The week in GRC: TCFD says climate disclosures lagging, and NY Fed president eyes Wall Street culture

Jun 07, 2019
This week’s governance, compliance and risk-management stories from around the web

The Wall Street Journal said that, according to people familiar with the matter, the US Department of Justice (DoJ) is preparing for an antitrust investigation of Alphabet’s Google, a move that could pose a major new layer of regulatory scrutiny for the company.

The DoJ’s antitrust division in recent weeks has been laying the groundwork for the probe, the people said. The Federal Trade Commission (FTC), which shares antitrust authority with the DoJ, previously conducted a broad investigation of Google but closed it in 2013 without taking action, although Google made some voluntary changes to certain business practices.

DoJ and FTC spokespeople declined to comment. Google didn’t immediately respond to requests for comment.

The Guardian reported that Bernie Sanders, speaking at Walmart’s AGM, demanded that the company increase its wages and put workers on its board. ‘Walmart can strike a blow against corporate greed and a grotesque level of income and wealth inequality that exists in our country,’ Sanders said in his three-minute remarks at the meeting. ‘Please do the right thing.’

Sanders attended the meeting as proxy for Carolyn Davis, a Walmart employee and labor activist who is a member of the labor advocacy group United for Respect. The proposal and a separate resolution introduced by an employee who sought to strengthen Walmart’s sexual harassment policies were overwhelmingly defeated in a shareholder vote.

Before Sanders spoke, Walmart CEO Doug McMillon defended the company, pointing to its decision to raise its minimum wage to $11 per hour and to provide benefits such as advanced job training and paid time off. Walmart has said it pays an average of $17.50 an hour to its hourly employees, including benefits.

– The SEC adopted a new regulation that calls for brokers to act in the best interest of their clients when making investment recommendations, CNBC noted. The commission approved Regulation Best Interest, along with other regulatory actions intended to enhance disclosures and clarify certain advisers’ existing responsibility to put their clients’ interests before their own.

Compliance by broker-dealers will include making required disclosures and working to mitigate conflicts that could lead a broker to make a recommendation that is not in a client’s best interest.

Supporters of the rule say it will be an improvement over existing standards for brokers, which require them only to make sure an investment is ‘suitable’ for a client. Critics warn that it does not eliminate conflicts of interest – such as commission-based pay or other financial arrangements – that end up costing investors and lining the pockets of brokers.

CNN reported that Fiat Chrysler withdrew its proposal to merge with Renault, saying that it ‘has become clear the political conditions in France do not currently exist for such a combination to proceed successfully.’ Renault had earlier said the French government had asked its board of directors to postpone a vote on the merger. The government is the company’s largest shareholder and had previously indicated that it would support a merger if the companies protected French jobs and auto plants.

Renault said in a statement on Thursday that it was disappointed not to be able to pursue the merger, which it said had ‘great financial merit’ and ‘compelling industrial logic.’

Reuters reported that, according to the DoJ, Insys Therapeutics agreed to pay $225 million and an operating unit will plead guilty to fraud to settle probes into the payment of kickbacks to induce doctors to prescribe highly addictive opioids. Prosecutors said Insys used kickbacks and other illegal marketing practices to boost sales of Subsys, a spray meant to treat pain in adult cancer patients that contains fentanyl, an opioid 100 times stronger than morphine.

The settlement calls for the operating unit, Insys Pharma, to plead guilty to five mail fraud counts. The company will pay a $2 million fine, forfeit $28 million and pay $195 million to settle charges it defrauded the government under the False Claims Act.

Insys did not respond immediately to requests for comment.

– The SEC appointed Marshall Gandy as co-national associate director of the investment adviser/investment company examination program in the office of compliance inspections and examinations (Ocie). He joins co-national associate director Kristin Snyder, who has led the program since August 2016 and was named Ocie’s deputy director in July 2018. Snyder and Gandy will oversee more than 630 lawyers, accountants and examiners responsible for inspections of SEC-registered investment advisers and investment companies.

Gandy has been the associate regional director for examinations in the SEC’s Fort Worth office since March 2012 and will continue in that role while also taking on his new job.

– According to CNBC, Peloton has filed with the SEC in preparation for an IPO. Peloton, which is best known for its exercise cycles, filed the paperwork confidentially. It said it has not yet decided on the number or price range of shares it expects to sell. Companies with less than $1 billion in revenue can file confidentially under the Jobs Act.

The company makes cycles and treadmills with screens for users to join live and recorded fitness classes from their homes, hotel rooms or offices. It has been a busy year for IPOs, with Uber, Lyft and Pinterest among the companies that went public in the first half of the year.

– The Task Force on Climate-related Financial Disclosures (TCFD) said companies are failing to disclose sufficient detail about how exposed they are to the potential risks of climate change, Reuters reported. ‘Given the speed at which changes are needed to limit the rise in the global average temperature – across a wide range of sectors – more companies need to consider the potential impact of climate change and disclose material findings,’ the TCFD report stated.

According to the report, there was only a 3 percent increase from 2016 to 2018 in the number of firms disclosing information on the resilience of their business strategies, taking into consideration different climate-related scenarios such as a 2-degree or lower global temperature increase.

– The WSJ reported that Saba Capital Management, which is run by Boaz Weinstein, sued BlackRock, arguing that the asset management firm has moved to block outsiders from making changes and gaining board seats at three of its funds. In two lawsuits, Saba alleged that BlackRock’s actions contradict the stance the firm and CEO Larry Fink have taken on corporate governance in recent years. In annual letters to CEOs and other communications, Fink and BlackRock have urged companies whose shares the firm holds to more actively engage with investors.

‘BlackRock purports to be a defender of good corporate governance while entrenching its favored board members and disenfranchising thousands of investors in BlackRock’s own products,’ Weinstein said in a statement.

A BlackRock spokesperson said in a statement about the lawsuits: ‘Our clients invest in these strategies to achieve specific outcomes; most often it’s to generate income, including tax-advantaged income, that they rely on. Saba’s hedge fund is trying to disrupt these strategies so Saba can enrich [itself] through a short-term trade at the expense of the funds’ longer-term shareholders, while potentially subjecting shareholders to unanticipated tax consequences.’

– Federal Reserve Bank of New York president John Williams said Wall Street has yet to do enough to address bad behavior in the financial services industry, the WSJ reported. He added that when firms get into trouble it is wrong to blame the problem only on those involved.

‘When things go wrong, business leaders blame a single bad apple as the cause of the problem,’ Williams said. ‘But focusing on an individual bad actor can obscure a culture in which people feel misconduct in the pursuit of profit is tolerated, or even condoned. The bad apple theory acts as an excuse for not doing the hard work of cultural reform.’ He added that this allows business leaders to avoid what created the problem.

Williams said problematic behavior on Wall Street remains an issue.

Reuters reported that, according to people familiar with the matter, the SEC is investigating Siemens, Philips and General Electric (GE) for allegedly using local middlemen to negotiate bribes with Chinese government and hospital officials to sell medical equipment. The investigations are part of a new effort by US regulators to clamp down on alleged corruption in sales of costly medical equipment worldwide, the people said.

The SEC declined to comment. Siemens, GE and Philips all denied wrongdoing and said they were unaware of any SEC investigation concerning their operations in China. Under the FCPA, it is illegal for Americans, US companies or foreign companies whose securities are listed in the US to pay foreign officials to win business.

– Korean Air Lines’ CEO said ownership discussions are continuing with family members after their patriarch’s sudden death in April raised questions about the airline and parent Hanjin Group, Reuters reported.

Listed holding company Hanjin Kal Corp has been led by Walter Cho since the death of his father, chair Cho Yang-ho. But it has yet to inform regulators who will officially lead the group. Cho’s widow and two daughters, as well as his son, own stakes in Hanjin Kal.

The change at the top comes soon after a local activist fund raised its stake in Hanjin Kal to nearly 16 percent, bringing the group’s ownership structure to wider attention. The Cho family and its academic foundations own 29 percent.

CNBC reported that activist firm Elliott Management said it plans to acquire Barnes & Noble for roughly $683 million, including debt. Barnes & Noble said last year it was looking into a sale after having received ‘expressions of interest’ from ‘multiple parties’, including its chair, Leonard Riggio, who founded the company in 1965. Riggio has entered into a voting agreement in support of the transaction, the company said Friday.

As a private company, Barnes & Noble will likely have more flexibility to make changes and investment that could be unwieldy under a public spotlight. Part of the company’s bookseller’s turnaround plan has included closing some of its more than 600 stores across the US and relocating to smaller spaces with a fresh and modern look.

– The SEC has appointed David Peavler director of the agency’s Fort Worth regional office. Peavler previously served for nearly 15 years in senior division of enforcement roles in the Fort Worth office, most recently as an associate director. He rejoins the SEC from HD Vest, where he has served as general counsel since 2017. 

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