Tag: Risk management


Governance Challenges Arising From “Corporate Cooperation” Concepts

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine, with assistance from Joshua T. Buchman and Kelsey J. Leingang; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

The current Department of Justice emphasis on “corporate cooperation” in the context of government investigations creates the potential for significant tension to arise between governance and executive leadership, which potential should be recognized and addressed proactively by the board.

The DOJ Criminal Division has, with notable frequency this spring, sought to increase public transparency as to the process it applies when making a decision with respect to corporate prosecutions. A principal goal of DOJ’s public effort is to clarify the parameters it considers in deciding how to proceed when made aware of alleged corporate wrongdoing. This goal includes making the value of cooperation, and the consequences of noncooperation, more clearly apparent to corporations and their advisors. [1]

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Quality Data and the Power of Prevention

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent address at Meet the Market North America, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As many of you know, I care passionately about the success of the Legal Entity Identifier (or LEI).

With the financial crisis in the rear view mirror, it is sometimes easy to forget the forces that converged in 2007 and harmed both our financial markets and our economy. The events of 2008 are indelibly etched into my memory. I remember when many of our country’s economic leaders began closed-door briefings with members of Congress. Concerned about the unfolding financial crisis, the Chair of the Federal Reserve and the Secretary of Treasury plead for help and for an unprecedented financial intervention to stave off another Great Depression. They wanted tools to protect our nation from powerful forces that were pulling the financial system deeper and deeper into distress and potential chaos. At the edge of the abyss, our economic and policy leaders developed a strategy to stabilize our financial system and unlock the halting credit markets. [1]

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Wham, Bam, Thank You Spam! Don’t Click on the Link!

Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on a Weil Alert authored by Mr. Ferrillo and Randi Singer; the complete publication, including footnotes, is available here.

It seems that just like in old times (in cyberspace that means last year) the existence of “snake-oil” salesmen on the Internet is getting worse, not better. Rather than selling something medicinal or at the very least useful, these snake-oil salesmen of today have one intent only: to steal your personal information or worse, to distribute malware to your computer. One recent report issued by Symantec in April 2015 literally details scores of scams all designed to steal information and potentially ruin your computer (and others’ as well) and steal your personal information. We detail them not out of morbid curiosity of the utter gall of the snake-oil salesmen, but to hopefully inform and prevent the inadvertent “click on the link” circumstances which you and your company would rather avoid. We also point to other recently issued reports noting that other scams like phishing and spear phishing continue to be a bothersome and dangerous component of company emails. At the end of the day, continuous employee training and awareness of these sorts of scams is truly a strong part of the Holy Grail of Cybersecurity, along with certain network hardware components that can help stop “bad” emails before they get to your employees’ desktops.

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The Prudent Investor Rule and Market Risk

Robert H. Sitkoff is the John L. Gray Professor of Law at Harvard Law School.

In a new working paper, entitled “The Prudent Investor Rule and Market Risk: An Empirical Analysis,” we examine fiduciary management of market risk. The backdrop for our study is a law reform that was meant to overcome a long tradition in fiduciary investment of equating stock with speculation. By focusing categorically on risk avoidance, traditional law did not account for the difference between idiosyncratic risk and market risk, the relationship between risk and return, or beneficiary risk tolerance. Worse still, courts considered the riskiness of each investment in isolation rather than in light of overall portfolio risk.

Twentieth century advances in economics and finance, however, led to extensive reform to the law of trust investment. The centerpiece of this reform is the prudent investor rule, which reorients fiduciary investment from risk avoidance to risk management in accordance with modern portfolio theory. Because the rule has been adopted in every state, because it applies to the entire field of fiduciary investing, including pension funds and charitable endowments, and because it has been adopted across the British Commonwealth, the rule governs the investment of many trillions of dollars in assets.

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Three Practical Steps to Oversee Enterprise Risk Management

The following post comes to us from Latham & Watkins LLP, and is based on a Latham publication by Scott Hodgkins, Steven B. Stokdyk, and Joel H. Trotter.

Oversight of enterprise risk management, or ERM, continues to challenge boards and occupy a prominent place on the governance agenda. Effective ERM seeks to balance risk and opportunity while enhancing value-creation opportunities. Proxy advisors may recommend “against” or “withhold” votes against directors of companies that experience a material failure of risk oversight.

A leading ERM framework, developed by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, directs boards to:

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The Influence of Board of Directors’ Risk Oversight on Risk Management Maturity and Firm Risk-Taking

The following post comes to us from Christopher Ittner of the Department of Accounting at the University of Pennsylvania and Thomas Keusch of the Department of Business Economics at Erasmus University Rotterdam.

A variety of external events, including inquiries into the causes of the 2008 financial crisis and changes in regulations and listing rules have fostered rising expectations for boards of directors to exert greater oversight of their organizations’ risk management processes. The primary impetus behind these external pressures is the belief that stronger board oversight over risk management processes will lead to substantive improvements in risk management and more informed risk-taking. Many observers, however, argue that board members often lack the time, skills, and information necessary for effective risk oversight. They contend that the adoption of governance practices that are advocated or mandated by external parties is often window-dressing. This point of view suggests that board risk oversight will have little effect on companies’ risk management practices or risk-taking.

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Preparing for the Regulatory Challenges of the 21st Century

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent remarks at the Georgia Law Review’s Annual Symposium, Financial Regulation: Reflections and Projections; 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.

During my tenure as an SEC Commissioner, our country’s economy has experienced extreme highs and lows. In fact, the country experienced the worst financial crisis since the Great Depression, followed by the current period of significant economic growth where the stock market has grown by around 165% from the low point of the financial crisis.

I have had a front-row seat to all of this, as I became an SEC Commissioner just weeks before the financial crisis hit our nation. As a result, I witnessed first-hand just how fragile our capital markets can be, and the need for a robust and effective SEC to protect them. First, let me provide a snapshot of what went on. I was sworn-in as an SEC Commissioner on July 31, 2008. Within a few weeks, on September 15, 2008, Lehman Brothers filed for bankruptcy. To give you a sense of its rapid decline, within 15 days, its share price went from $17.50 per share to virtually worthless. The demise of Lehman Brothers is often seen as the first in a rapid succession of events that led to an unimaginable market and liquidity crisis. These events included:

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Chairman’s Address at SEC Speaks 2015

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent address at the Practising Law Institute’s SEC Speaks in 2015 Conference; the full text, including footnotes, is 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.

By every meaningful measure, 2014 was a year of significant accomplishment across all of the agency’s areas of responsibility. The year was highlighted by the completion of several transformative rulemakings, including new policy reforms to address faults exposed during the financial crisis and initiatives to better address vulnerabilities in the resiliency and integrity of our markets. It was also an unprecedented year in enforcement, in terms of the number of cases and, more importantly, their subject matter. We made important strides in our review and action plans for optimizing the structure of our equity and fixed income markets, enhancing our risk supervision of the asset management industry and bolstering the effectiveness of public company disclosure. We also significantly strengthened our examination coverage of market participants. But, as always, we have more to do and expect a very busy 2015.

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Financial Market Utilities: Is the System Safer?

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication.

It has been two and a half years since the Financial Stability Oversight Council (FSOC) designated select financial market utilities (FMUs) as “systemically important.” These entities’ respective primary supervisory agencies have since increased scrutiny of these organizations’ operations and issued rules to enhance their resilience.

As a result, systemically important FMUs (SIFMUs) have been challenged by a significant increase in regulatory on-site presence, data requests, and overall supervisory expectations. Further, they are now subject to heightened and often entirely new regulatory requirements. Given the breadth and evolving nature of these requirements, regulators have prioritized compliance with requirements deemed most critical to the safety and soundness of financial markets. These include certain areas within corporate governance and risk management such as liquidity risk management, participant default management, and recovery and wind-down planning.

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Key Considerations for Board and Audit Committee Members

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. This post is based on a PwC’s 2014-2015 Key considerations for board and audit committee members report.

The changing business landscape, technological advances, and significant risks such as cybersecurity continue to present opportunities and challenges for companies today. Directors will want to take a fresh and critical look at their boardroom agenda to ensure it is meeting today’s needs.

PwC’s 2014-2015 edition of Key considerations for board and audit committee members, an annual publication from PwC’s Center for Board Governance, can help enhance the quality of board and management discussions in the coming year.

Here are some highlights:

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