Tag: Risk management

The Spotlight on Boards

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Sabastian V. Niles. Mr. Niles is counsel at Wachtell Lipton specializing in rapid response shareholder activism and preparedness, takeover defense, corporate governance, and M&A.

The ever evolving challenges facing corporate boards, and especially this year the statements by BlackRock, State Street and Vanguard of what they expect from boards, prompts an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have almost as much influence on board and company behavior.

Boards are expected to:


The Importance of Being Earnest About Liquidity Risk Management

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement at an open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The fund industry has witnessed substantial changes in recent years, including the rise of novel investment strategies, a growing use of derivatives, and an increased focus on assets that, traditionally, have been less liquid. Unfortunately, it appears that not all funds’ liquidity risk management practices have kept pace with these developments.

Today [September 22, 2015], the Commission considers proposing a set of rules and amendments that will help ensure that open-end investment companies—which include mutual funds and exchange traded funds—manage their liquidity risks in a prudent and responsible manner. The proposed changes will also help attenuate the dilution risks that confront long-term shareholders, and will give investors needed tools to monitor how well funds are managing their liquidity risk. These proposals are important, because they will adapt our decades-old liquidity regime to the fund industry’s new and vastly altered landscape. The proposals we consider today are especially timely, for at least two reasons. First, a study published just last night suggests that U.S. bond funds need to sharpen their methodologies for analyzing the liquidity of their portfolios, because their current methods might be inadequate. And second, a resurgence of volatility in the bond markets in recent months has, in concert with shifting market dynamics, thrust liquidity concerns in that space to the forefront.

These proposals are intended to foster a rigorous and analytically sound approach to liquidity risk management, while also helping investors to better gauge the ability of funds to fulfill redemption obligations.


Cybersecurity: Enter Insurance Regulators

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Sean Joyce, Chris Joline, Adam Gilbert, Joseph Nocera, and Armen Meyer.

Since issuing its Principles of Effective Cybersecurity last July, [1] the National Association of Insurance Commissioners (“NAIC”) has been making progress in the development of cybersecurity examination manuals. NAIC’s regulatory guidance is intended to help state insurance regulators identify cybersecurity risks and communicate a uniform set of control requirements to insurers, insurance producers, and related regulated entities (collectively, “Insurance Companies”).

Given the priority regulators are placing on cybersecurity (including NAIC’s Cybersecurity Task Force) and the continued occurrence of high profile data breaches, we expect that cybersecurity examinations will commence as early as 2016 and will be performed by insurance regulators as part of their standard three-year exam cycle. While NAIC’s examination manuals will act as guidelines for state regulators, actual regulation will vary by state. Thus, Insurance Companies should be tracking state regulatory developments to ensure that their cybersecurity programs are rigorous and all-encompassing.


Open-End Fund Liquidity Risk Management and Swing Pricing

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Commission will consider a recommendation of the staff to propose a new rule and amendments designed to strengthen the management of liquidity risks by registered open-end investment companies, including mutual funds and exchange-traded funds (or ETFs).

Regulation of the asset management industry is one of the Commission’s most important responsibilities in furthering our mission to protect investors, maintain orderly markets, and promote capital formation. The Commission oversees registered investment companies with combined assets of approximately $18.8 trillion and registered investment advisers with approximately $67 trillion in regulatory assets under their management. At the end of 2014, 53.2 million households, or 43.3 percent of all U.S. households, owned mutual funds. Fittingly, next Tuesday, we will reflect on our history of regulating funds and advisers at an event to celebrate the 75th anniversary of the Investment Company Act and the Investment Advisers Act.


Reg SCI: Ready for Opening Bell?

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer. The complete publication, including footnotes, is available here.

Less than three months remain before the November 3rd, 2015 go-live date of Regulation Systems Compliance and Integrity (“Reg SCI”). While some impacted entities have made great progress toward compliance since the rule was finalized last December, many still have a great deal to do.

Reg SCI is a wide-reaching new regulatory regime aimed at improving the SEC’s oversight of the US securities market and the market’s operational stability. The rule applies to about 35 entities that make up the core of the market’s technological infrastructure (“SCI entities”).

Perhaps the most pressing activity for SCI entities is preparing for the completion of their first annual review by December 31st of this year. This annual review must be performed by the entity’s “objective personnel”—i.e., people who were not involved in the development, testing, or implementation of the relevant systems (or involved in the Reg SCI compliance program itself). Many SCI entities are working to assemble teams of such personnel to carry out the review, which will include detailing the state of the entity’s compliance and identifying needed remediation.


Board Retirement and Tenure Policies

Ann Yerger is an executive director at the EY Center for Board Matters at Ernst & Young LLP. The following post is based on a report from the EY Center for Board Matters, available here.

Investors’ increasing focus on board composition includes attention to whether boards are continuing to refresh and recruit new directors in line with the company’s changing strategic goals and risk profile. But the challenges of effective board succession planning can go beyond finding new directors whose skill sets, diversity, character, and availability match the board’s needs—they may also include asking long-standing directors to leave the board when appropriate, while protecting directors’ collegiality and relationships.

Based on what the EY Center for Board Matters is hearing from investors and directors, optimal practices for aiding board renewal include robust performance evaluations (including following through on key takeaways), assessments that map director qualifications against a board skills matrix, and creating a board culture where directors do not expect to serve until retirement. [1] Director retirement and tenure policies are also among the tools available to boards to ease transitions. Such policies can help depersonalize the process of asking directors to leave the board.


Do Women Stay Out of Trouble?

Anup Agrawal is Professor of Finance at the University of Alabama. This post is based on an article authored by Professor Agrawal; Binay Adhikari, Visiting Assistant Professor of Finance at Miami University; and James Malm, Assistant Professor of Finance at the College of Charleston.

Does the presence of women in a firm’s top management team affect the risk of the firm being sued? A large literature in economics and psychology finds that women tend be more risk-averse, less overconfident, and more law-abiding than men. As more women reach top management positions, these gender differences have implications for firms’ policies and performance. As Neelie Kroes, then European Competition Commissioner provocatively asked in a speech at the World Economic Forum, “If Lehman Brothers had been Lehman Sisters, would the financial crisis have happened like it did?” (see New York Times, February 1, 2009).


Risk Management and the Board of Directors

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Daniel A. Neff, Andrew R. Brownstein, Steven A. Rosenblum, and Adam O. Emmerich.



Corporate risk taking and the monitoring of risks have continued to remain front and center in the minds of boards of directors, legislators and the media, fueled by the powerful mix of continuing worldwide financial instability; ever-increasing regulation; anger and resentment at the alleged power of business and financial executives and boards, including particularly as to compensation during times of economic uncertainty, retrenchment, contraction, and changing dynamics between U.S., European, Asian and emerging market economies; and consistent media attention to corporations and economies in crisis. The reputational damage to companies and their boards that fail to properly manage risk is a major threat, and Institutional Shareholder Services now includes specific reference to risk oversight as part of its criteria for choosing when to recommend withhold votes in uncontested director elections. This focus on the board’s role in risk management has also led to increased public and governmental scrutiny of compensation arrangements and the board’s relationship to excessive risk taking and has brought added emphasis to the relationship between executive compensation and effective risk management. This post highlights a number of issues that have remained critical over the years and provides an update to reflect emerging and recent developments.


Outsourcing: How Cyber Resilient Are You?

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Bruce Oliver, Roozbeh Alavi, Garit Gemeinhardt, Amandeep Lamba, and Joe Walker.

Cyber attacks on financial institutions continue to increase, both in number and impact. While the industry’s defenses against cyber criminals have been improving, recent high-profile breaches indicate that many cyber risk areas remain under addressed.

Regulators are particularly concerned that the industry’s third-party service providers are a weak link that cyber attackers can exploit. [1] Financial institutions have become increasingly reliant on the information technology (IT) services these providers offer, either directly through the outsourcing of IT or indirectly through outsourced business processes that heavily rely on IT (e.g., loan servicing, collections, and payments). [2] Regardless, banks remain ultimately responsible—they own their service providers’ cyber risks.


The UK’s Final Bonus Compensation Rule

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Roozbeh Alavi, Mike Alix, Adam Gilbert, and Armen Meyer. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann; and How to Fix Bankers’ Pay by Lucian Bebchuk.

On June 23rd, the UK’s Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) [1] finalized a joint bonus compensation rule that was proposed last July. While the industry (including subsidiaries and branches of US banks in the UK) had hoped for a more lenient approach, the final rule generally retains the proposal’s stringent requirements, especially with respect to bonus deferral periods and clawbacks. [2]

The rule applies to “senior managers” [3] and other “material risk takers” [4] at UK banks and certain investment firms. As finalized, the rule establishes the toughest regulatory approach to bonus compensation of any major jurisdiction, going beyond the EU-wide CRD IV. [5] Therefore, unless regulators in other major jurisdictions take a similar approach, institutions that are active in the UK are placed at a competitive disadvantage compared to their peers elsewhere.


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