Report: Conflicts of Interest on the FINRA Board

Ann Marsh of Financial Planning says that a new report documents conflicts of interest on the FINRA board, the self-regulatory body with jurisdiction over financial services.

A new report by a group of securities arbitration attorneys calls into question FINRA’s ability to protect investors given alleged conflicts of interests on its board.

The report was issued Wednesday morning by the Public Investors Arbitration Bar Association, whose members represent investors in legal disputes with FINRA member firms. The group raises concerns about five of FINRA’s 13 public governors and one recently departed governor who now sits on the Federal Reserve’s Board of Governors.

FINRA’s board is comprised of 24 members. Among them, 10 have open industry ties consistent with the nonprofit’s public-private status as a self-regulator of the financial industry. Another 13 seats are designated to public members, intended to represent investors. The remaining seat is for FINRA’s CEO.

VEA Vice Chair Nell Minow was quoted:

“It’s just a disgrace,” says corporate and nonprofit governance expert Nell Minow. “These conflicts of interest are a monstrous issue. It destroys any credibility that the organization has at all.”

Minow, who is vice chairman of ValueEdge Advisors in Portland, Maine, was not involved in PIABA’s report. “This is exactly the reason that we don’t like to see industries regulate themselves,” she says. “Normally it takes a government agency at least a generation to become completely captive to industry. But in a self regulatory system, it takes five minutes….”This is not the fox guarding the henhouse,” she says of FINRA’s governance issues. “This is the fox eating all the hens.”

Sarbanes-Oxley, Bemoaned as a Burden, Is an Investor’s Ally – The New York Times

Gretchen Morgenson writes in the NY Times about efforts to roll back the post-Enron reforms of Sarbanes-Oxley. It is astounding to imagine that the very provisions that restored trust in public companies after the series of accounting frauds of the Enron era are already being described as burdensome and costly.

What is burdensome and costly, of course, is financial fraud. We cannot imagine how executives can argue that neither investors nor insiders need to know whether their internal controls are effective. Morgenson says:

Seismic accounting scandals like the ones that sank Enron and WorldCom in the early 2000s have, happily, been scarce in recent years. But they may well resurface if elements of the Sarbanes-Oxley Act, the law created to curtail accounting fraud, are rolled back as some corporate executives are urging.Tom Farley, president of the NYSE Group, which operates the New York Stock Exchange, is among those leading the charge. In congressional testimony in July, he criticized the law’s provision requiring auditors of publicly held companies to report on and attest to management’s assessment of internal controls on financial reporting. The requirement is costly and burdensome to companies, Mr. Farley said, and helps to explain why the number of public corporations in the United States is declining.He urged lawmakers to review the requirement because markets had evolved since it became law.

WSJ CFO Network, Washington 2017

The Wall Street Journal’s CFO Network gathering is always engaging and informative. This year VEA Vice Chair Nell Minow attended to appear at breakout sessions on board effectiveness and shareholder activism, and reported back on what she learned:

The speakers included Senators John McCain on national security (he said his biggest fears are North Korea and Russia) and Elizabeth Warren (she noted pointedly that there is widespread support, even among Trump voters for maintaining or expanding the Consumer Financial Protection Bureau and cited the President’s often-claimed enthusiasm for breaking up the TBTF financial institutions), Chairman of the House Ways and Means Committee Kevin Brady (he insists that major tax reform, including filing on a postcard for most individuals, is going to happen), and Ranking Member Adam Schiff of the House Permanent Select Committee (he supports an independent investigation into Russian interference with the democratic process).

A presentation on the prospects for financial regulation/deregulation included former SEC Chairman Harvey Pitt and former Commissioner Paul Atkins. Atkins referred to Dodd-Frank as “mostly rubbish…littered with all sorts of gimmies to unions, trial lawyers, and activists,” mentioning the conflict mineral and pay ratio disclosures as examples. He and Pitt emphasized the importance of making sure the investors get material information and are not overwhelmed with data. They insisted that the new administration will bring tough cases. Since fines are paid by the shareholders, they suggested that they do not impose a meaningful penalty. Pitt recommended outsourcing audits of investment managers and broker-dealers, using the Commission’s authority to exempt issuers from regulatory burdens, and experimenting with pilot programs to test regulatory ideas. Another possibly experiment: summary disclosures with hyperlinks providing more information, to assess the way users access the data. Atkins said, “You read through this stuff and most of it is kind of baloney.”

The Women of Abacus Bank Talk About the Failed Prosecution and the New Documentary

abacus.jpegOn Huffington Post, VEA Vice Chair Nell Minow writes about a new documentary about the failed prosecution of the only bank indicted following the subprime financial meltdown, Abacus.

“Abacus: Small Enough to Jail” is a new documentary from “Hoop Dreams” director Steve James about a tiny, family-run Chinatown bank that was the only financial institution indicted following the financial meltdown. The original 184 indictments issued by the office of New York City District Attorney Cyrus R. Vance, Jr. were reduced to 80 before the trial. Vera and Jill Sung, daughters of the bank’s immigrant founder and vibrant presences in the trial and in the film, said in an interview that their only regret about the documentary is that restrictions on filming in the courtroom meant that they could not include footage of the 80 “not guilty” verdicts being read out at the conclusion of the trial.

The massive financial institutions involved in the meltdown were making so much money with mortgage-based derivatives that they ran out of mortgages to stuff into them. So they started lending money to people who would not otherwise qualify and misrepresented the reliability of the loans and the derivatives they supported. None of these enormous “too big to fail” financial institutions were indicted. But Abacus never made “liar’s loans.” Its repayment rate is close to 100 percent. The government never lost any money and they never required a bailout. And yet, the tiny five-branch bank and its executives were tried on criminal charges.

As the film shows, Abacus founder Tom Sung was already a very successful lawyer and businessman when he was inspired by “It’s a Wonderful Life” to become the George Bailey of the mostly-immigrant Chinese community. Traditional banks were happy to take their deposits but reluctant to loan money to them. He named the bank after the ancient calculator that has symbolic importance in Chinese culture and he made sure that the staff spoke the customers’ language.

Tom Sung’s daughter Jill, president of the bank, became suspicious of an employee who turned out to be extorting side payments from bank customers and immediately informed the authorities. The ensuing investigation uncovered irregularities in the paperwork, mostly because the Chinatown community was reluctant to provide full documentation in their loan requests. But there were no irregularities in the risk assessments or payouts. Jill said in our interview, “The loans that were actually brought in the indictment all are either still performing or the borrowers paid them off.”

Then why bring a case that was evidently inadequate that 80 charges produced not even a single guilty verdict? Jill said it was a combination of three factors. “You have a DA who was politically ambitious and he’s in the financial capital of the world,” there was pressure to respond to the sub-prime financial meltdown, and racism: “if it was not the primary motivator it certainly colored the whole prosecution and how his team approached the weaknesses in the community.” Jill’s sister Vera, a director of the bank, added, “It’s a subtle form of intimidation but not so subtle, coming to your house at six in the morning, knocking on your door, gun at their sides, and saying ‘Hi, we would like to interview you. Could you please come down?’ For a lot of people who do not speak English and who were not born here and who comes from a country that is a police state, that is very intimidating and they will do or say anything to appear cooperative.” “They said, ‘Don’t forget, we can send you back.’ The tactics they used were clearly intended to intimidate,” Jill said. “The tactics they used was clearly targeted to fears that they knew existed in the community and they use that.”

This was even more evident in the highly unusual televised perp walk, with the bank’s employees handcuffed together. “There was no concern of security,” Vera said. “Why are their chains exposed? Usually people put their coats over them, but that didn’t happen here. Whoever has seen that, it will stay with them and they will think, ‘Oh, they’re all guilty.’”

The government, in a highly unusual move, rescinded the plea agreement with their star witness, the employee Jill had identified as stealing from the bank and its customers, because his testimony was so thoroughly discredited.

But the movie is more than the story of a business or an unjust prosecution. It is ultimately the story of a family and their devotion to each other and to their community. Jill and Vera spoke about what they did to find moments of peace in the midst of the pressure of the trial. For Jill, it was her family. “I was able to shut it down when I was home.” In the courtroom, she took notes to help her keep her composure. Vera did yoga. “It’s very hard when you’re involved in an event like this. It just subsumes everything, your sleep, your dreams. You’re constantly thinking about it, you’re constantly thinking about what you’re going to do to prove them wrong or how you can show them they’re thinking wrong. It’s so hard not to let it invade you in that sense. You just have to have off times.”

They were glad to have their story told, first in a New Yorker story by Jiayang Fan, and then in this documentary. And they are glad to be back in business. “It has taken a while because the case went on for five years when we were not able to do the business we wanted to, so it’s taken about a year to rebuild, to establish contacts with contracts, with our counterparties because no one wants to do business with a bank that’s indicted,” Jill said. “We’ve been working to re-establish with our community that we’re here, that nothing is going to happen to us because we survived. You can do a lot more with us now.” They are still trying to be the George Bailey of their community. “We want to make loans to the small businesses and the first-time home buyers,” Jill said. “That’s our mission,” added Vera. “That’s what we want to do. So that’s what we’re doing.”abacus

We Strongly Oppose the Oxymoronic “CHOICE” Act

We join with the Council of Institutional Investors in strongly opposing the falsely named “CHOICE” Act, which would eliminate critical shareholder rights and market responses that ensure the integrity of our financial markets. The proposal would sharply reduce the number of shareholder proposals and shareholder oversight on ceo pay, restrict the ability of independent proxy advisory firms to provide essential information and guidance on matters of corporate governance, and entrench underperforming and overpaid executives. It has been less than a decade since the financial meltdown and Congress, fueled by corporate political contributions, is trying to get rid of some of the reforms that restored the credibility of our financial markets.

From CII:

CII supports sensible, effective rules that safeguard investors and strengthen markets.

Three Principles to Protect Investors and Strengthen Capital Markets

As Congress and the administration consider revamping key aspects of America’s financial regulatory system, CII urges policymakers to uphold and enhance critical protections for investors.

Painful reminders of the massive failures of oversight—by regulators and corporate boards—that contributed to the financial crisis of 2008 are with us still. The market meltdown cost millions of Americans their jobs and homes, and devastated their retirement savings. Robust reforms have helped to restore investor confidence in the integrity of the marketplace. That trust must not be undermined.

That’s why CII believes that any future financial reforms should uphold three principles that foster fair, stable and vibrant markets:

  • Protect fundamental shareholder rights
  • Promote effective disclosure and reliable financial reporting
  • Safeguard the independence of the Securities and Exchange Commission (SEC)

The House Financial Choice Act, however, would weaken critical shareholder rights that investors need to hold management and boards of public companies accountable, and that foster trust in the integrity of the U.S. capital markets. CII has outlined its concerns in detail in recent comment letters here and here, in a Member Toolkit and below on this page.

CII Member Toolkit for Responding to the CHOICE Act

1. Protect fundamental shareholder rights
Robust shareholder rights ensure that investors are treated fairly and equitably, that management and boards are accountable to owners and that market participants have confidence in the integrity of capital markets.

Strong public company boards of directors are the first line of defense for shareholders. The board has a fiduciary duty to see that senior managers run the company in the long-term interest of its owners. But holding directors accountable to shareholders is inherently challenging in today’s public companies, where equity ownership is dispersed among thousands of owners. Balanced rules ensure that shareholders have fundamental safeguards, including a level playing field in director elections, a meaningful vote and effective tools to engage management and the board.

Support fair rules for shareholder proposals.

  • Shareholder proposals are essential tools for investors, individually and collectively, to express their views to management and boards on major governance and other issues. The vast majority of these votes are strictly advisory; even if they pass, boards can choose whether to act on them.

    However, the major U.S. House bill to roll back financial regulation would sharply increase the regulatory hurdle for shareholder proposals. The legislation reportedly would require any shareholder wishing to put a proposal on a public company ballot to own at least 1 percent of the company’s stock for a minimum of three years. That would raise the stock ownership threshold for filing a proposal at Apple, the largest market cap company, to $7 billion. This radical change could effectively shut out shareholder proposals. Congress should not micro-manage the shareholder proposal process, which the SEC has overseen well for decades, and especially not through draconian restrictions on filersRead more…

Support fair rules for electing directors.

  • The House bill would prohibit the SEC from finalizing a proposed rule to allow shareowners to freely vote for the board candidates they favor in a contested election for board seats. The SEC’s proposal for universal proxies would give shareholders voting by proxy (the vast majority of investors) the same voting options as shareholders who vote in person: freedom of choice to vote for the specific combination of director nominees they believe best serves their interests. Congress should not block SEC action on this critical mechanism for holding directors accountable to the shareholders they are elected to represent. And the SEC should adopt its proposed rule as soon as possible. Read more…
  • Shareholders should have the power to remove directors in uncontested elections, too, if they think the directors are doing a poor job. That is why CII supports a strong majority vote standard in director elections, rather than a plurality standard that permits boards to ignore the owners’ wishes when the majority of owners oppose directors standing for re-election. At the very least, there should be clarity about the vote standard the company uses. Too often, shareholders are in the dark about how votes for director are counted. The SEC should finalize its proposal to require companies to provide clear disclosure in proxy statements of the voting standard used in uncontested director elections. Read more…

Support fair shareholder votes on executive compensation.

  • The 2010 Dodd-Frank Act’s requirement that public companies offer shareholders a periodic advisory vote on executive compensation (“say on pay”) has been a winning game-changer for companies and their shareholders. Say-on-pay votes enable shareholders, individually and collectively, to express their views about CEO pay. They have sparked improved communication between boards and shareholders, and greater understanding among investors about corporate strategy and how pay incentives drive the strategy.

    While say-on-pay votes are strictly advisory and most pass by wide margins, they have led many board compensation committees to improve pay-for-performance incentives in executive compensation. Shareholders overwhelmingly support annual say-on-pay votes.

    The House bill would require companies to hold say-on-pay votes only when there is an ill-defined “material change” to executive compensation. Congress should preserve the requirement that companies hold regular say-on-pay votes and the option for this important vote to occur annually. Read more…

Support fair rules for “clawbacks” of unearned executive compensation.

  • Dodd-Frank’s requirement that companies recover (claw back) incentive-based compensation from executives when a material error results in a financial restatement is simply fair pay for fair play. Executives who reap additional pay for “hitting the numbers” should not be rewarded when they fail to hit the numbers. Congress should preserve this important shareholder protection.

Support independent proxy research.

  • Independent research helps investors cast informed proxy votes. But access to independent research is threatened by a proposed legislative provision that could drive up the cost of voting responsibly–and possibly drive proxy advisory firms out of business.

    Proxy advisory firms play a vital and necessary role in assisting pension funds and other institutional investors in carrying out their fiduciary duty to vote proxies in the best interest of plan participants and clients. Many investors purchase research from proxy advisory firms but vote according to their own guidelines.

    The House bill would give companies an incentive to try to delay publication of proxy advisor reports as long as possible, increasing costs to advisory firms and their investor clients. Congress should not interfere with the right of investors to purchase independent proxy research. Read more…

2. Promote effective disclosure and reliable financial reporting

Investors and other market participants depend on prompt, transparent disclosure of important corporate financial information. High-quality, timely disclosure gives investors a full picture of a company’s businesses and helps investors price risk. But some observers have proposed drastic cuts in corporate reporting requirements for public companies.

Support disclosure requirements that investors need to make informed investment and voting decisions.

  • Investors are the primary users of financial reporting information, and they do not view “information overload” as a problem. A CFA survey of investors found that 80 percent of respondents did not think reducing the volume of financial statement disclosure was important. Investors are more concerned with obtaining meaningful information. While eliminating disclosure overlap makes sense, regulators should focus on protecting investors—the owners of public companies—when considering appeals for reduced disclosure. Congress and the SEC should balance corporate demands for less disclosure with investors’ need for effective disclosure.
  • Hedging by executives undercuts pay incentives. Equity granted as a long-term incentive is supposed to be at risk; hedging insulates executives from risk. It also severs alignment with long-term shareholders. That’s why CII policies call on public companies to bar executives from hedging company stock. At a minimum, shareholders should be able to know if and how executives are hedging, because hedging weakens alignment of executive pay with long-term shareholder value.

    Dodd-Frank’s requirement that companies disclose their policies on company-stock hedging by executives would give investors a better understanding of who is allowed to hedge and how. But Congress should let the SEC adopt its proposed hedging disclosure rule, not gut requirements for disclosure of hedging.

3. Safeguard the independence of the SEC
Sufficient, stable and independent SEC funding is critical to ensuring the integrity of the U.S. capital markets.

Support full funding for the SEC.

  • While reducing the federal deficit and burdens on American taxpayers are vitally important, the SEC needs appropriate resources to fulfill its mission: protecting investors; maintaining fair, orderly and efficient markets; and facilitating capital formation.

    Funding the SEC does not increase the federal deficit or cost taxpayers any money. Its funding is fully offset by transaction fees from self-regulatory organizations. The SEC is the only independent federal agency that is tasked explicitly with protecting investors. Congress should give the SEC the resources it needs to police the markets effectively.

Support the SEC’s rulemaking authority.

  • Flexible rulemaking authority helps keep the SEC nimble and responsive to changing market needs. But the House bill would heap additional, unnecessary reviews on the SEC that would hamstring its rulemaking capacity and undermine its ability to fulfill its mission. The SEC would do little else but evaluate its rules.

    Shareholders are no fans of unneeded regulation. But the SEC already performs cost-benefit analyses on proposed rules, as numerous laws require (including the Administrative Procedure Act, the Paperwork Reduction Act of 1980, the Small Business Regulatory Enforcement Fairness Act of 1996 and the Regulatory Flexibility Act). While some costs of proposed rules can be estimated reliably, the benefits of regulation are often difficult to measure. Congress should not shackle the SEC with excessive cost-benefit analysis requirements.

Read More…

Universal Proxy Cards

  • The right of shareholders to elect directors to represent them is a fundamental right of share ownership. That right is especially critical when there is a contest for board seats. Contested elections are pivotal events for companies and for shareholders, since board seats, and in some cases, board control, are at stake.
  • In contested director elections, management and the dissident shareholder who is running competing candidates should provide shareholders with proxy cards that list all director nominees. Such “universal proxy” cards would guarantee that all shareholders are able to choose among all nominees to vote for the specific combination of nominees that they prefer, regardless of which slate they are on.
  • But that is not what happens now in contested elections at U.S. companies. Shareholders can choose any combination of nominees only if they vote in person at the meeting. For many retail and institutional investors, however, attending shareholder meetings is prohibitively costly and time-consuming. The vast majority of shareholders vote by marking proxy cards. And shareholders voting by proxy when there is contest for board seats generally can only vote either management’s card or the dissident’s card. They cannot “split their ticket” and vote for some nominees from each side.
  • Mandatory universal proxy cards for all contested elections would guarantee that shareholders are able to choose from among all board nominees, regardless of whether they vote in person or by proxy.
  • Opponents of universal proxy cards contend their use would encourage more proxy contests or favor dissidents. But there is no compelling evidence for either assumption.
    • The SEC’s universal proxy proposal does not eliminate the substantial cost and risk associated with waging a dissident campaign. Legal, administrative and solicitation expenses required for a dissident to wage a proxy contest can run to six or seven figures. Furthermore, the SEC proposal requires dissidents to solicit shareholders representing at least a majority of outstanding votes.
    • A Harvard study found that universal proxy cards in general favor neither management nor dissidents. Perceptions vary about which side benefits more, and those perceptions depend on contest-specific circumstances. Companies and dissidents have been on both sides of this issue. Tessera Technologies sought universal cards in its 2013 contest with dissident Starboard Value, as did Shutterfly in its 2015 proxy fight with Marathon Partners, but the companies were rebuffed. When dissidents sought universal proxy cards at Target in 2009 (Pershing Square) and DuPont in 2015 (Trian Fund Management), the companies declined. Parties in contests rarely request universal proxy cards because they assume the other side will refuse. The only clear “winner” from universal proxy cards is the investor.
  • Claims that universal proxy cards would empower special interests do not hold up, either. Ultimately, board seats would go to nominees who receive the most votes.

Shareholder Proposals

  • Shareholder proposals are an essential tool for investors, individually and collectively, to express their views to management and boards on major governance and other issues.
  • The vast majority of shareholder proposals are strictly advisory; even if they pass, companies can choose whether to act on them.
  • Shareholder proposals have encouraged many companies to adopt enhanced governance policies that today are viewed widely as best practice. For example, electing directors by majority vote, a radical idea a decade ago when shareholders pressed for it in proposals, is now the norm at 90% of large-cap U.S. companies.
  • The CHOICE Act would require a shareholder wishing to put a proposal on a company’s annual meeting ballot to own at least 1% of the stock for three years (the current threshold is $2,000 worth of stock for one year). That would raise the ownership threshold to file a shareholder proposal at Apple, for example, to $7.5 billion. At Wells Fargo, the threshold to file would be $2.6 billion. Even the largest pension funds would not be able to file shareholder proposals.
  • Current SEC rules require a shareholder to refile a proposal only if it has received at least 3 percent of the vote on its first submission, 6 percent on the second and 10 percent on the third. The House bill would raise those thresholds to 6 percent, 15 percent and 30 percent, respectively.
    • Those hurdles would also knock out many shareholder proposals. The percentage of proposals since 2000 that are estimated to fall below those thresholds are 13.32 percent, 31.5 percent, and 50.14 percent, respectively
  • Critics contend that shareholder proposals are a growing burden on companies. But the number of shareholder proposals has not climbed significantly. In recent years, it has vacillated from a high of 1,126 in 2009 to a low of 691 in 2011.
  • What has changed is that support for shareholder proposals has grown and represents a significant proportion of investors.
    • In 2016, 61 percent of proposals that came to a vote received at least 25 percent support from shareholders, up from 31 percent in 2000 (source: ISS Voting Analytics).
    • The proportion of proposals that win the support of a majority of shareholders has risen, too. In 2016, 21 percent of proposals received a majority of votes cast, up from 15 percent in 2000 (source: ISS Voting Analytics).
  • The SEC oversees a robust appeals process that allows companies to exclude proposals from the proxy card that do not meet certain procedural and/or substantive hurdles. SEC staff has a well-earned reputation for deliberating fairly. In 2013-2015, companies challenged nearly one-third of shareholder proposals and about half were omitted from the proxy.
  • Companies complain about the burden of costs “imposed” by shareholder proposals. But incurring those costs is largely their choice; it is the cost of trying to exclude the proposal from the proxy. The cost to put a proposal on the proxy ballot is de minimus.

Say on Pay

  • A periodic advisory vote on executive compensation (“say on pay”) is an essential tool for investors, individually and collectively, to express their views on a matter that goes to the heart of corporate governance and performance. It is important for boards and their compensation committees to frame pay decisions around long-term shareholder interest, and not simply respond in a vacuum to pay demands of senior managers.
  • The 2010 Dodd-Frank Act requires public companies to offer shareholders say-on-pay votes annually, every other year or every three years. Most companies hold say-on-pay votes annually, which CII and most institutional investors prefer.
  • But lthe Financial CHOICE Act includes a provision that would require public companies to hold advisory votes on executive compensation only when there is a “material change” to executive compensation.
  • A 12-year global study found significant benefits from say on pay. Following adoption of say-on-pay laws in various markets, the link between CEO pay and firm performance increased, especially at companies with poor pay practices and weak governance. Say on pay also coincided with reduced disparity between CEO compensation and the pay of other top executives, a factor associated with higher firm valuation.
  • Say-on-pay votes have been a catalyst for discussion between U.S. boards and shareholders, leading to greater investor understanding of company strategy and how pay incentives drive the strategy. Growing comfort in engaging on pay is leading to more discussion between companies and investors on a range of other issues.
  • Since 2011, when say-on-pay became mandatory at U.S. public companies, boards have been eliminating club memberships, tax gross-ups and other executive perks. They have also strengthened links between executive compensation and corporate performance.
  • Say-on-pay votes usually are not controversial, and shareholders generally have been deferential to board compensation committees, except where shareholders clearly see a problem. Each year since 2011, more than 97 percent of say-on-pay proposals win majority support of shareholders.
  • Eliminating say-on-pay votes would prompt more investors to vote against corporate directors at companies with troublesome pay practices, because they would have no other mechanism by which to signal their disapproval.

Investor access to independent proxy research

  • Proposed legislation would require proxy advisory firms to give companies advance copies of their recommendations and elements of their research and to resolve corporate complaints about errors prior to voting. It would also force proxy advisory firms to hire an ombudsman to address issues companies raise.
  • The new regulatory scheme would pressure proxy advisors to accede to management’s recommendations to minimize delays and added costs, reducing the value of the research to investors.  Moreover, the scheme might inhibit proxy advisors from even issuing research and recommendations where the subject company invokes the process and does not confirm its agreement with the resolution of issues raised.
    • It would also narrow the already-limited window for investors to cast thousands of votes during the spring proxy season.
    • It would create new barriers to entry, including yet-to-be determined registration qualification standards to be set by the SEC, in what has been a low-margin industry with few competitors, and potentially drive some proxy advisory firms out of business
  • Solutions already exist to address significant errors in proxy advisors’ reports:
    • Companies can quickly offer corrections to proxy advisor reports and communicate them to the marketplace via a regulatory filing in addition to the error correction processes undertaken by the proxy advisors themselves.
    • Proxy advisors do revise reports to correct material errors as well as to include any new information that is material. Critically, we understand that the leading providers communicate that information to clients immediately in the form of an alert to subscribers.
    • Market discipline is the ultimate backstop: advisory firms that make too many errors risk reputational damage and the loss of investor clients.
  • The proposed regulatory scheme is based on the false premise that proxy advisory firms dictate proxy voting results. There is no compelling empirical evidence to support that assumption; moreover, academic literature suggests otherwise
    • Many pension funds and other institutional investors buy and review proxy advisors’ research and recommendations, often buying research and recommendations from multiple providers, but vote according to their own guidelines.
    • For example, in 2016, Institutional Shareholder Services (ISS), the largest proxy advisory firm, recommended against say-on-pay proposals at 12 percent of Russell 3000 companies. Yet just 1.7 percent of those proposals received less than majority support from shareholders.
    • Similarly, while ISS opposed the election of 6.5 percent of director-nominees in the 2016 proxy season, just 0.2 percent failed to garner majority support.

Push to Get Rid of Another Crucial Shareholder Protection: SOx 404

Business groups want to soften a Sarbanes-Oxley rule that requires companies to have auditors weigh in on their “internal controls”—the policies and procedures intended to prevent errors or fraud on their financial statements.Sarbanes-Oxley requires companies to evaluate whether these controls are effective and to have their auditor pass judgment on that assessment. Shareholder advocates say the rule, known as Section 404(b), helps ensure companies are giving accurate numbers to investors. Groups like the U.S. Chamber of Commerce say the rule is too costly and burdensome for small companies.

Source: Why Stop at Dodd-Frank? Some Want Trump’s Regulatory Overhaul to Go Further – WSJ

Latest Dodd-Frank reversal bill could exempt a third of public companies from giving auditor warning – MarketWatch

ValueEdge Advisors Vice Chair Nell Minow is quoted in this story about a possible proposed change to Dodd-Frank that would make it easier for companies to hide accounting problems from their investors, creditors, and suppliers.

 The sweeping package to reform the Dodd-Frank bank reform law introduced in Congress has a provision that would curtail the reporting of accounting problems from about a third of issuers.

Rep. Jeb Hensarling, the Texas Republican who chairs the House Financial Services Committee, has suggested modifications to his legislation introduced last September, according to a memo leaked last week to journalists, that would uproot Dodd-Frank to raise the limit for companies to comply with the requirement for an outside auditor’s opinion on a company’s internal controls over financial reporting, or ICFR.

That requirement was originally mandated by Section 404(b) of the Sarbanes-Oxley Act of 2002. In the memo, referred to by several new outlets who obtained a copy as Choice 2.0, Hensarling doubles the permanent exemption threshold from the original bill of last September, to $500 million in market capitalization from $250 million. The current exemption is $75 million. In Hensarling’s legislation, the exemption was also extended to depository institutions with less than $1 billion in assets.

Nell Minow, a corporate governance expert and the vice chairwoman of ValueEdge Advisors, told MarketWatch, “This is an outrage. It isn’t just that investors and consumers will not have this information; the more significant problem is that knowing it will not be public, boards will think they do not have to investigate and make corrections.”

The Dodd-Frank exemption threshold of $75 million “is a perfectly acceptable number for establishing materiality,” said Minow. “Raising it allows companies to ignore significant problems until they become too big to fix.”

Source: Latest Dodd-Frank reversal bill would exempt a third of public companies from giving auditor warning – MarketWatch

What the CFPB ‘Commission’ Debate Is Really About | Bank Think

Corporations are happily preparing their wishlists for getting rid of consumer and employee protections under the new administration and the Republican-controlled Congress and Senate. Look for them to be disguised as “reform,” as pointed out in this piece from Adam J. Levitin in American Banker.

The financial services industry is pushing hard for Congress to change the single director Consumer Financial Protection Bureau into a multimember commission under the guise of “good government.” Let there be no mistake what this is really about: the proposal for a commission structure is a backdoor attack on the very existence of the CFPB as an agency.The financial services industry doesn’t have the courage to attack the CFPB, an immensely popular agency, directly. So instead, the strategy is to try to render it ineffective by changing it from a single-director structure to a five-member commission.

Source: What the CFPB ‘Commission’ Debate Is Really About | Bank Think

Donald Trump’s Point Man on Financial Regulation: A Former Regulator Who Favors a Light Touch – WSJ

Donald Trump has tapped a longtime critic of heavy regulation to flesh out his new administration’s plans for remaking the financial rule book, including the potential dismantling of much of the Dodd-Frank financial overhaul.

Source: Donald Trump’s Point Man on Financial Regulation: A Former Regulator Who Favors a Light Touch – WSJ