The week in GRC: Senators grill SEC chair over cyber-breach and EU pushes bank diversity targets

Sep 29, 2017
This week’s governance, compliance and risk-management stories from around the web

The New York Times said the Commodity Futures Trading Commission (CFTC) is shifting its enforcement strategy by increasingly looking to banks and other financial institutions to self-report their own misconduct and problems in the market.

The new framework is premised on the idea that large firms, given the right incentives, have the potential to be invaluable partners for law enforcement. Under the commission’s new approach, companies that come clean about misconduct, co-operate fully with the CFTC as it investigates and fix their internal problems potentially stand to save millions of dollars.

– Fidelity International’s decision on how to handle its research costs to comply with new EU rules depends on how the US deals with the regulations, according to Bloomberg. ‘The one sticking point is the US because its securities industry doesn’t get pushed around by anybody,’ said Richard Lewis, head of global equities at Fidelity. ‘We’ll have to wait and see what the US regulators come up with.’

One issue with Mifid II is the requirement that brokerages are paid directly for research – which conflicts with US rules. The SEC has signaled to brokerages that it has increased efforts to find a solution before the rules take effect in January next year.

– According to the Financial Times, corporate governance campaigners say the tide may be turning against Silicon Valley entrepreneurs who want to keep a tight grip on their companies through shares with greater voting rights.

Growing opposition against founders who want to exert control after their companies go public follows Facebook’s decision to scrap a contentious reorganization of its stock and comes as many of the large private technology firms are expected to go public in the next couple of years. Some are looking at adopting share structures that give additional voting power to the founder and early investors but, after recent pressure from shareholders, they may now think twice.

The Wall Street Journal reported that Jeereddi Partners and Purple Mountain Capital Partners were calling for new leadership at discounted housewares retailer Tuesday Morning in the latest of a series of activist campaigns targeting CEOs. The firms urged the company to replace CEO Steven Becker, and have put forward a candidate to replace him as well as another candidate to join the board. The firms said the board wouldn’t consider their candidate or hear out their ideas.

The proposed nominees would ‘inject instability and disruption at the very moment that Tuesday Morning is executing against operational priorities intended to drive improved top and bottom line performance,’ Tuesday Morning chair Terry Burman said. Tuesday Morning, which confirmed receipt of the director nominations in its own statement Monday, said it would be filing a preliminary proxy statement for its 2017 annual meeting, set to take place November 15.

Marketwatch reported that Equifax chair and CEO Richard Smith retired Tuesday after 12 years in the roles. ‘The cyber-security incident has affected millions of consumers, and I have been completely dedicated to making this right,’ Smith said. ‘At this critical juncture, I believe it is in the best interests of the company to have new leadership to move the company forward.’ The board named president of Asia-Pacific Paulino do Rego Barros as interim CEO and board member Mark Feidler as non-executive chair.

– The SEC announced two initiatives designed to build on its enforcement division’s efforts to address cyber-based threats and protect retail investors: the creation of a cyber-unit that will focus on targeting cyber-related misconduct, and the establishment of a retail strategy task force that will implement initiatives that directly affect retail investors.

‘Cyber-related threats and misconduct are among the greatest risks facing investors and the securities industry,’ said Stephanie Avakian, co-director of the enforcement division. ‘The cyber-unit will enhance our ability to detect and investigate cyber-threats through increasing expertise in an area of critical national importance.’

– According to Bloomberg, Wall Street brokerages are lobbying regulators to ensure new EU Mifid II rules that will upend banks’ investment research operations don’t spread to the US. But these efforts are causing tension with public pension funds and other large investors that are some of their biggest clients. Brokers want the SEC to make clear they can continue combining the cost of financial research and trading in one bill for US customers – a practice that is being banned in the EU.

Pro-investor groups and state pension systems argue that the European requirements would likely reduce costs and pierce the opacity of Wall Street billing practices if applied in the US, and are urging SEC chair Jay Clayton to bring the debate into the open. An SEC spokesperson declined to comment.

– Large financial institutions across the EU will be required to ‘consider’ diversity and whether to adopt gender targets for their top executives for the first time as part of regulatory guidelines, the FT reported. Diversity is one of five key elements highlighted by a package of corporate governance guidelines published by the European Banking Authority and the European Securities and Markets Authority. The guidelines, which will take effect from June 2018, constitute the first time the two regulators have weighed in on how diverse financial companies’ highest echelons should be.

‘The diversity policy for significant institutions should include a quantitative target for the representation of the underrepresented gender in the management body,’ the guidelines read. ‘Significant institutions should quantify the targeted participation of the underrepresented gender and specify an appropriate timeframe within which the target should be met and how it will be met.’

– The WSJ noted that major institutional investors, governance advisers and boards themselves are cracking down on so-called ‘overboarding’, trying to ensure directors don’t spread themselves too thin. Overstretched directors lack time to adequately monitor management, critics argue, although many directors who serve multiple boards contend that they adequately manage their time and can handle their board responsibilities.

A new analysis of S&P 500 CEOs for the WSJ by Equilar suggests leaders with multiple outside corporate board seats and their employers make more money, but their shareholders see lower returns than those with just one outside directorship, or none. BlackRock cast 168 votes against directors this year due to overboarding concerns.

– The WSJ reported that, according to people familiar with the matter and documents, investigators from the FBI and the SEC are looking into business practices at Renovate America, the largest provider of energy-saving home-improvement loans. Renovate America’s chief legal officer Scott McKinlay said: ‘[W]e have been assured that Renovate America is not a target of an FBI investigation. We believe from our discussions with the FBI about its investigation of a contractor with [which] we have done business that it is likely our company has come up in the context of those FBI interviews.’

FBI agents are seeking documents that show how the company marketed its financing to homeowners, trained its sales team and outside contractors and communicated with investors, according to a document reviewed by the WSJ. An FBI spokesperson said the agency ‘would not confirm or deny the existence of an investigation to an individual or company.’

A Renovate America spokesperson said in a statement: ‘[W]e have received a request for information from the [SEC]. We are fully co-operating with its information request and believe it is unlikely to have a material effect on the business.’ An SEC spokesperson declined to comment.

– A new proposal on dual-class shareholding is due and is expected to get through Hong Kong in some form, according to the FT. It could also take root in other markets: London and Singapore are also debating the topic, while New York already allows it. In Hong Kong, the issue came up via a June paper from the stock exchange considering whether to create a new board to host companies unqualified for the city’s main board, including secondary listings for mainland Chinese companies and ‘companies with non-standard governance features.’

– US senators criticized the SEC’s new chair, Jay Clayton, for how the agency handled a 2016 breach of its system for storing market-moving information, the WSJ reported. ‘I was disturbed to learn that the SEC suffered a cyber-breach of its Edgar system in 2016, but did not notify the public, or even all of its commissioners, until it was discovered during your recent review,’ Senator Mike Crapo, R-Idaho, chair of the Senate Banking Committee, said at a hearing. ‘It is critical that the SEC safeguards the data it collects and maintains.’

Clayton faced a series of tough questions over the SEC’s cyber-security, including the agency’s plans for a database that will keep track of billions of daily trades and orders in US stock and option markets. He said the government needs more resources to gird against cyber-attacks and must do more to defend its systems. He also said he didn’t believe his predecessor, Mary Jo White, knew about the incident.

– The WSJ reported that Kellogg CEO John Bryant is stepping down next week. Steven Cahillane, CEO of Nature’s Bounty and a former Coca-Cola executive, will join Kellogg to succeed Bryant, the company said. Bryant will remain chair of the board until March 15, at which point Cahillane will assume that role. Bryant said his successor has ‘an exceptional track record’ and will ‘continue the transformation’ of Kellogg. Bryant said in a statement that he chose to retire. It is unclear when the discussions for succession began. Kellogg declined to comment.

– Saudi Arabia plans to unveil regulations to make share listings easier and encourage M&A among publicly traded companies in the Middle East’s biggest bourse, according to Bloomberg. The regulations will simplify the time taken to float a company and remove some of the tough conditions that have constrained M&A among listed companies, according to Capital Market Authority chair Mohammed El-Kuwaiz.

Reuters reported that, according to Europol, ransomware overtook most other forms of cyber-crime as online crime surged in 2017. Europol co-ordinated several successful cross-border operations against cyber-criminals last year, but national authorities urgently need to devote more resources to targeting the developers of hacking tools, Europol director Rob Wainwright warned. ‘The last year has been exceptional, given the size and the type and the range of the attacks we’ve seen,’ he said.

– The UK’s Financial Conduct Authority (FCA) argued against any attempt by European regulators to change the rules governing asset managers after Brexit, according to the FT. Megan Butler, director of supervision with the FCA, said there was no justification for any changes to the rules and cautioned that overhauling them could be detrimental to Europe.

The rules around so-called ‘delegation’ – which deals with the fact that most asset managers are registered in countries such as Ireland and Luxembourg but most of their business is done in London – threaten to be an issue in the negotiations about how to regulate financial services after the UK leaves the EU.

‘We are particularly conscious of the need to find sensible outcomes on delegation,’ Butler said. ‘There is an important question as to whether a change to delegation provision could, potentially, have an adverse impact on European and global markets.’

– The WSJ reported that, according to people familiar with the matter, Hain Celestial reached an agreement with an activist investor that calls for sweeping changes to the company’s board. As part of the settlement with Engaged Capital, Hain will nominate six new directors and three board members won’t run for re-election, the people said. The board will comprise 11 directors, all but one independent. Hain also agreed to form a group of directors who will examine strategic alternatives, the people said.

– Andrew Bailey, the FCA’s chief executive, told Bloomberg that regulators are working to find a solution for asset managers and banks that will be caught between US and EU rulebooks when Mifid II takes effect in January. ‘This is an issue we have to solve before the end of this year,’ he said. ‘We need to solve it in a pragmatic fashion. I don’t want to see firms left on the horns of a dilemma: Two sets of authorities pointing in different directions – what do we do?'

Bailey said FCA representatives attended a meeting with the 40 biggest asset managers and banks that was aimed at seeking clarity on the financial markets overhaul. The meeting ‘was really about one particular issue, and it’s about research,’ he added.

Reuters reported that the Federal Reserve said eight of the largest US banks and 82 foreign banks will have an extra year to submit their so-called ‘living wills’ outlining how they would be unwound in the event of bankruptcy. Under the Dodd-Frank Act, the largest US banks must present plans that explain how they would be unwound in the case of a financial crisis without disrupting the broader economy.

– The CFTC has hired Brian Bussey, who is at present associate director for derivatives policy at the SEC, as its director of clearing, overseeing clearinghouses and major derivatives market participants, the WSJ noted. Bussey comes to the CFTC as it grapples with how to overhaul rules for swap trading that were instituted during the Obama administration to better reflect how markets function.

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