The week in GRC: Passive asset management raises governance fears and groups file suit against rule reduction order

‒ The Wall Street Journal reported that the six biggest US banks could potentially return more than $100 billion in capital to investors over time through dividends and share buybacks if the government succeeds in its efforts to loosen bank regulation. President Donald Trump on February 3 signed a memorandum ordering a review of the Dodd-Frank Act.

Bank stocks gained ground as investors’ expectations on higher interest rates, less regulation and stronger economic growth stoked optimism that banks will be able to return more capital to shareholders. While there is no guarantee the banks will do so when they are able, they have been eager in recent years to return capital as their profits have grown and their balance sheets have become less risky.


‒ As the Trump administration looks to undo much of Dodd-Frank, banks are scurrying to prepare their wish lists, according to the WSJ. Despite the initial banker euphoria, some executives counseled patience, saying the overall impact of Dodd-Frank should be studied further before dramatic changes are made. Many prefer slowly unwinding regulations a few at a time, rather than a ripping-off-the-bandage approach that could add uncertainty and concerns about a return to pre-crisis practices.

Banks as a whole aren’t necessarily keen for the administration to scrap the Volcker Rule. Few banks, if any, want to return to the sort of freewheeling days before the global financial crisis, when proprietary trading desks operated like hedge funds within taxpayer-backed deposit gatherers.


‒ Passive asset management houses have enjoyed rapid growth over the past 10 years, but some observers and participants in the field have expressed concerns this has led to large corporations facing less scrutiny from their shareholders, the Financial Times reported.

‘If more and more of the industry is owned by passive investors that are only trying to replicate the index, there is no oversight, no governance,’ says Richard Buxton, CEO of Old Mutual Global Investors, the UK asset manager that sells only actively managed funds. But he also recognizes that some large passive houses ‒ such as Legal & General Investment Management, the UK’s largest fund manager ‒ take corporate governance seriously.


‒ Reuters reported that almost 100 companies, including Apple, Google and Microsoft, joined together to file a legal brief opposing President Trump’s temporary travel ban, arguing that it ‘inflicts significant harm on American business.’ The brief, filed in the US Court of Appeals for the 9th Circuit, included Facebook, Twitter, Intel, eBay, Netflix and Uber, as well as non-tech companies such as Levi Strauss and Chobani.

‘The order represents a significant departure from the principles of fairness and predictability that have governed the immigration system of the [US] for more than [50] years,’ the brief from the companies stated. ‘The order inflicts significant harm on American business, innovation and growth as a result.’


‒ CME Group plans to broaden its rules against wrongdoing at the request of federal regulators, the company said, in a move that is expected to ramp up disciplinary action against traders, Reuters said. Traders who engage in the manipulative practice known as spoofing are ‘the most immediate and likely target’ of the rule changes, said Craig Pirrong, a finance professor at the University of Houston. CME declined to comment beyond its notice.


‒ Bloomberg reported that European Central Bank president Mario Draghi took the Trump administration to task, warning against the rollback of post-financial crisis regulation. Draghi hit out at the US president’s moves to begin dismantling Dodd-Frank, arguing that weakening the compendium of financial rules intended to prevent a repeat of the 2008 financial crisis would be ‘very worrisome.’


‘The last thing we need at this point in time is a relaxation in regulation,’ he said. ‘Frankly I don’t see any reason to relax the present regulatory stance that has produced a stronger banking and financial services industry than before the crisis.’


‒ Jacob Aarup-Andersen, CFO of Danske Bank, warned that US efforts to dismantle some bank regulations have left global work on a post-crisis framework in limbo, according to Bloomberg. Talks focused on concluding the final chapter of standards under the Basel Committee on Banking Supervision, dubbed Basel IV by the industry, now look ‘a bit up in the air,’ Aarup-Andersen said.


‒ Reuters reported that acting SEC chair Michael Piwowar took steps to delay a rule that will require companies to disclose a ratio comparing their CEO’s pay with the median workforce. Piwowar said he wants companies to submit comments that outline ‘any unexpected challenges’ they are facing as they prepare to comply with the rule later this year. He also asked the SEC’s staff to ‘reconsider the implementation of the rule’ to determine ‘whether additional guidance or relief is appropriate.’


‒ Litigation could stymie efforts by the SEC to comply with executive orders intended to roll back financial regulations, according to the WSJ. The SEC doesn’t have the authority to revoke Dodd-Frank, and nearly 80 percent of rules under the law are already implemented.

Instead, the commission can offer relief by amending its rules, or granting exemptions ‒ a process that is open to judicial review. Any legal objections could slow the SEC’s already lengthy amendment process, hindering the agency’s ability to execute the president’s executive order, legal experts and former agency officials said. The SEC declined to comment.


‒ The WSJ said most brokerages are waiting to see what the US Department of Labor (DoL) does after an executive order from President Trump instructed the department to review and halt the retirement savings fiduciary rule if it determines it conflicts with the administration’s regulatory principles. Some firms, however, have already rolled out a number of changes to comply with the rule and are sticking with plans to improve disclosures to investors, regardless of the rule’s fate.


‒ Lloyd Blankfein said he’d like to operate Goldman Sachs with less capital as growth picks up, Bloomberg reported. ‘Left to our own devices, we wouldn’t hold as much capital as we’re holding,’ the CEO said, responding to a question about what regulatory changes he’d like to see. ‘Certain belt-and-suspender elements of the regulatory framework put different constraints on different firms.’

Rules put in place after the financial crisis have gone too far, and loosening some would help the industry without risking its safety, Blankfein said.


‒ Reuters reported that a Merrimack Pharmaceuticals employee was arrested on charges he engaged in an insider trading scheme with a former employee of a rival biopharmaceutical company. Songjiang Wang, who Merrimack has employed as director of statistical programming since 2011, was charged in a criminal complaint with conspiring to commit securities fraud. He was arrested after prosecutors brought related charges in June against Schultz Chan, who had been the director of biostatistics at Akebia Therapeutics.

Wang was released on a $750,000 bond, a spokesperson for acting US Attorney William Weinreb said. Wang’s lawyer did not respond to a request for comment. A lawyer for Chan, who has pleaded not guilty, declined to comment. Merrimack said in a statement that the case was an ‘isolated matter involving a single, non-executive-level employee’ and that the company was co-operating with authorities. ‘Merrimack takes seriously compliance and is committed to the highest standards of ethical conduct as we work to develop treatments for cancer patients around the world,’ the company said.


‒ Pre-paid card providers are gearing up for a possible reprieve from a rule meant to set industry limits on areas including overdraft fees, according to the WSJ. The Consumer Financial Protection Bureau (CFPB) rule, most of which is supposed to go into effect this October, doesn’t prohibit overdraft fees but does place limits on such fees in the first year of use.

It also requires card companies to wait 30 days after consumers register their cards before allowing for overdraft charges, among other requirements. But last week a resolution was introduced in the Senate Banking Committee that would block the CFPB pre-paid card rule from going into effect.


‒ President Trump assured US airline executives his administration would help them compete with foreign carriers, and promised lower regulation, tax relief and infrastructure upgrades, according to Bloomberg. ‘You people are regulated probably as much as anybody,’ he said. ‘We’re going to be announcing something I would say over the next two or three weeks that will be phenomenal in terms of tax.’


‒ Reuters reported that the longest-serving member of Delaware’s Supreme Court, Randy Holland, announced his plan to retire at the end of March. A replacement will be nominated by Governor John Carney, who took office last month, and must be confirmed by the state’s senate. Justices serve 12-year terms.

‘I just feel that after 30 years it is time to retire,’ Holland said in a statement. ‘I’m looking forward to pursuing other opportunities, like teaching.’ A majority of publicly traded US companies are chartered in Delaware and the court plays a key role in interpreting the state’s corporate law.


‒ A US federal judge on Wednesday upheld the DoL’s fiduciary rule for brokers offering retirement advice, in a possible setback for President Trump’s efforts to scale back government regulation, Reuters said. The 81-page ruling came days after Trump ordered the department to review the rule – a move widely interpreted as an effort to delay or kill the regulation.

The decision was a defeat for the business and financial services industry groups that had sought to overturn the measure. Although it is not expected to stop the department from delaying the rule’s April 10 compliance deadline while it conducts the review, some legal experts said it could make it more difficult to find a way to justify scrapping or significantly altering the rule.


‒ The FT reported that Cigna’s $48 billion acquisition of rival health insurer Anthem was blocked by a federal judge. US District Judge Amy Berman Jackson ruled late on Wednesday that the effect of the tie-up between Anthem and Cigna ‘may be substantially to lessen competition’ in ‘what is already a highly concentrated market’, particularly in the sale of commercial health insurance to ‘national accounts’ – customers with more than 5,000 employees, typically spread over two or more states.


‒ The WSJreported that, according to people familiar with the matter, the Trump administration is preparing to nominate J Christopher Giancarlo as chair of the Commodity Futures Trading Commission (CFTC). If confirmed by the Senate, Giancarlo is expected to adopt a more industry-friendly approach to overseeing banks and other financial firms in the derivatives market. For example, he could ease the CFTC’s swap-trading requirements and aspects of the CFTC’s plan to boost oversight of high-frequency trading firms. Giancarlo and a White House official declined to comment.


‒ Politico reported that liberal groups filed a lawsuit against President Trump in an attempt to block his executive order that mandates many federal agencies repealing two regulations for every new one they put on the books. Public Citizen, the Natural Resources Defense Council and the Communications Workers of America filed suit, claiming Trump exceeded his constitutional authority in issuing the order. White House press secretary Sean Spicer told reporters Wednesday the suit is without merit and overly speculative.


‒ Jeb Hensarling, R-Texas, chairman of the House of Representatives Financial Services Committee, laid out his plan to roll back Wall Street rules and consumer protections conceived after the 2008 financial crisis, Reuters reported. Under Hensarling’s plan, the largest US banks would face less oversight ‒ though not as little as they had been hoping for ‒ while start-ups would have easier access to investors. The plan would significantly dilute the powers of the CFPB.

Hensarling’s legislation, called the Financial Choice Act, is likely to clear his own committee within a few weeks and ultimately be passed by the full House. But it would require 60 votes in the Senate, where Republicans hold 52 seats and Democrats defend the CFPB as well as many of the provisions House Republicans would weaken.


‒ The WSJ said technology executives and European officials are worried the ability of companies to transfer everything from payroll files to social media posts to the US from Europe could be in jeopardy, should the Trump administration consider removing existing privacy protections for Europeans.


‒ Some in the brokerage industry wouldn’t be sorry to see the DoL’s fiduciary rule go and say they want the SEC to craft a best interest standard instead that would govern assets in both retirement and non-retirement accounts, according to the WSJ. The SEC was empowered to write such a rule by Dodd-Frank.

Unlike the department’s rule, which focused only on retirement savings and which critics say is overly complex with restrictions on how brokers can be compensated, a uniform rule could focus on the basic tenets of how brokers should be held to a higher standard of care when working with investors.