Tag: Risk


The Board-Centric Annual Meeting

John Wilcox is Chairman of Sodali and former Head of Corporate Governance at TIAA-CREF. This post is based on a Sodali publication by Mr. Wilcox.

For a growing number of listed companies around the world the annual shareholder meeting has come to resemble a trial by ordeal. Instead of the traditional town-meeting business forum, the AGM has morphed into a jousting field where activists, proxy advisors and various special interest groups play a dominant role. This state of affairs has evolved because for the past three decades companies have been resistant to change and defensive about governance reform, while shareholders and activists have taken the lead in successfully promoting greater board accountability and stronger governance rules. Corporate scandals, the financial crisis, escalating CEO pay, declining public trust in business leaders together with enhanced shareholder rights have transformed the annual meeting into an event where companies often focus on damage control rather than showcasing their business.

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FinCEN: Know Your Customer Requirements

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, Joseph Nocera, Jeff Lavine, Didier Lavion, and Armen Meyer.

In recent years, authorities in the US and abroad have increased their focus on modernizing and enforcing anti-money laundering and terrorism financing (AML) regulations. As part of these efforts, the US’s Financial Crimes Enforcement Network (FinCEN) proposed Know Your Customer (KYC) requirements in 2014, which we expect to be finalized this year. [1]

FinCEN’s KYC requirements were proposed as part of a broader regulation setting out the core elements of a customer due diligence program. [2] Taken together, these elements are intended to help financial institutions avoid illicit transactions by improving their view of their clients’ identities and business relationships.

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So You’re Thinking of Joining a Public Company Board

David A. Katz is a partner specializing in the areas of mergers and acquisitions, corporate governance and activism, and crisis management at Wachtell, Lipton, Rosen & Katz. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal.

Candidates for directorships on public company boards have much to consider. Potential exposure to legal liability, public criticism, and reputational harm, a complex tangle of applicable regulations and requirements, and a very significant time commitment are facts of life for public company directors in the modern era. The extent to which individuals can effectively manage the risks of directorship often depends on company-specific factors and can be increased through diligence and thoughtful preparation on the part of the director and the company.

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Proposed Rule on Registered Funds’ Use of Derivatives

David C. Sullivan is partner in the Investment Management practice at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Sullivan, Tim Diggins, George Raine and Sarah Clinton.

On December 11, 2015, the SEC issued its long-anticipated release (the “Release”) proposing Rule 18f-4 (“the “Proposed Rule”) under the 1940 Act regarding the use of derivatives and certain related instruments by registered investment companies (collectively, “funds”). The stated objective of the Release is to “address the investor protection purposes and concerns underlying section 18 [of the 1940 Act] and to provide an updated and more comprehensive approach to the regulation of funds’ use of derivatives” in light of the increased participation by funds in today’s large and complex derivatives markets.

We provide an executive summary of the Proposed Rule and other aspects of the Release below and, in the Appendix of the complete publication, we discuss the Proposed Rule in more detail.

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Board Governance: Higher Expectations, but Better Practices?

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

The board’s role in risk governance continues to attract the attention of regulators who demand that the appropriate risk tone be set at the top of financial institutions. While the largest US banks have made significant progress toward meeting these expectations, many institutions still have a lot of work to do.

Our observations of the policies and practices of the largest US banks indicate that boards have undergone structural and functional transformation in recent years. We are finding that this transformation has been fueled not only by banks’ need to satisfy regulators, but also by their own realization of the benefits of stronger risk governance. We believe the post-crisis regulatory requirements and heightened expectations for risk governance, when fully implemented, will lead to improvements in the board’s understanding of risk taking activities and position the board to more effectively challenge management’s actions when necessary.

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2015 FINRA Enforcement Actions

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

Over the past several years, the Financial Industry Regulatory Authority (“FINRA”), the self-regulatory organization responsible for regulating every brokerage firm and broker doing business with the U.S. public, brought between 1,300 and 1,600 disciplinary actions each year. In 2014, the most recent year for which full-year statistics are available, it ordered $134 million in fines and $32.2 million in restitution. During the same period, it barred or suspended nearly 1,200 individuals, and expelled or suspended 23 firms. It also referred over 700 fraud cases to other federal or state agencies for potential prosecution. FINRA orders also often trigger automatic “statutory disqualifications” under Section 3(a)(39) of the Securities Exchange Act and Article III, Section 4 of FINRA’s By-Laws. Absent relief, these disqualifications prohibit persons from associating with a broker-dealer or prohibit firms from acting as broker-dealers.

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Governance Challenges When Gatekeepers are “Chilled”

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. BuchmanEugene I. Goldman, and Kelsey J. Leingang; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

An emerging governance challenge is the need to address the tension between the pursuit of legitimate corporate strategic goals, and the concerns of internal “gatekeepers” who perceive themselves at increasing personal legal risk for corporate wrongdoing. This challenge is a direct byproduct of new enforcement initiatives of the Department of Justice and the Securities and Exchange Commission, and other recent developments with respect to corporate officials.

The concern is that these developments may cause some gatekeepers and other corporate officials to be much more self-protective in performing their corporate and fiduciary responsibilities, to the possible detriment of strategic implementation. Attentive boards will acknowledge this challenge and engage its gatekeepers in an appropriate resolution.

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CFTC’s Proposed Rules on Cybersecurity

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, Joseph Nocera, Jeff Lavine, Didier Lavion, and Armen Meyer.

Last week, the Commodity Futures Trading Commission (CFTC) proposed cybersecurity regulations for electronic trading platforms, clearing organizations, and data repositories. Most importantly, the proposal calls for five types of systems testing, the most impactful of which is the requirement that organizations test key controls (e.g., access to sensitive data or procedures that control changes to critical systems).

Guidance from other regulators thus far has come in the form of examination guidelines or self-assessment tools rather than regulations. [1] The CFTC’s proposal would be the first cybersecurity regulation, and some other regulators are likely to follow suit. [2]

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Chair White Statement on Use of Derivatives

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 two separate recommendations from the staff today [December 11, 2015]. First, we will consider and vote on a recommendation from the staff of the Division of Investment Management to propose an updated and more comprehensive approach to the use of derivatives by mutual funds and exchange-traded funds, closed-end funds, and business development companies.

Second, we will consider and vote on a recommendation from the staff of the Division of Corporation Finance to propose rules to require disclosure of certain payments made to governments by resource extraction issuers, as mandated by the Dodd-Frank Act.

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Boards and Internal Audit

Ruby Sharma is a principal with the EY Center for Board Matters. The following post is based on a report from the EY Center for Board Matters, available here.

The role of the board has always been an important and demanding one, but today’s board members face increasingly complex challenges in overseeing an organization’s risk management, including:

  • Demands for greater accountability from investors
  • Increasingly complex regulatory oversight
  • Sluggish economic growth
  • The convergence of industries
  • Disruptive new technologies
  • Scarcity of resources and the effects of a changing climate
  • Human capital and talent management challenges

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