of the regulations’ after Brexit, according to the Financial Times. Woods defended UK regulation, pledging to ‘maintain standards of resilience in the financial sector at least as high as those we have today.’ The EU has pledged to penalize the UK if it waters down financial services rules to undercut the bloc after Brexit, as some prominent Brexiteers have advocated.

– The Financial Industry Regulatory Authority (Finra) noted that two rule changes took effect with the aim of addressing the financial exploitation of seniors and vulnerable adults. Broker-dealers are now required to make reasonable efforts to obtain the name and contact information for a trusted contact person for a customer’s account. In addition, the rule permits Finra member firms to place a temporary hold on a disbursement of funds or securities when there is a reasonable belief of financial exploitation, and to notify the trusted contact of the temporary hold.

The trusted contact person is intended to be a resource for firms in handling customer accounts, protecting assets and responding to possible financial exploitation of any vulnerable investors. The new rule allowing firms to place a temporary hold provides them and their associated people with a safe harbor from certain Finra rules.

Reuters reported that US regulators told lawmakers at a congressional hearing that digital currencies such as bitcoin demand increased oversight and may require a new federal regulatory framework. Commodity Futures Trading Commission chair Christopher Giancarlo and SEC chair Jay Clayton gave testimony to the Senate Banking Committee amid growing global concerns over the risks virtual currencies pose to investors and the financial system.

– Avon Products hired Jan Zijderveld, a Unilever veteran, as its new CEO, according to the WSJ. Zijderveld, whose new job was effective immediately, was most recently president of Unilever’s European unit. He succeeds Sheri McCoy, who announced in August that she would step down this year, saying at the time that she had accomplished her main goals: splitting off and selling Avon’s North American unit, relocating the company to the UK from the US and putting in place a new management team. Zijderveld will have to contend with a group of activist investors that want Avon to sell itself.

The New York Times reported that casino businessman Stephen Wynn resigned as chair and CEO of his company, Wynn Resorts, in response to sexual misconduct allegations. In a statement, Wynn said he was stepping down because ‘an avalanche of negative publicity’ had created an environment ‘in which a rush to judgment takes precedence over everything else, including the facts.’ He will be replaced by Matt Maddox, who has been president of Wynn Resorts since 2013. In a statement, the company’s board said it had accepted Wynn’s resignation ‘reluctantly.’

Wynn has denied all the allegations, calling them ‘preposterous.’ The Massachusetts Gaming Commission has promised an investigation, as Wynn Resorts is building a multi-billion-dollar casino outside Boston. After Wynn announced his resignation, the commission said it would ‘need to assess the overall impact and implications of this significant development.’

Reuters reported later that the board of Wynn Resorts has been sued by shareholders that allege the board knew for years that Wynn had been accused of sexual misconduct and failed to investigate. The company declined to comment.

– At a meeting Wednesday, the WSJ said, gambling regulators in Massachusetts, where Wynn Resorts is planning a $2.4 billion casino, raised pointed questions with implications for directors and executives who could have been in a position to know about Wynn’s alleged misdeeds and didn’t report them. They also said Wynn’s resignation raises new questions about the power he will continue to wield at Wynn Resorts, given that he still has control of more than 20 percent of the company’s shares.

A Wynn Resorts spokesperson declined to comment on questions raised at the Massachusetts meeting. The company said it is ‘fully co-operating’ with the state’s investigation and ‘will address any questions the commission has directly with it.’ The company said details of Wynn’s separation agreement will be released when it is finalized.

The Guardian reported that supermarket company Tesco is facing a demand for up to £4 billion ($5.6 billion) in back pay from thousands of mainly female shop workers in what could become the UK’s largest ever equal-pay claim. Law firm Leigh Day has launched legal action on behalf of nearly 100 shop assistants who say they earn as much as £3 an hour less than male warehouse workers in similar roles. Up to 200,000 shop-floor staff could be affected by the claim.

Tesco said it would consider any changes to pay in partnership with Usdaw, the trade union that represents the majority of its shop-floor staff. Tesco said: ‘We are unable to comment on a claim that we have not received. Tesco has always been a place for people to get on in their career, regardless of their gender, background or education, and we work hard to make sure all our colleagues are paid fairly and equally for the jobs they do.’

– Activist investor Blackwells Capital is ramping up its pressure on Supervalu, planning a board fight and urging a breakup and potential sale of one of the largest US grocery companies, according to the WSJ. Blackwells Capital privately urged the board to give it three seats and form a committee to review potentially separating Supervalu’s retail and wholesale divisions and selling the wholesale group, according to a letter it sent to the board.

When the board rejected those requests, Blackwells decided to take its case to Supervalu shareholders, and plans to criticize management and the board’s oversight of the company and stock, the letter said. In a statement, the company said it has already ‘taken a number of critical steps to transform’, including boosting wholesale revenue and selling down the retail arm. The company ‘continues to pursue options for certain retail banners and its real estate portfolio, while remaining focused on reducing costs,’ it added.

– BlackRock called for regulation that would clearly spell out the risks associated with inverse and leveraged exchange-traded products (ETPs) after the collapse of two notes linked to volatility, Bloomberg said. Inverse and leveraged ETPs don’t perform like exchange-traded funds (ETFs) under stress and regulators should acknowledge the difference, BlackRock said. The firm ‘strongly supports’ a classification system that would label these ETPs as different from ‘plain vanilla’ ETFs, the firm said.

– The SEC’s office of compliance inspections and examinations announced its 2018 exam priorities. Key areas of interest this year will be matters involving critical market infrastructure, duties to retail investors and developments in crypto-currencies, initial coin offerings and secondary market trading. The priorities are broken down this year into five categories: (i) compliance and risks in critical market infrastructure, (ii) matters of importance to retail investors, including seniors and those saving for retirement, (iii) Finra and the Municipal Securities Rulemaking Board, (iv) cyber-security and (v) anti-money-laundering programs.

Bloomberg reported that, according to senior UK officials, Prime Minister Theresa May is drawing up plans for an instant break from key EU regulations – including some covering financial services – after Brexit in an effort to exploit the upside of the divorce. As part of the government’s emerging thinking for the ‘end state’ relationship between the UK and the EU, officials believe the country should immediately drop EU rules in certain areas, while staying close in others for longer.

– The WSJ reported that, according to recruiters and corporate directors, women looking to land their first board seats have a much tougher time than men. Some businesses are now trying to solve this problem in the face of intensified shareholder pressure for more female directors. For example, BlackRock recently said companies in which it invests should have at least two women on their boards. The proportion of women on S&P 500 company boards grew by just 1 percentage point to 22 percent last year, up from 16 percent in 2007, executive recruiters Spencer Stuart reported.

--The WSJ reported that an activist investor is launching a proxy fight to oust the entire board and CEO of Newell Brands, which makes everything from Elmer’s glue to Mr Coffee machines. Starboard Value is aligning with three former executives of Jarden Corp, which Newell bought less than two years ago in a $15 billion deal, in its campaign to change course at the company, according to people familiar with the matter.

Newell declined to comment. The company said recently, ‘With the support of the board, we are focused on the acceleration of our transformation plan and successfully strengthening Newell’s leadership position in a rapidly changing marketplace.’

--Finra said that the majority of brokers and firms who violated rules paid disgruntled clients the cash that arbitrators awarded them, calculating that fewer than 2 percent failed to pay the awards in 2016, according to Reuters. The self-regulatory organization published the data for the first time in an effort to reduce growing concern from investor advocates that clients who lose money because of a broker who made overly risky investments, for example, may never get paid back if the broker and brokerage have financial difficulties.

--SandRidge Energy replaced CEO James Bennett as well as CFO Julian Bott and announced drastic cuts to its drilling budget and corporate overhead, Bloomberg reported. The shakeup comes after activist investor Carl Icahn successfully pressured SandRidge to abandon plans to acquire rival Bonanza Creek Energy. Icahn voiced ‘grave concerns’ about the company’s governance. Requests for comment left with SandRidge and Icahn’s office weren’t returned immediately.

‘James Bennett guided the company through a challenging period of financial distress,’ John Genova, chair of the board, said in a statement. But ‘the board has determined that the time has come to transition to new leadership.’

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