Skip to main content
Jan 10, 2020

The week in GRC: SEC releases 2020 exam targets, and banks weigh ESG risks when lending

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

Bloomberg reported that Hudson’s Bay Co minority shareholders including Catalyst Capital Group won a battle to obtain a higher price for the owner of Saks Fifth Avenue after chair Richard Baker and allies raised their offer a second time. The Baker group increased its take-private bid to C$11 ($8.48) a share, 16 percent higher than its original offer made in June.

Private equity firm Catalyst, which had argued against the agreement and persuaded regulators to delay a shareholder vote, agreed to support the new deal. The raised offer ‘delivers significantly more value for all minority shareholders, well above the original proposal,’ said Gabriel de Alba, managing director and partner at Catalyst, in a separate statement.

This ‘provides minority shareholders with compelling and immediate value and is supported by our largest minority shareholder,’ said David Leith, chair of the Hudson’s Bay board’s special committee formed last year to address the offer.

The Wall Street Journal said that, according to people familiar with the matter, UK authorities are looking into whether a trading outage blamed on a software problem at the London Stock Exchange (LSE) may in fact have been caused by a cyber-attack intended to disrupt markets. A UK intelligence agency has contacted the LSE in the past two months requesting additional information about the outage, people familiar with the matter said.

An LSE spokesperson denied that the incident was cyber-security-related, attributing it to a ‘technical software configuration issue following an upgrade of functionality.’ The spokesperson added that the LSE ‘has thoroughly investigated the root cause of the issue to mitigate against any future incidents.’

A spokesperson for regulator the Financial Conduct Authority (FCA) declined to comment on the incident, but said ‘all regulated firms must have appropriate systems and controls in place to manage operational and technology-related risks and we expect them to report material incidents of this nature to us.’

– The SEC’s office of compliance inspections and examinations (OCIE) released its 2020 examination priorities, including areas it believes present potential risks to investors and the integrity of the US capital markets. As in previous years, the areas OCIE’s 2020 exams will focus on include: retail investors, market infrastructure, information security, investment advisers, investment companies, broker-dealers and municipal advisers, anti-money-laundering programs, financial technology and innovation, and oversight of the Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board.

– According to CNBC, presidential contender Senator Elizabeth Warren, D-Massachusetts, unveiled a proposal to revamp the nation’s personal bankruptcy laws. ‘I’m announcing my plan to repeal the harmful provisions in the 2005 bankruptcy bill and overhaul consumer bankruptcy rules in this country to give Americans a better chance of getting back on their feet,’ Warren wrote in the plan. She said her bankruptcy plan would make it easier for those who are in debt to obtain relief through bankruptcy, including by ending ‘the absurd rules that make it nearly impossible to discharge student loan debt.’

The plan targets provisions of the 2005 law that Warren says made the bankruptcy process more complicated and expensive for individuals. She would do away with paperwork requirements in the bill that she said ‘imposed the same onerous paperwork requirements on a middle-class American filing for bankruptcy as it did on a wealthy real estate developer.’

– The US Department of Justice (DoJ) has closed an inquiry into whether Uber Technologies violated the FCPA, the WSJ reported. The Uber probe, disclosed by the company in April, focused on allegations of improper payments in Indonesia, Malaysia, China and India. The company disclosed the end of the probe in a securities filing on Monday, saying the DoJ would be taking no action. An Uber spokesperson declined to comment beyond the filing.

– Banks are taking into account environmental and social risks in determining whether to lend money to certain corporate borrowers, according to the WSJ. A survey published by Fitch Ratings found that 67 percent of banks screen their loan portfolios for ESG risks. Some banks commit to stop lending to companies in industries viewed as high risk, such as those that operate private prisons or manufacture firearms, according to Monsur Hussain, a financial institutions researcher at Fitch. Other banks work with credit underwriters, sustainability experts and investor relations executives to review potential credits.

‘We find that ESG screening leads to greater due diligence,’ Hussain said. Banks rarely decline to lend based on ESG factors alone, he added. A challenge facing banks is how to create quantitative models that estimate how, for instance, the risks of climate change could affect the underlying financial performance of a loan. Most banks are assessing ESG risks qualitatively, executives said.

CNBC said that, according to Challenger Gray & Christmas, there were 1,640 departures by CEOs of US companies in 2019, higher than the 1,484 exits in 2008 when the country was embroiled in the financial crisis. ‘The number of chief executives who announced their departures in 2019 was staggering,’ said Challenger vice president Andrew Challenger in a press release.

‘Following the #MeToo movement, companies were determined to hold CEOs accountable for lapses in judgment pertaining to professional and personal conduct, creating higher ethical standards at the C-level. What may have gone unrecognized or was downplayed in the past was not overlooked by boards, shareholders or the general public in 2019.’

Reuters reported that the FCA has told the heads of commercial insurance companies to stamp out bad behavior in the industry and improve diversity, or risk losing their jobs. The warning follows last year’s admission by Lloyd’s of London of sexual harassment and daytime drinking in the market. Lloyd’s has introduced a plan to raise standards.

‘A senior manager’s failure to take reasonable steps to address non-financial misconduct could lead us to determine that [he or she is] not fit and proper,’ said Jonathan Davidson, the FCA’s executive director of supervision, retail and authorizations, in a letter. Senior manager approval is based on a number of factors including integrity and reputation, the FCA said in the letter to CEOs.

– The WSJ noted that Rod Rosenstein, the former deputy attorney general who oversaw special counsel Robert Mueller’s Russia investigation, is joining King & Spalding. Rosenstein’s role as a partner at King & Spalding is his first job in the private sector after nearly 30 years at the DoJ. He will advise companies and other clients on regulatory, congressional and other investigations as part of the firm’s special matters and government investigations team.

– The WSJ reported that Willie Walsh will stand down as CEO of International Consolidated Airlines Group (IAG) – British Airways’ parent company – on March 26 before retiring at the end of June. He will be succeeded by Iberia CEO Luis Gallego.

Walsh began his career as a Boeing 737 pilot at Aer Lingus and rose through the ranks of the Irish airline to become CEO, before later taking the same role at British Airways in 2005. In 2011 he led the merger of British Airways with Iberia to create IAG. ‘Willie has been the main driver of this unique idea that is IAG,’ IAG’s chair Antonio Vázquez said in a statement.

– The SEC took the first step in potentially changing how stock market data is governed after years of complaints by brokers that the exchanges that control the data are conflicted in their role, according to Reuters. The commission voted to issue for public comment a staff proposal to draw up new rules governing public data feeds that it said would also improve transparency and address inefficiencies in the collection and dissemination of the data.

The proposal would update rules put in place in 2005 that gave exchanges and FINRA responsibility for the governance and operation of three public data feeds showing current best prices and last trades for stocks. Since then, exchanges have created faster, more sophisticated proprietary data feeds that compete against the public feeds.

– The WSJ reported that the UK’s Financial Reporting Council (FRC) is calling for better corporate governance and reporting practices as hundreds of companies in the country prepare to release annual reports based on new rules governing corporate behavior. Companies listed on the premium segment of the LSE with reporting periods starting on or after January 1, 2019 must comply with the 2018 UK Corporate Governance Code, and reporting on compliance with the code will be part of the annual reports published by companies with December 2019 year-ends.

Several early adopters have struggled to define their company’s purpose and many of them used slogans and marketing language to explain their culture, according to the FRC, which has beefed up its scrutiny of companies’ financial reports and audit firms following several corporate failures. ‘There is insufficient consideration of the importance of culture and strategy, or the views of stakeholders,’ it said.

– Matt Miner, a deputy assistant attorney general in the DoJ’s criminal division who helped design policies to incentivize companies to build compliance programs, has left the agency to return to Morgan Lewis & Bockius, the WSJ reported. During his tenure, the criminal division revised guidance for prosecutors on how to evaluate programs that companies create to prevent misconduct. The department has been focused in recent years on getting companies to invest in stronger compliance programs.

Miner will return to Morgan Lewis as a partner on January 21, a spokesperson for the firm said. ‘It was the privilege of my professional career to date to work with my colleagues in the criminal division, especially the career prosecutors in the fraud and appellate sections,’ Miner said in a statement. ‘They represent the true ideal of public servants.’

Reuters reported that officials said the US Federal Trade Commission (FTC) is considering a rule aimed at reining in corporations from pushing employees to sign non-compete agreements that prevent them from working for rival companies. The practice of requiring workers to sign an agreement barring them from leaving for a similar job elsewhere appears to have begun among white-collar professions and have spread to low-wage jobs that require minimal training.

Commission member Rebecca Slaughter said she had not prejudged a decision on a rule but seemed skeptical of such agreements. ‘We know non-compete clauses can limit employee mobility and competition even in states where non-compete clauses are legally unenforceable,’ she said. Commissioner Noah Phillips also seemed skeptical of non-compete agreements because of their potential to reduce labor mobility, but indicated he was reluctant to have the FTC tackle the issue due to a lack of specific authority from Congress or historical precedent.

FINRA released its 2020 risk-monitoring and examination priorities letter, highlighting new priorities and areas of continuing concern that it will continue to focus on in the coming year. New this year is a focus on Regulation Best Interest (Reg BI) and Form CRS, the client relationship summary. In the first part of the year, FINRA will review firms’ preparedness for Reg BI to gain an understanding of implementation challenges they may face. After the June 30, 2020 compliance date, FINRA will examine firms’ compliance with the rule, Form CRS and related SEC guidance and interpretations.

Among other issues identified in the 2020 priorities letter are communications with the public, cash management and bank sweep programs, best execution and cyber-security.

– According to the WSJ, BlackRock said it has joined Climate Action 100+, the world’s largest group of investors by assets, which urges companies to act on climate change. ‘We believe evidence of the impact of climate risk on investment portfolios is building rapidly and we are accelerating our engagement with companies on this critical issue,’ a BlackRock spokesperson said.

‘BlackRock is responding to the demands of its asset owner clients and other groups globally that they take meaningful action to address climate change,’ said Fiona Reynolds, member of the Climate Action 100+ steering committee and CEO of the Principles for Responsible Investment.

Launched in 2017, Climate Action 100+ is a group of more than 370 institutional investors, including the money management arms of HSBC and UBS Group, that now represents roughly $41 trillion in assets thanks to BlackRock’s membership, up from $35 trillion. The group has successfully pressured Royal Dutch Shell and BP to set targets to reduce emissions and disclose more data.


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...