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Apr 20, 2018

The week in GRC: Wells Fargo to pay $1 billion to settle probes, and Cuomo pressures banks over NRA ties

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

– The Financial Times reported that BlackRock founder and CEO Larry Fink made $28 million last year, up by nearly 10 percent from 2016 and 195 times the median compensation at the world’s biggest asset manager, which has campaigned against excessive executive pay. According to BlackRock’s most recent proxy statement, Fink was paid a base salary of $900,000 in the 12 months to December, a $10 million cash bonus and deferred shares worth about $17 million, some of which are linked to long-term performance goals.

The Dodd-Frank Act requires that US listed companies now report their CEO-median worker pay ratios. Given BlackRock’s higher median compensation, Fink’s CEO pay ratio of 195 times was lower than that of other Wall Street leaders.

– Deutsche Bank CFO James von Moltke told Bloomberg that the European Central Bank (ECB) has asked the lender to simulate an orderly wind-down of its trading book. ‘There’s no novelty about the exercise per se; the novelty is that we’re doing this with the ECB,’ von Moltke said. The exercise will take several months, being ‘broader in scope’ than previous ones carried out for UK and US supervisors, he said.

Modeling the winding down of viable businesses, which regulators in the US and the UK have required for years, is different from the broader planning for closing an entire bank, which focuses on reacting to a bankruptcy. An ECB spokesperson declined to say whether Deutsche Bank was the first bank to receive such a request, noting that ‘the ECB does not comment on individual banks.’

Reuters noted that the US House of Representatives voted on April 13 to make the Federal Reserve the primary regulator for the Volcker Rule. The bill would streamline the rule, which is currently enforced by five separate regulators. The degree of bipartisan support for the measure suggests House lawmakers may try to include it in a broader bill easing bank rules that has already passed the Senate.

– According to the FT, Hong Kong Exchanges and Clearing (HKEX) is using artificial intelligence (AI) to detect unusual trading activity as it steps up efforts to root out stock price manipulation and market abuses. HKEX is the first exchange in Asia to use the surveillance software created by Nasdaq, which uses AI to help predict unusual trading activity. The software analyses historic trading activity to identify patterns and anomalies, such as dramatic rises in trading volumes or wild swings in share prices. It then combines this with the exchange analysts’ historical assessments of trading data to determine which areas to monitor.

– The Financial Industry Regulatory Authority (Finra) named Timothy Scheve, president and CEO of Janney Montgomery Scott, as a new ‘large firm governor’ on its board of governors. Scheve was appointed to complete the term of former governor John Thiel, who left the board earlier this year. Scheve became Janney’s president and CEO in August 2007.

Finra is overseen by a board of governors, the majority of whom are public representatives. The 10 industry governors include three from large firms, one from a medium-sized firm, three from small firms, one floor member, one independent dealer/insurance affiliate and one investment company affiliate.

Reuters reported that Legal & General Investment Management (LGIM), one of Europe’s biggest asset managers, has written to the CEOs of some of the world’s largest companies calling for more action on female representation on boards, gender pay gaps and climate change. LGIM has taken a lead in improving corporate governance and its voting intentions are keenly watched, particularly by major corporations, in which it is often a leading shareholder.

LGIM said it would vote against UK companies where women did not represent at least a quarter of the board, and wanted a full breakdown of any gender pay gap and plans to close it. It also said boards should consider creating an advisory committee of external experts to help challenge consensus views.

– According to the WSJ, proxy advisory firm ISS in a note to institutional investor clients called for Equifax investors to vote against the re-election of five Equifax board members who served on the company’s audit and technology committees before a 2017 data breach. The five board members in their roles on the technology committee ‘had clear lines of responsibility for risk management related to technology security,’ ISS’ report states. The breach and Equifax’s failure to quickly notify the public ‘suggest a failure to adequately oversee some of the most significant risks facing the company,’ it adds.

An Equifax spokesperson said the company has met with the majority of its shareholder base in recent months, adding: ‘We are confident our investors will conduct their own analysis... and believe they will recognize the tireless efforts of each of our directors.’ The five board members couldn’t be reached for comment.

Reuters reported that Telecom Italia’s management defended its strategy, saying alternative moves proposed by activist fund firm Elliott Advisers were premature, unfeasible and carried financial and execution risks. Elliott, now Telecom Italia’s second-largest investor with a 9 percent stake, is pushing for a shake-up of the phone firm. The activist fund, which is seeking to replace six of the board candidates nominated by top shareholder Vivendi, has also said it would push to reintroduce dividends and convert Telecom Italia’s savings shares into ordinary ones.

The company’s management, in a presentation to investors, said it had evaluated all the actions proposed by Elliott, but decided they were either premature or unfeasible to be included in its current strategy, unveiled last month by CEO Amos Genish. ‘Furthermore, in the current context and regulatory environment, they would carry material financial and execution implications,’ the company said. Elliott had no immediate comment.

– Activist investor Carl Icahn and Darwin Deason deepened their battle with Xerox over the proposed Fujifilm merger, alleging poor governance and laying out their own plan for the company, the FT reported. In a letter accompanying a presentation, Icahn and Dawson said: ‘Both the substance of the proposed value-destroying transaction and the conflict-tainted process by which it was hatched are an insult to long-suffering Xerox shareholders and make a mockery of well-established corporate governance norms.’

Xerox responded in a statement, saying in part: ‘Mr Icahn and Mr Deason have joined forces in a highly disingenuous campaign that distorts and omits key facts about Xerox, its board and management team, and the proposed combination with Fuji Xerox. Their ongoing attacks risk damaging the company and its ability to create value for shareholders. Their presentation and accompanying letter rehash prior misleading statements and fail to provide a credible or actionable alternative to create value for Xerox shareholders.’

– According to the WSJ, Wynn Resorts’ largest shareholder, Elaine Wynn, demanded that the company move swiftly to restructure its board and improve its corporate governance as regulators continue to investigate the company’s handling of sexual misconduct allegations against her ex-husband, former CEO Steve Wynn. He denies any wrongdoing. Elaine Wynn said in a letter to the board that she was focused both on maximizing the company’s value and on ‘fully restoring its reputation and in transforming it into a corporate governance leader’, according to an SEC filing.

A Wynn Resorts spokesperson declined to comment on the filing. Representatives for the company’s board didn’t respond to requests for comment.

Reuters reported that the SEC proposed a new rule that would require brokers to clearly explain the fees investors pay and commissions brokers earn when giving financial advice. The proposed Regulation Best Interest would require brokerages to put that information, along with any conflicts of interest and questions clients should ask, in a four-page disclosure document that brokers would be required to give investors.

If passed, the proposed rule would replace the Obama-era fiduciary duty rule, which was issued by the US Department of Labor and overturned in March by the 5th US Circuit Court of Appeals. SEC commissioner Kara Stein was critical of the proposed rule and voted that it not be opened up for the 90-day public comment period because, she said, it does not set hard lines defining what is in a client’s best interest and will add to confusion.

– The European Commission gained greater authority over the approval of car models across Europe under a new law meant to prevent a repeat of Volkswagen’s emissions-test scandal, according to Bloomberg. The commission won the power to fine automakers up to €30,000 ($37,131) per faulty car and order recalls as part of more centralized market oversight approved by the European Parliament. The EU legislation makes the commission more like the US Environmental Protection Agency.

CNN Money reported that Wynn Resorts appointed three women to its board of directors. ‘These appointments signify a turning point for us, and I look forward to working with each of our new directors as we usher in a new era at Wynn,’ CEO Matt Maddox said. Wynn’s board of directors announced the appointments more than two months after Wynn Resorts founder Steve Wynn resigned as CEO, citing ‘an avalanche of negative publicity’. He has denied allegations of sexual misconduct.

The board said its new members are Wendy Webb, CEO of Kestrel Advisors, ‘three-time CEO’ Betsy Atkins and Dee Dee Myers, a public relations executive for Warner Brothers Entertainment who was White House press secretary during the Clinton administration.

– Paint maker PPG Industries said it has launched an investigation after receiving a report alleging violations of its accounting policies, according to the WSJ. The company said it recently received a complaint through its internal reporting system regarding how it recorded certain expenses in its first quarter. In an initial review, the company said it identified about $1.4 million of expenses that should have been accrued. The audit committee of PPG’s board is investigating the matter, the company said, adding that it is unable to predict the timing or outcome of the inquiry.

– The SEC said Douglas Scheidt, an associate director and the chief counsel in the division of investment management, will retire from the agency at the end of September. Scheidt has led the division’s chief counsel’s office for more than 21 years. During his tenure, he has provided legal and policy guidance for the asset management industry on a wide variety of matters, with a focus on regulatory compliance and the duties of fund directors and investment advisers, including valuation, distribution, fiduciary duty, fund governance, affiliated transactions and portfolio management.

Bloomberg reported that Wells Fargo will pay $1 billion to settle US regulatory probes into mistreatment of consumers. The bank will pay penalties of $500 million each to the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency, according to a statement from the CFPB. The settlement covers issues in Wells Fargo’s auto-lending and mortgage units. The bank revealed last year that it had forced unwanted insurance on customers who took out car loans, prompting investigations by US and California regulators.

The bank settled without admitting or denying wrongdoing. CEO Tim Sloan, who took the helm after scandals began emerging in 2016, said in a statement: ‘While we have more work to do, these orders affirm that we share the same priorities [as] our regulators and that we are committed to working with them as we deliver our commitments with focus, accountability and transparency.’

– New York Governor Andrew Cuomo ramped up pressure on banks and insurers to revisit whether their ties to the National Rifle Association (NRA) and other gun rights groups harm their reputations and the public interest, according to Reuters. Cuomo noted that some well-known companies, including MetLife, have ended some business relationships with the NRA after a gunman killed 17 people at a Parkland, Florida, high school on Valentine’s Day.

The governor directed the New York State Department of Financial Services to urge state-chartered banks and the more than 1,400 insurers it regulates to review whether their ties to the NRA and similar groups sends the ‘wrong message’ to clients and communities. ‘This is not just a matter of reputation, it is a matter of public safety,’ Cuomo said.

– The WSJ said Barclays CEO Jes Staley will keep his job after UK regulators concluded his efforts to unmask a whistleblower didn’t represent a ‘lack of integrity’ and instead chose to fine him. The bank said it still backed Staley. Last year Barclays flagged to regulators Staley’s attempts to reveal the identity of a whistleblower who criticized a hire he had made.

On Friday the bank said the UK’s Financial Conduct Authority and Prudential Regulation Authority concluded that Staley didn’t act ‘with a lack of integrity or that he lacks fitness and propriety to continue to perform his role.’ He does face a fine, however, and Barclays’ board has already said it would dock some of his 2016 pay. Barclays said it couldn’t comment on the outcome of the probe because Staley still has the right to challenge the fine.