The week in GRC: Companies expect greater IT spending, and SEC steps into proxy adviser debate

Sep 14, 2018
This week’s governance, compliance and risk-management stories from around the web

– The Financial Industry Regulatory Authority (Finra) issued a white paper outlining recent regulatory technology (regtech) developments within the securities industry and potential opportunities and implications these technologies may have for broker-dealers. Finra highlights five areas where industry participants have most prominently used regtech innovations: surveillance & monitoring, customer identification & anti-money laundering compliance, regulatory intelligence, reporting & risk management and investor risk assessment.

Potential benefits reg-tech may offer include better risk management and improved efficiency through automation. Finra also outlines possible regulatory and implementation issues for broker-dealers to consider, such as supervisory control systems, outsourcing structure and vendor management, customer data privacy and security risks.

Bloomberg reported that, according to people familiar with the matter, European finance ministers agreed they would not rush to further regulate the crypto-currency market, and will wait for the outcome of a thorough analysis by European authorities before deciding on any steps.

‘The EU will be acting carefully in this area,’ said Irish finance minister Paschal Donohoe. Officials also agreed with the view of the Financial Stability Board, which said earlier this year that crypto-assets don’t at present threaten the financial system. Regulators around the world are taking steps to rein in one of the biggest investment crazes in recent memory.

– Unilever laid out details for the planned December listing of its new Dutch entity, which has sparked criticism from some UK shareholders and become entangled in the debate over Brexit, Reuters reported.

The company, which makes products such as Dove soap, Lipton tea and Ben & Jerry’s ice cream, has said ending its dual Anglo-Dutch structure is a purely business move to improve corporate governance and make it more agile, particularly with regard to M&A. The decision to make Rotterdam its main headquarters is pending shareholder approval, and faces pushback from some UK investors.

– According to The Wall Street Journal, companies this year are expected to spend more on IT, particularly cloud and security, as they manage increasingly complex technology environments such as a mix of cloud providers and on-premise infrastructure.

Of 46 chief information officers surveyed by KeyBanc Capital Markets, about 40 percent said they expect IT budgets to increase in 2018, up from 29 percent a year ago. Respondents expect weighted average year-on-year budget growth of 4.2 percent, up from 1.5 percent weighted growth in a previous survey conducted earlier this year.

Corporate IT environments are growing more complex as firms work to combine public cloud services with their private data centers. About 32 percent of respondents said they plan to use multiple vendors to create internal private cloud systems, while 27 percent said they would work with vendors to create a hybrid setup.

– The WSJ noted that banks, regulators and law-enforcement agencies are sharing more intelligence through voluntary networks to deter money laundering and terrorism financing but that, as the practice spreads, observers warn of the risks of data mishandling.

Information-sharing partnerships are growing across the global financial landscape. The UK pioneered the practice in 2015, and new partnerships were launched in the US, Singapore and Australia last year. The Netherlands, Hong Kong and Europol are all running pilot programs with the aim of setting up hubs to share intelligence on financial crime. The partnerships are designed to share patterns of criminality without regulatory burdens. But as more data is collected, these groups are facing ethical issues of privacy, disclosure and conflict of interest, according to experts.

Reuters reported that, according to people familiar with the matter, Deutsche Bank is considering an overhaul to loosen the ties between its retail and investment banks, a change that may make it easier to merge some or all of the group with rivals. The bank is said to be examining creating a holding company structure, which would give it more flexibility to strike merger deals. No decision has yet been made, and although such an arrangement would bring potential advantages, a number of questions about how it would work in practice remain. Deutsche Bank declined to comment.

– AP (via The Guardian) reported that McDonald’s restaurant workers voted to stage a one-day strike at outlets in 10 US cities next week, with the aim of pressuring the company to take stronger steps against sexual harassment on the job. Organizers of the action say it will be the first multi-state strike in the US specifically targeting sexual harassment and that they have been emboldened by the #MeToo movement.

McDonald’s, in an email to the AP, defended its anti-harassment efforts, stating: ‘We have policies, procedures and training in place that are specifically designed to prevent sexual harassment at our company and company-owned restaurants, and we firmly believe our franchisees share this commitment.’

– Six major internet companies and internet service providers, including AT&T, Twitter and Google, will explain their consumer data privacy practices to a US Senate panel on September 26, Reuters said. The hearing will give the companies the chance to testify on ‘how they plan to address new requirements from the [EU] and California, and what Congress can do to promote clear privacy expectations without hurting innovation,’ Senator John Thune, R-South Dakota, said.

The Internet Association, which represents more than 40 major internet and technology companies, said on Tuesday that it supported modernizing US data privacy rules but wants a national approach that would pre-empt new regulations in California that take effect in 2020.

– The WSJ said few financial firms have shown an interest in the Office of the Comptroller of the Currency’s (OCC) offer of a new route to the traditional banking system. The lack of immediate interest from companies arises in large part from uncertainty about what activities the OCC’s so-called fintech charter will allow, what regulatory requirements it will carry and whether it will hold up in court.

That uncertainty grew on Wednesday when the Conference of State Bank Supervisors said it intends to file a lawsuit challenging the OCC’s authority, renewing a previously unsuccessful legal challenge. An OCC spokesperson said the agency will ‘vigorously defend’ its authority to charter ‘companies that are engaged in the business of banking, meet the qualifications for becoming a national bank, and apply to conduct business as part of the federal banking system.’

Bloomberg looked at data from Prattle showing that quarterly earnings calls are dominated by men, who talk more often and speak longer than women. In a study of more than 155,000 company conference calls over the past 19 years, Prattle finds that men spoke 92 percent of the time. That’s in part because male executives and analysts far outnumber women in those roles – and also because men just talk more.

‘Male executives provide significantly more verbose answers to analyst questions than their female counterparts,’ Prattle CEO Evan Schnidman said. ‘One could surmise that male executives are more prone to speaking simply to hear themselves speak.’

– Sports Direct said chair Keith Hellawell would step down at its annual meeting on Wednesday, heading off a potential revolt from independent shareholders over corporate governance at the firm majority-owned by founder Mike Ashley, according to Reuters.

Three shareholder advisory groups had urged investors to vote against the re-election of Ashley and Hellawell on Wednesday, saying their concerns about corporate governance had not been resolved. The company came under fire in a report by UK lawmakers in 2016, which described ‘appalling working practices at both the Sports Direct shops and warehouses.’

Hellawell said on Wednesday he was stepping down after overseeing significant improvements in the working practices and corporate governance of the company. ‘I have every confidence the group will continue to go from strength to strength,’ he said.

– The WSJ reported that the EU took two major steps against money laundering. European Commission president Jean-Claude Juncker called for greater supervisory and enforcement power for the European Banking Authority (EBA) over its anti-money-laundering (AML) rules. Under his proposals, the EBA would be allowed to request investigations of a European country’s banks by national AML supervisors, and convene a new committee bringing those supervisors together in one place.

In addition, the European Parliament approved new measures that members said would close loopholes in existing rules and make it easier for authorities to stop illicit transfers.

– According to Bloomberg Law, at least three of Tesla’s top 10 investors voted to curb CEO Elon Musk’s duties months before a series of controversies raised questions about his leadership. Funds run by BlackRock, State Street’s investment management arm and Capital Group backed a shareholder proposal that would have forced the CEO to relinquish his dual role as chair of Tesla’s board, according to voting records compiled by Proxy Insight.

Musk has said he does not intend to relinquish his dual roles. Tesla’s board had recommended that shareholders vote against the proposal, saying its lead independent director protects the company against any potential governance issues arising from having Musk as CEO and chair. More recently, Tesla directors issued a statement saying ‘we fully support Elon’ continuing to lead the company.

Spokespeople for BlackRock, State Street and Capital Group said they don’t comment on votes at specific companies.

– The WSJ reported that US public companies secured a victory in a long-standing fight to curb the impact of proxy advisers. The SEC waded into the issue by rescinding a pair of roughly 15-year-old letters, written by its staff, that had given mutual fund managers greater assurance to rely on a proxy adviser’s recommendations about matters up for a vote at a public company’s annual meeting. Many companies say the letters boosted the influence of proxy advisers.

ISS said the SEC’s change wouldn’t disrupt how investors employ its advice. ‘Corporate lobbyists have created a mythology surrounding these letters in an attempt to undermine the important work we do for our sophisticated institutional investor clients,’ said ISS general counsel Steven Friedman. A spokesperson for Glass Lewis didn’t immediately respond to a request for comment.

SEC commissioner Robert Jackson questioned the decision to change how investors interact with proxy advisers. There is little evidence proxy advisers wield too much influence, he said.

– According to the WSJ, Deutsche Bank promoted a London-based senior risk officer to oversee financial crime-fighting responsibilities globally, replacing an executive who is leaving for Danske Bank. Stephan Wilken, who has been with Deutsche Bank for more than 20 years, will become head of anti-financial crime and chief of anti-money-laundering on October 1, replacing Philippe Vollot, according to a company memo.

Danske, Denmark’s largest bank, announced in July that Vollot will become chief compliance officer and join its executive board no later than December 2018.

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