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Aug 05, 2022

The week in GRC: US companies face year-round wildfire threat and S&P 500 firms face more shareholder proposals

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

The Wall Street Journal (paywall) reported that the New York State Department of Financial Services (NYDFS) imposed a $30 mn fine on the cryptocurrency trading unit of online brokerage Robinhood Markets for alleged violations of anti-money-laundering and cyber-security regulations. It is the department’s first crypto-related enforcement action.

NYDFS said Robinhood Crypto failed to maintain and certify compliant anti-money-laundering and cyber-security programs. As part of the consent order, Robinhood will also be required to retain an independent consultant to evaluate its compliance with the department’s regulations and its remediation efforts. The regulator said the firm’s Bank Secrecy Act and anti-money-laundering compliance program was insufficiently staffed and did not transition in a timely manner from a manual transaction monitoring system that was appropriate for the company’s size, transaction volumes and customer profiles.

‘We have made significant progress building industry-leading legal, compliance and cyber-security programs, and will continue to prioritize this work to best serve our customers,’ said Cheryl Crumpton, Robinhood’s associate general counsel of litigation and regulatory enforcement, in a statement. ‘We remain proud to offer a more accessible, lower-cost platform to buy and sell crypto and are excited to continue to grow our business in a responsible manner with new products and services our customers want.’

Reuters said the number of people applying to law school this fall declined 12 percent from the previous year, suggesting a surge of applicants in 2021 was an anomaly rather than a new normal. There were 62,520 applicants nationally this year, according to data from the Law School Admission Council. That is down 8,592 from last year, when the applicant pool spiked by 13 percent. It is also a slight drop from 2020, with 864 fewer applicants.

‘What we’ve seen is a rapid return – a more rapid return than anyone expected – to normality,’ said law school admissions consultant Mike Spivey.

Although smaller, this year’s applicant pool represents an all-time high for minorities, who comprise 43 percent of all applicants, said Susan Krinsky, the council’s executive vice president for operations.

– The WSJ reported that, according to data analytics firm ESGUAGE, investors submitted 650 proposals to S&P 500 companies as of July 29, up from 613 proposals and 556 proposals during the same period in 2021 and 2020, respectively. The increase follows changes to SEC guidance on the conditions under which it will give no-action relief for companies to exclude proposals. The SEC last month proposed additional changes.

‘These changes will make it more challenging to get shareholder proposals excluded,’ said Laura Richman, counsel at law firm Mayer Brown, who didn’t speak about specific proposals. ‘So we may see more of them next year.’ Companies have to spend more time and money to engage with investors as they submit more proposals and become more prescriptive in what they are seeking, lawyers said. The latter is resulting in a lower percentage of proposals gaining majority support.

– According to the WSJ, wildfires are becoming a year-round challenge for businesses as the US gets hotter, although experts say proactive measures can help. The costliest US wildfire to date, the 2018 Camp Fire in California, caused an estimated $10.4 bn in insured losses, according to Aon. Companies across the country, including in areas not seen as traditional wildfire hot spots, should take steps to mitigate the risk, experts said.

‘It’s about not being reactive – it’s about being proactive,’ said Richard Standring, a senior risk consultant at insurer Allianz. ‘No states are immune from wildfire. The map is really being redrawn.’ Every state bar Delaware had wildfires last year, and experts are predicting an above-average season for this year, Standring added.

Businesses are increasingly planning ahead for how their operations might respond to a wildfire – for example, with tabletop exercises to run through scenarios, said Steve Hernandez, a risk control expert at insurer CNA.

– Ben & Jerry’s independent board said parent company Unilever, with which it is in a dispute over the sale of its Israeli business, had frozen its directors’ salaries in July as a pressure tactic ahead of a mediation on the matter, Reuters reported. Ben & Jerry’s sued Unilever on July 5 to try to stop the sale of its business in Israel to local licensee Avi Zinger. Ben & Jerry’s last year said it no longer wanted to sell its products in the occupied West Bank because it was ‘inconsistent’ with its values, which prompted Unilever to make the sale.

‘This decision for us to go to court is because of Unilever’s sale without our input, which is a clear violation of the letter and the spirit of our original acquisition agreement with Unilever,’ board chair Anuradha Mittal said. ‘If Unilever is willing to so blatantly violate the agreement that has governed the parties’ conduct for more than two decades, then we believe it won’t stop with this issue. If left unaddressed, Unilever’s actions will undermine our social mission and essential integrity of the brand, which threatens our reputation and ultimately our business as a whole.’

Unilever said in a statement that it reserved primary responsibility for financial and operations decisions under the terms of its acquisition of Ben & Jerry's, and 'therefore has the right to enter this agreement with Avi Zinger.'

– The SEC appointed Anthony Thompson to a second term as a member of the Public Company Accounting Oversight Board (PCAOB). Thompson joined the board on January 3, 2022, filling a term that expires on October 24, 2022. His second term will run until October 24, 2027.

‘I am pleased Tony will serve a second term on the PCAOB board,’ said SEC chair Gary Gensler in a statement. ‘The public will continue to benefit from Tony’s dedication and broad expertise. I am confident he will help the PCAOB build and sustain trust in the financial information that public companies disclose to investors.’

– The WSJ reported that airfreight company Atlas Air Worldwide Holdings has agreed to be bought by a consortium of investors led by Apollo Global Management. An Atlas spokesperson said the deal has an equity value of $3.2 bn. Atlas Air serves freight, commercial, charter and military customers. The deal comes amid an overall slowdown in M&A, including for private equity firms, in part because higher interest rates have made financing deals more expensive and buyout loans harder to come by.

Atlas Air has been a consistent presence among the nominees and winners of the Corporate Governance Awards in recent years. Among other things, the company was honored in the best proxy statement (small cap) category at last year’s awards and Adam Kokas, executive vice president, general counsel and secretary, was named governance professional of the year (small to mid-cap) at the 2019 awards.

– New York Attorney General Letitia James said in a letter to Transportation Secretary Pete Buttigieg that the US Department of Transportation should increase its oversight and regulation of airlines to address flight issues in airports across the country, according to the WSJ. James called for investigations, potentially leading to fines if airlines deliberately book flights despite staff shortages. ‘Airlines knowingly advertising and booking flights they do not have adequate staff to operate are flying in the face of the law,’ she said.

Flight cancellations have hit New York-area airports particularly hard. Nearly 8 percent of departures from Newark Liberty International and 7.2 percent of departures from LaGuardia Airport during the period from June 1 to June 12 were canceled, according to FlightAware. Both figures were steep rises from 2019.

A spokesperson for James said her office isn’t contemplating taking any enforcement action on its own. Asked for comment, a Transportation Department representative said airlines that fail to meet their responsibilities ‘will be held accountable.’