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Aug 02, 2019

The week in GRC: Investors seek activist hedge fund transparency, and DoJ appoints fraud section chief

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

The Wall Street Journal reported that a range of cyber-security regulations proposed by the Chinese authorities are worrying US companies, which see the rules as new barriers to the Chinese market. The new draft rules and standards expand on existing cyber-security laws that the US and many foreign businesses already consider overly tough. Some bar certain data from leaving China or slow down the process of sending data overseas, increasing uncertainties and costs. Tough procurement rules could also place foreign products at a disadvantage.

US companies and trade groups say some of the proposals are too vague and give Chinese officials leeway on enforcement. The Cybersecurity Administration of China and the Ministry of Public Security, which are involved in the various drafts, didn’t respond to requests for comment.

– According to Reuters, investment firm Mellby Gard, which is the biggest shareholder in KappAhl, made an offer to buy the rest of the Swedish fashion group whose profits are under pressure from tough competition in a rapidly changing market. Mellby Gard, the investment vehicle of Rune Andersson, currently owns 29.6 percent of KappAhl. It said synergies with its other holdings could strengthen KappAhl’s competitiveness in a challenging market.

KappAhl said in a statement that an independent bid committee that does not include chair Anders Bülow and board member Thomas Gustafson – both of whom are also on Mellby Gard’s board – would now evaluate the bid.

– Capital One Financial Corp said a hacker accessed the personal information of roughly 106 million card customers and applicants, one of the largest data breaches of a big bank, according to the WSJ. Most of the exposed data involves information submitted by customers and small businesses that applied for Capital One credit cards between 2005 and early 2019, including addresses, dates of birth and self-reported income, the bank said. Capital One said it is unlikely the stolen information was disseminated or used for fraud.

– The Financial Times said the US Department of Justice has appointed Robert Zink as its fraud section chief, filling the role on a permanent basis for the first time in two years. The unit of roughly 150 lawyers is the largest office of white-collar prosecutors within the department, with a focus on foreign bribery, healthcare fraud and securities fraud.

– The SEC announced that Robert Cohen, chief of the division of enforcement’s cyber-unit, will be leaving the agency in August after 15 years. Cohen is the first chief of the cyber-unit, created in 2017. It focuses on violations involving digital assets and cryptocurrency, cyber-related trading violations such as hacking to obtain material non-public information, and cyber-security disclosures and procedures at public companies and financial institutions.

‘I’m grateful to Rob for his thoughtfulness, expertise and leadership in taking on the creation of the cyber-unit,’ said SEC chair Jay Clayton. ‘He leaves the unit well positioned to continue the critical work of protecting our markets and retail investors in this complex and continually developing area.’

Reuters reported that investors and fund managers say pension funds, sovereign wealth funds and other big institutional investors are demanding US activist hedge funds be more transparent about their investment ideas and charge less.

Institutional investors are increasingly pressuring these hedge fund managers to raise separate pots of capital for each company they target through special-purpose vehicles and have been able to drive down how much they pay for investment gains. Fund managers must now bring their best ideas, fully formed and described in detail in glossy pitch books, outlining to their investors exactly how they plan to increase a company’s stock.

‘This structure lets us look at dozens of transactions and only invest in a manager’s very best ideas,’ said Gregg Hymowitz, CEO of EnTrust Global, one of the largest investors in special-purpose vehicles raised by activist hedge funds.

– The WSJ reported that the UK Financial Reporting Council (FRC) imposed higher fines and opened more new enforcement cases during the year that ended March 31. The FRC issued £42.9 million ($52.19 million) in fines to audit and accounting firms, up from £15.5 million during the same period a year earlier, according to the regulator. The FRC concluded 13 cases, four more than in the previous year, and opened 15 new investigations, up from 14. The FRC has 41 open cases.

‘Recent corporate collapses have brought corporate reporting, governance and the role of audit under intense scrutiny with fundamental questions raised from many quarters as to the function of audit and whether it is meeting society’s needs and expectations,’ the FRC said in its report. As part of the changes in the sector, the FRC will become part of a new statutory audit and accounting body called the Audit, Reporting and Governance Authority.

– Federal Deposit Insurance Corporation (FDIC) chair Jelena McWilliams said cyber-security is the biggest threat facing US banks, CNN reported. ‘It's something we take very seriously,’ McWilliams said, adding that the FDIC could fine a bank that suffers a major breach after failing to fix weak cyber-defenses flagged by the agency. Beyond a fine, she said poor cyber-defenses could force regulators to downgrade their ratings on bank management teams.

McWilliams said the FDIC is ‘monitoring’ the cyber-defenses and ‘continuously’ testing the safety and structure of banks' networks and firewalls. The agency then points out weaknesses, orders banks to fix them and monitors whether progress has been made.

Bloomberg said that, according to a study, companies that wait too long to appoint their first female board member are more likely to pick one who is already a director elsewhere, meaning that she will have less time to devote to the company. Lone female directors serve on an average of roughly 1.4 boards, the busiest of all classes of directors, according to research by Bloomberg Intelligence analyst Rob Du Boff, who described the phenomenon as ‘ovHERboardedness.’

For women on boards in the S&P 500 or Stoxx 600 with two or more female directors, there was little evidence the candidates had the same sorts of issues, Du Boff said. ‘In companies where there was only one woman on the board, the number of average board seats was elevated,’ he said. ‘The number of board seats for men was below average’ for those boards.

– According to the WSJ, Carlyle Group said it would drop its partnership structure and become a corporation with a single class of shares, going a step further than other private-equity firms that have already converted. Each of the new Carlyle shares will have one vote, giving greater say to the roughly 30 percent of shareholders who aren’t insiders at the firm. The changes are expected to pave the way for Carlyle’s inclusion in indexes such as FTSE Russell’s, which have minimum requirements for public-shareholder voting rights, and the S&P 500, which doesn’t allow companies with more than one class of shares.

The conversion is scheduled to be complete on January 1, 2020.

Carlyle is the latest in a wave of private-equity firms to convert to a so-called C corporation, prompted by the passage of a new US tax law in late 2017 that lowered the highest corporate rate to 21 percent from 35 percent.

Reuters reported that trade groups representing many of the largest asset managers said in a legal filing that an SEC plan to study how stock exchange fees and incentives affect brokers’ trading habits is in the best interest of investors and should go ahead. The transaction fee pilot is intended to assess how rebate payments most stock exchanges make to brokers for stock orders that add liquidity influences brokers’ behavior. The agency delayed its start date in March after the three largest exchange operators sued to prevent it.

The exchanges say rebates help attract liquidity, while also compensating brokers for taking the risk of providing two-sided bid and ask prices for others to trade against. But the system has many critics. ‘The transaction fee pilot is a constructive and long overdue first step toward fixing an outdated and byzantine pricing model that is badly in need of reform,’ the Investment Company Institute and the Council of Institutional Investors said in a joint amicus brief in support of the SEC. ‘It should be allowed to proceed.’

– GoDaddy said CEO Scott Wagner is stepping down due to health reasons, according to the FT. Wagner, who has led GoDaddy since January 2018, will be replaced by former Expedia executive Aman Bhutani beginning September 4.

‘The board and I have worked to identify a tremendous successor, and lay the groundwork for a smooth transition,’ Wagner said in a statement. He joined GoDaddy in 2013 having spent 13 years at private-equity firm KKR, which was part of a group that acquired the company in 2011. GoDaddy went public in 2015.

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...