Skip to main content
Oct 23, 2020

The week in GRC: SEC changes auditor independence rules, and Yale investment chief seeks money manager diversity

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

Reuters reported that, according to lawyers, lobbyists and policy experts, a decade-long Republican campaign to weaken the Consumer Financial Protection Bureau’s (CFPB) independence would backfire if Democrat Joe Biden wins the presidential election and gains the power to replace the agency’s director with a consumer champion. The Trump administration has relaxed enforcement and some rules and successfully asked the US Supreme Court to decide whether the president should have discretionary power to fire the CFPB’s director, as Republicans have argued.

That landmark decision would also give a Biden presidency power to fire current CFPB director Kathy Kraninger, who was appointed by President Donald Trump. Kraninger, whose term ends in 2023, declined to be interviewed but has said the agency should focus on policing bad actors rather than penalizing companies for minor, procedural violations. Progressives such as Senator Elizabeth Warren, D-Massachusetts, believe the CFPB should play a key role in tackling wealth inequality and racial justice problems underscored by the pandemic.

The Wall Street Journal noted that the SEC adopted changes that relax some conflict-of-interest rules for companies and audit firms, making it easier for them to avoid violating auditor independence in certain situations. The amendment, approved on October 16, gives auditors more discretion in assessing conflicts of interest in their relationships with the businesses they audit – for example, in situations involving affiliates of their clients or past lenders. The rule is also intended to lower the burden for companies trying to go public.

The SEC said the changes won’t loosen the requirements but will improve audit quality by increasing the number of qualified audit firms from which a company can choose. ‘These modernized auditor-independence requirements will increase investor protection by focusing audit clients, audit committees and auditors on areas that may threaten an auditor’s objectivity and impartiality,’ said SEC chair Jay Clayton.

SEC members Caroline Crenshaw and Allison Herren Lee opposed the changes, saying they introduce greater opportunity for error and uncertainty and reduce investors’ visibility into how auditors make judgments.

Reuters reported that Tokyo Dome Corp, owner of baseball club Yomiuri Giants’ stadium, said it is considering holding an extraordinary shareholders meeting to discuss a request from an activist fund. Tokyo Dome is facing shareholder activism from Hong Kong-based fund Oasis Management, which has been seeking better management of the company’s facilities, including the Tokyo Dome stadium.

Oasis has been making various proposals to Japanese companies and putting pressure on management as shareholder activism has been gaining momentum, with the government advocating better corporate governance.

Oasis officials were not immediately available for comment.

– The WSJ reported that Berkshire Hathaway agreed to pay roughly $4.1 million to settle allegations that a Turkish subsidiary violated US sanctions on Iran. The US Department of the Treasury alleged that Berkshire’s indirect subsidiary – Iscar Kesici Takim Ticareti ve Imalati Limited Sirket – sold cutting tools and related inserts to two third-party Turkish distributors between 2012 and 2016, knowing that the goods would be shipped to a distributor in Iran for resale to end-users there. Several of those recipients were identified later as Iranian government entities, according to the civil settlement agreement between Berkshire and the Treasury’s Office of Foreign Assets Control (OFAC).

A spokesperson for Berkshire didn’t immediately respond to a request for comment. OFAC credited Berkshire for its co-operation with the investigation and the steps it took to remediate the compliance lapse.

AP said the US Department of Justice (DoJ) sued Google for allegedly abusing its dominance in online search and advertising. It is the government’s most significant effort to protect competition since its case against Microsoft more than 20 years ago. ‘Google is the gateway to the internet and a search-advertising behemoth,’ said US Deputy Attorney General Jeff Rosen. ‘It has maintained its monopoly power through exclusionary practices that are harmful to competition.’

The case alleges that Google uses billions of dollars collected from advertisers to pay phone manufacturers to ensure Google is the default search engine on browsers. The government alleges that this limits competition and harms consumers by reducing the quality of the search and limiting privacy protections and alternative search options.

Google vowed to defend itself and responded immediately via a tweet: ‘Today’s lawsuit by the [DoJ] is deeply flawed. People use Google because they choose to – not because they’re forced to or because they can’t find alternatives.’

– China’s securities regulator said Ant Group received approval for its Shanghai public offering, and has now cleared all regulatory hurdles for a dual-listing that is expected to raise billions, according to CNN. Ant, the financial technology company affiliated with Alibaba, plans to list simultaneously in Hong Kong and Shanghai. The company will announce the IPO’s share price on October 27, according to updated regulatory filings. The listing is expected to set a new world record, surpassing the $29.4 billion raised by Saudi Aramco’s IPO last December, and would be the first simultaneous listing in Hong Kong and on Shanghai’s STAR Market.

– According to the WSJ, the UK’s Financial Reporting Council (FRC) proposed rule changes that would place the onus on auditors to seek out fraud among their clients. ‘Concerns have been raised that auditors are not doing enough,’ it said. The changes would make it clearer that auditors have direct responsibility to look for wrongdoing.

An EY spokesperson said ‘the audit profession must and will play its role in detecting fraud’ but stressed that ‘management, boards and the regulations that govern their company conduct are ultimately the first lines of defense.’ The firm’s chair last month sent a letter to clients laying out its commitment to catching fraud.

In a public hearing last year, some UK audit heads said that although auditors might detect material fraud in the course of their work, they didn’t believe it was part of their job, and that their main responsibility was to say whether companies’ accounts were reasonable.

– The WSJ reported that David Swensen, investment chief of Yale University’s $31.2 billion endowment, told the dozens of firms that manage Yale’s money they would be measured on their progress in increasing the diversity of their investment staff. Swensen said the Yale Investments Office would also be working to improve its own team’s composition.

The national discussion over race has resulted in an accelerated push for diversity on boards and in companies. It has also prompted some investors to look at investment management. ‘Our goal is a level of diversity in investment management firms that reflects the diversity in the world in which we live. Genuine diversity remains elusive, giving investors like Yale and your firm an opportunity to drive change,’ Swensen wrote in a letter to money managers. Yale plans to ask its managers for relevant data on diversity annually, the letter said.

– A California appeals court unanimously ruled against Uber Technologies and Lyft, saying they must reclassify their drivers in the state as employees, Reuters reported. Although the ruling does not take effect before a November 3 company-sponsored ballot measure that will ask voters to decide on the future status of gig workers, it narrows the companies’ options should their ballot fail. The case emerged after California implemented a law aimed at reclassifying ride-hail, food delivery and other app-based workers as employees entitled to benefits such as unemployment insurance and minimum wage.

California in May sued Uber and Lyft for not complying with that law. A California judge in August ordered the companies to reclassify their drivers as employees, a ruling the companies appealed under the threat of leaving the state altogether. The appeals court on Thursday upheld the ruling.

Lyft and Uber in a statement said they were considering all legal options, including an appeal. ‘This ruling makes it more urgent than ever for voters to stand with drivers and vote yes on Prop 22,’ Lyft said, referring to the ballot measure.

– The SEC announced an award of more than $114 million to a whistleblower whose information and assistance led to the successful enforcement of SEC and related actions. The award consists of a roughly $52 million award in connection with the SEC case and a roughly $62 million award arising out of the related actions by another agency. The combined $114 million reward is the largest in the program’s history. The next largest award was $50 million.


Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...