Earlier this week, the Financial Crimes Enforcement Network (“FinCEN”) proposed a rule that would require investment advisers registered with the Securities Exchange Commission (“SEC”) to establish anti-money laundering (“AML”) programs and report suspicious activity to FinCEN pursuant to the Bank Secrecy Act (“BSA”). FinCEN’s proposed rule would
Trying to save its own neck? ISS works to assure “data integrity”
On Thursday, Institutional Shareholder Services Inc. (ISS) announced the launch of a new data verification portal to be used for equity-based compensation plans that U.S. companies submit for approval by their shareholders. This is a welcome change to ISS policy; although call me a cynic, but I believe this new policy has more to do with the SEC Staff’s recent interpretive guidance and less to do with actually improving their product.
Criticism of ISS (and the other proxy advisors) is nothing new. Public companies have long complained about ISS’s conflicts of interest (ISS “grading” issuers’ corporate governance policies and then charging companies a subscription fee to learn how to improve their “grades”). Further, ISS constantly churns their corporate governance policies (presumably) to keep their services relevant. But, the biggest complaint from public companies occurs when ISS makes a recommendation based on erroneous data. In fact, in a study from the Center on Executive Compensation, 17% of respondents reported erroneous analysis of long-term incentive plans and 15% of respondents reported that …
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Congress to the rescue?: Congressman hints at legislation to rein in proxy advisory firms
Who says Congress isn’t popular? Well, Congress may become much more popular with public company executives if Congressman Patrick McHenry (R-NC) can make good on his recent promise to challenge the power of proxy advisory firms if the SEC doesn’t act. In a recent keynote speech at an American Enterprise Institute conference on the role of proxy advisory firms in corporate governance, Rep. McHenry stated that proxy advisory firms are a significant issue on Capitol Hill.
As I have blogged about before, there are some real questions as to whether proxy advisory firms actually serve investors’ interests. While ISS and Glass Lewis are entitled to create a business model based on providing services to institutional investors, there has been either a market or regulatory failure that has forced public companies to consider corporate governance policies promulgated by two unregulated proxy advisory firms before making business decisions. Public companies should be making decisions based on what makes sense for their company and their shareholders and not based on trying to meet arbitrary policies of ISS or Glass Lewis (policies that seem to be continuously tweaked to keep the proxy advisory firms services relevant). To be fair, ISS and Glass Lewis claim that their policies aren’t arbitrary at all, but rather their policies reflect their clients’ views. Of course, for that to be the case, all of their institutional investor clients would need to have a monolithic view toward corporate governance.
Because institutional investors may own hundreds or even thousands of positions in public companies, institutional investors do not have the ability or the resources to research all of the issues facing each of those holdings. That is where ISS and Glass Lewis step in to provide guidance to these institutional investors. While some institutional investors have robust voting policies and attempt to make educated and informed voting decisions, …
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FATCA: What it is, and why it may apply to your business
The Foreign Account Tax Compliance Act (“FATCA”) is a US law designed to counter offshore tax avoidance by US persons. Controversial because of its wide-ranging breadth and application to non-US financial institutions, in the most general sense, FATCA imposes a 30% withholding tax on payments of US source income made to foreign financial institutions (“FFIs”) unless they enter into an agreement with the US Internal Revenue Service (“IRS”) and disclose information about their US account holders.
After having revised the timelines for FATCA’s implementation on several occasions (culminating in an implementation delay of over three years from the date of its adoption in March of 2010), FATCA’s official July 1, 2014 implementation date is on the horizon. As a result, FFIs worldwide have made a mad dash in the race toward FATCA compliance over the last few months.
So why does this matter to non-banking/non-financial institutions? Well, as an initial matter, FATCA’s definition of an FFI is broad, including more types of entities than one might expect. As a result, US entities must make sure they have evaluated their corporate structure to determine whether its network includes an FFI. Under FATCA rules, the following types of entities may qualify as FFIs, subject to certain exceptions:
- Non-US retirement funds and foundations
- Special purpose entities and banking-type subsidiaries
- Captive insurance companies
- Treasury centers, holding companies, and captive finance companies
Additionally, even if an organization’s affiliate network does not include an FFI, US-based entities could be …
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Uniform fiduciary standard for broker-dealers and investment advisers? Proceed with caution!
When managing investments and strategies for personal financial goals, retail investors often seek guidance from their investment advisers, and on an increasing basis, from their broker-dealers. Broker-dealers and investment advisers are regulated extensively, but the regulatory requirements differ. Broker-dealers and investment advisers are also subject to different standards under federal law when providing investment advice about securities.
The Investment Advisers Act of 1940 regulates specified financial professions, including financial planners, money managers, and investment consultants. Under the Advisers Act, an investment adviser is any person who, for compensation, is engaged in a business of providing advice to others or issuing reports or analyses regarding securities. With regard to the required standard of care applied to investment advisers when providing advice to their clients, applicable case law requires a fiduciary standard which, essentially, requires that the advisor put the client’s interests first, ahead of his or her own interest.
The Securities Exchange Act of 1934 and its implementing rules comprise the most central regulatory apparatus for broker-dealers. The Exchange Act defines a broker as a “person engaged in the business of effecting transactions in securities for the account of others,” while a dealer is a “person engaged in the business of buying and selling securities for his own account.” In comparison to the fiduciary obligation of an investment advisor, broker-dealers currently have a less stringent “suitability standard” that requires that investment products they sell fit an investor’s financial needs and risk profile.
Under the Investment Advisers Act, registered broker-dealers are excluded from its terms so long as …
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Social media and brokers: FINRA wants broker-dealers to be “friends” with their employees
With newer methods to communicate and interact with the so-called social network popping up on almost a daily basis, securities regulators have been giving more and more attention to social media and how companies and certain regulated professionals are employing it. As we discussed in a previous blog, the SEC has signed off on public companies utilizing social media for disclosure purposes, provided that, among other things, companies disclose to investors the types of social media outlets they will employ for such purposes. The SEC has issued guidance on the use of social media by public companies for Regulation FD and other disclosure purposes, which can be found in this SEC Press Release and in the SEC’s report on its investigation of the Facebook postings made by Netflix’s CEO.
Now it appears that social media is gaining the attention of FINRA as well, the primary self-regulatory organization for registered broker-dealers. As reported in a recent article on CNN, FINRA wants state privacy laws to provide exemptions for registered broker-dealer firms that would permit such firms to access Facebook and other social media accounts of their associated persons (i.e., stockbrokers). Because of the prominence and proliferation of Facebook and the personal or sensitive nature of the information contained on an individual’s Facebook page and other social media accounts, state legislatures have proactively enacted legislation that prevent or restrict companies from monitoring employees through social media. According to the National Conference on State Legislatures, six states enacted legislation in 2012 that prohibits employers from requesting or requiring an employee, student or applicant to disclose a user name or password for a personal social media account.
FINRA is concerned, however, that prohibiting access to employee social media accounts may affect a registered broker-dealer’s ability to fully comply with its mandated supervisory duties under federal laws and regulations. For example, registered broker-dealers are required to maintain copies of all “business communications” as discussed in guidance issued by FINRA in Regulatory Notice 11-39. Under Rule 17a-4(b)(4) of the Exchange Act, “business communication” includes “[o]riginals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public.” Thus, if a stockbroker is using social media to…
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SEC Publishes Notice of Proposed Amendments to “Qualified Client” Test
Section 205(a)(1) of the Investment Advisers Act generally prohibits an investment adviser from collecting performance based compensation that is based on a share of capital gains on, or capital appreciation of, a client’s funds or assets under management. The Securities and Exchange Commission (“SEC”) adopted Rule 205-3 to provide exceptions to this prohibition if the…