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Jun 15, 2018

The week in GRC: SEC’s Clayton says bulk of Dodd-Frank to stay, and investors balk at research tracking

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

The New York Times noted that the Federal Communications Commission’s repeal of net neutrality rules – which had required internet service providers to offer equal access to all web content – took effect on Monday, and looked at the likely impacts.

– Under proposed new government rules, the largest UK companies will from 2020 be legally required to publish the gap between the salary of their CEO and what they pay their average UK worker, according to Reuters. Business minister Greg Clark said the government would set out new laws in Parliament that would require UK-listed companies with more than 250 employees to reveal their pay gap and justify their CEO’s salary. ‘We understand the anger of workers and shareholders when bosses’ pay is out of step with company performance,’ Clark said.

The Wall Street Journal noted that data suggests gains stocks usually reap when they debut in the S&P 500 are short-lived. Stocks tend to rise when added to the broad market index, with some attributing that to portfolio managers whose funds track the index rushing to buy them. But data challenges the assumption that index inclusion boosts long-term stock performance.

Changes to the S&P 500 are made by a committee that meets monthly, according to a spokesperson for S&P Dow Jones Indices. Stocks are chosen on the basis of their size, liquidity and record of corporate profitability, among other factors, with pending announcements closely guarded to avoid prematurely causing stock swings.

CNBC reported that hedge fund manager and philanthropist Paul Tudor Jones said the definition of capitalism in the US is due for an overhaul because of income inequality. ‘Capitalism may need modernizing,’ Jones said. ‘In 1985, 35 percent of the nation’s wealth was owned by the bottom 90 percent [of the populace]. Today, they own 23 percent, and [those 12 percentage points] have gone to the top.’ He pointed to Milton Friedman’s nearly 50-year-old definition that the ‘social responsibility of a company is to improve its profits.’

‘When Milton Friedman said that, tax rates had just come from 91 percent to 70 [percent] and income inequality was one fifth of what it is today,’ Jones said. ‘You can see how it was relevant at the time but fast forward to where we are today [and] it’s a different deal.’

– Activist Elliott Management is hoping to strike a deal with Sempra Energy and its CEO Jeff Martin to replace six board members and initiate a strategic review of the company, which Elliott argues has become a scattered conglomerate with disparate pieces, according to the WSJ. Elliott and Bluescape Resources, an energy investment firm it sometimes works with, said they own a combined 4.9 percent Sempra stake. Sempra said in a statement that it is reviewing the investors’ letter and presentation and is committed to an open dialogue with shareholders and delivering long-term value.

– The WSJ reported SEC chair Jay Clayton as saying that the vast majority of the Dodd-Frank Act isn’t going anywhere. Clayton said regulators are evaluating how post-financial crisis rules have performed in practice, and that he had concerns about some of the unintended side effects from some regulations. But any changes will be around the edges, keeping the core of post-crisis overhauls in place, he added.

– Toshiba said it planned to buy back shares worth roughly ¥700 billion ($6.3 billion), the largest buyback from the market on record in Japan, appealing to foreign shareholders that took a big stake last year, according to the WSJ. The company will use proceeds from an $18 billion deal to sell its flash-memory unit to a consortium led by Bain Capital, which closed June 1. Toshiba said that in deciding on the buyback, it paid heed to the views of shareholders, particularly overseas investors that believed it was undervalued.

– The FT reported that foreign banks in the US are pushing for regulatory relief, complaining that they have been unfairly hit by tougher capital standards developed under the Obama administration. Industry groups say they have put the issue at the top of their agenda for the remainder of the year, after signals the Federal Reserve is open to relaxing the rules. At issue is ringfencing – the requirement that non-US banks operating in the country set up stand-alone subsidiaries with dedicated capital and liquidity inside them.

Reuters reported that AT&T secured court approval to buy Time Warner for $85 billion, prevailing against an effort by President Donald Trump’s administration to block the deal and likely setting off a series of corporate mergers. Trump, a frequent detractor of Time Warner’s CNN and its coverage, denounced the deal when it was announced. US District Judge Richard Leon found little to support the government’s arguments the deal would harm consumers, calling one position ‘gossamer-thin’ and another ‘poppycock.'

– According to The New York Times, the New York State Court of Appeals reined in the Martin Act, a powerful law used by the state’s top prosecutor to bring fraud charges against Wall Street firms. The decision stated that the statute of limitations for bringing claims under the Martin Act is three years, not six.

A spokesperson for Barbara Underwood, the acting New York attorney general, said in a statement that the ruling’s effects would be limited because most of the office’s cases against Wall Street firms are brought in a timely fashion. ‘We don’t anticipate this impacting our cases in any significant way,’ the spokesperson said. ‘We intend to move forward all of our existing investigations and prosecutions.’

– Banks, facing pressure to find new ways to boost revenue in their research units, are collecting data on what their clients are reading and when – but some investors who make trading decisions based on that research are pushing back, according to the WSJ.

To bolster their research business, banks are increasingly using some of the techniques adopted by advertising and media companies, such as tracking who has access to the notes to ensure everyone is paying. They also want to keep track of what clients are reading to help better price research products. ‘It’s a real tug of war,’ said Philip Brittan, CEO of Crux Informatics, which helps banks organize and potentially sell their internal data. ‘Banks will say it’s our property, and [clients] will say their usage is their property. It’s an unsettled topic.’

The FT reported that, under a proposed new corporate governance code, private companies in the UK will be urged to align executive pay with the long-term outlook for their business and identify risks that could undermine them. James Wates, who chairs Wates Group, one of the UK’s largest family-owned construction companies, set out the principles after being asked by the government to bring about a ‘step change’ in the way large private companies are run.

Wates said the new principles would ‘provide a flexible tool’ for private companies to understand good practice in corporate governance. Frances O’Grady, TUC general secretary, said recent corporate scandals showed it was clear standards must improve at private businesses.

Reuters reported that a proposal to simplify the Volcker Rule may – rather than making life easier for Wall Street firms – entangle billions of dollars’ worth of assets not caught by the regulation at present. The little-noticed wrinkle, if enacted, could prompt Wall Street firms to overhaul their treasury, trading and merchant banking operations and change their accounting practices, according to lawyers and executives. They say the proposal could create new headaches for big banks by banning a swath of trades and long-term investments not currently covered by the rule.

‘It’s going to capture trades that wouldn’t be captured by the current regulation – and that’s the bogeyman people would want to avoid in this proposal,’ said Jacques Schillaci, a banking lawyer at Linklaters.

Spokespeople for the Federal Reserve, SEC, Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation declined to comment. A spokesperson for the Office of the Comptroller of the Currency said the agency looked forward to reviewing stakeholder comments.

– Unilever, one of the UK’s biggest companies, looks set to leave the FTSE 100, the country’s blue chip stock index, the WSJ reported. The company said it was ‘extremely unlikely’ it would keep a place in the index after it consolidates its UK and Dutch legal structure in the Netherlands. It currently operates as two separately listed companies, Unilever PLC in the UK and Unilever NV in the Netherlands.

Unilever will still retain a listing in London but not one that allows it to be included in the FTSE 100, of which it is one of the largest components. On the flip side, Unilever’s weighting in pan-European indices will increase. It will also be listed in the Netherlands and the US.

Unilever CFO Graeme Pitkethly maintained that ‘simplification is the right thing for the company.’ The company in March said it would unify its dual structure, picking Rotterdam as its headquarters over London.