Tag Archives: U.S. Securities and Exchange Commission

Exclusive-U.S. SEC advisers push for details on gender, racial diversity at fund boards

By Ross Kerber

(Reuters) -Mutual fund boards would be required to disclose information on the gender and racial diversity of their directors under a rule change recommended to the top U.S. securities regulator.

The suggestion from an advisory subcommittee of the U.S. Securities and Exchange Commission, which would need further approval, goes further than subcommittee members had outlined in the spring and mirrors a growing focus from other quarters on the financial industry’s lack of diversity.

At present, there is “virtually no representation of women and minorities” on the boards that set policies across the $29.3 trillion U.S. mutual fund industry, Gilbert Garcia, chair of the subcommittee and managing partner of a Houston investment firm, said in an interview late on Monday.

Garcia said the subcommittee does not have a specific set of disclosures in mind, but said in general more data should lead to more diversity. “The theory is that by shining transparency on this, market forces will change the makeup” of boards, he said.

The push for new information is in line with other steps aiming to show the lack of women and minority representation in many realms of U.S. business. A new Illinois law requires public companies headquartered in the state to list the race and gender of each director, for instance.

Fund boards are distinct from the directors who run publicly traded asset-management businesses like BlackRock Inc or T. Rowe Price Group, and traditionally face less public scrutiny. Fund boards oversee areas like the fees that funds pay to managers and their performance.

Garcia had said on March 19 the subcommittee would likely recommend other changes including having investment advisers report on the race and gender of officers.

That idea remains among the official recommendations the subcommittee has made to the SEC’s asset management advisory committee ahead of its Wednesday meeting, according to a subcommittee report.

Other recommendations include calls for demographic details on fund firm workforces, for new SEC guidance on how asset managers are chosen, and for a study of how political contribution rules could influence asset allocation at the expense of smaller firms owned by women and minorities.

Gary Gensler, the SEC chair appointed by U.S. President Joe Biden this year, said at a conference last month he has asked staff to propose “human capital disclosure” details that could include information on diversity and other workforce demographics.

Skeptics worry Gensler and other officials will adopt regulations that are hard to enforce on areas outside of traditional finance. Beyond social issues like board room diversity these include climate change considerations and executive pay metrics.

Speaking on a panel organized by the conservative-leaning Competitive Enterprise Institute on Tuesday, which was webcast, Jennifer Schulp, director of financial regulation studies at the Cato Institute think tank in Washington, said the SEC could move too quickly or overstep its mandate.

“We’re going to suffer from haste here,” she said.

(Reporting by Ross Kerber in BostonEditing by Matthew Lewis)

U.S. SEC ousts head of accounting watchdog, puts rest of board on notice

WASHINGTON (Reuters) -The U.S. Securities and Exchange Commission on Friday said it has voted to remove the head of the accounting oversight board that sets standards for audits of public companies and left the rest of the members on notice.

The SEC voted to remove William Duhnke III from his role as chairman of the Public Company Accounting Oversight Board, effective Friday, the agency said in a statement. The other four members will stay on, but the SEC is soliciting resumes for those roles.

The move to remove the head of a watchdog critics have described as toothless marks a major warning shot by the new SEC chair, who took the helm at the top markets regulator in mid-April.

“The PCAOB has an opportunity to live up to Congress’s vision in the Sarbanes-Oxley Act,” SEC chair Gary Gensler said in the statement, referring to the 2002 law that established the board.

It also comes amid pressure from some Democratic lawmakers, who have said the board has been falling down on its job to oversee audit firms meant to keep publicly traded companies in check.

Duane DesParte, who joined the board in 2018, will serve as acting chair, the SEC said.

(Reporting by Chris Prentice and Katanga Johnson; Editing by Leslie Adler)

U.S. pension funds sue Allianz after $4 billion in coronavirus losses

By Tom Sims

FRANKFURT (Reuters) – Pension funds for truckers, teachers and subway workers have lodged lawsuits in the United States against Germany’s Allianz, one of the world’s top asset managers, for failing to safeguard their investments during the coronavirus market meltdown.

Market panic around the virus that resulted in billions in losses earlier this year scarred many investors, but no other top-tier asset manager is facing such a large number of lawsuits in the United States connected to the turbulence.

In March, Allianz was forced to shutter two private hedge funds after severe losses, prompting the wave of litigation the company says is “legally and factually flawed”.

Together, the various suits filed in the U.S. Southern District of New York claim investors lost a total of around $4 billion. The fallout has also prompted questions from the U.S. Securities and Exchange Commission, Allianz has said.

A spokesman for Allianz Global Investors said in a statement to Reuters: “While the losses were disappointing, the allegations made by claimants are legally and factually flawed, and we will defend ourselves vigorously against them.”

The plaintiffs are professional investors who bought funds that “involved risks commensurate with those higher returns,” the spokesman added.

The latest claims against Allianz and its asset management arm Allianz Global Investors last week include one from the pension fund for the operator of New York’s transport system, the Metropolitan Transportation Authority (MTA). It has 70,000 employees and made an initial investment of $200 million.

Similar suits have been filed against Allianz by pension funds for the Teamster labor union, Blue Cross and Blue Shield, and Arkansas teachers. The suits are seeking a jury trial to award damages.

The suits allege that Allianz Global Investors, in its Structured Alpha family of funds, strayed from a strategy of using options to protect against a short-term financial market crash.

The SEC’s inquiry continues and Allianz is cooperating. The SEC did not respond to requests for comment.

Attracting investors with an “all-weather” investing approach, Allianz “bet the house” and “out of greed … sacrificed the hard-earned pension and benefits of the MTA’s workers, who at the time were risking their lives under COVID keeping New York alive,” the MTA’s lawsuit said.

The cases are a second front of litigation for Allianz, one of Europe’s largest insurance companies. The Munich-based company and its competitors face suits for not paying claims related to business closures during the pandemic lockdowns.

The company’s insurance business as a whole has been under pressure as it faces claims for cancelled events, and a decline in demand for car and travel insurance. It expects to post the first decline in annual profit in nearly a decade.

At the end of March, Allianz informed investors it was liquidating two funds, as well as an offshore feeder fund. Investors lost 97% on one of the funds, the suits say.

In April, Morningstar downgraded its rating for the remaining funds to negative “because of the failure in risk management protocols and the uncertainty”.

Allianz disputed that rating and in July published an internal report that found that the losses “were not the result of any failure in the portfolio’s investment strategy or risk management processes”.

(Reporting by Tom Sims; editing by David Evans)

U.S. SEC fines World Acceptance Corp $21.7 million for Mexican bribes

By Pete Schroeder

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission announced on Thursday it had fined World Acceptance Corp, a consumer loan company, $21.7 million for paying bribes in Mexico.

The SEC said in a statement that the company’s Mexican subsidiary paid over $4 million in bribes to Mexican government and union officials in exchange for business lending to government employees.

The South Carolina-based company agreed to the penalty without admitting or denying guilt. The company agreed to overhaul its internal operations, as well as pay $17.8 million in disgorgement, nearly $2 million in interest, and a $2 million penalty.

“This long-running bribe scheme did not happen in a vacuum. Through a lack of adequate internal accounting controls and a culture that undermined its internal audit and compliance functions, World Acceptance Corporation created the perfect environment for illicit activity to occur for nearly a decade,” Charles Cain, a senior SEC enforcement official, said in a statement.

The SEC said that the company’s Mexican subsidiary would deposit money into bank accounts linked to the officials or distribute bags of cash. The expenses were then recorded as legitimate business expenses.

The SEC charged that the company’s internal controls were insufficient to detect the activity, and management “lacked the appropriate tone” on compliance.

In a statement, the company’s general counsel, Luke Umstetter, said he was pleased to have resolved the issue and that the company has addressed those past issues.

(Reporting by Pete Schroeder; editing by Jonathan Oatis)

Cyber security is the biggest risk facing financial system

U.S. Securities and Exchange Commission Chair Mary Jo White is interviewed at the Reuters Financial Regulation Summit in Washington, US May 17, 2016.

By Lisa Lambert and Suzanne Barlyn

WASHINGTON (Reuters) – Cyber security is the biggest risk facing the financial system, the chair of the U.S. Securities and Exchange Commission (SEC) said on Tuesday, in one of the frankest assessments yet of the threat to Wall Street from digital attacks.

Banks around the world have been rattled by a $81 million cyber theft from the Bangladesh central bank that was funneled through SWIFT, a member-owned industry cooperative that handles the bulk of cross-border payment instructions between banks.

The SEC, which regulates securities markets, has found some major exchanges, dark pools and clearing houses did not have cyber policies in place that matched the sort of risks they faced, SEC Chair Mary Jo White told the Reuters Financial Regulation Summit in Washington D.C.

“What we found, as a general matter so far, is a lot of preparedness, a lot of awareness but also their policies and procedures are not tailored to their particular risks,” she said.

“As we go out there now, we are pointing that out.”

White said SEC examiners were very pro-active about doing sweeps of broker-dealers and investment advisers to assess their defenses against a cyber attack.

“We can’t do enough in this sector,” she said.

Cyber security experts said her remarks represented the SEC’s strongest warning to date of the threat posed by hackers.

A former member of the World Bank’s security team, Tom Kellermann, who is now chief executive of the investment firm Strategic Cyber Ventures LLC, called it “a historic recognition of the systemic risk facing Wall Street.”

BROKEN WINDOWS

Under White, a former federal prosecutor, the SEC introduced an initiative called “broken windows” designed to crack down on small violations of SEC rules to deter traders and others from larger transgressions.

But critics have questioned whether the initiative, similar to one used by former New York City Mayor Rudy Giuliani in his crackdown on crime in the city, is an effective use of the agency’s limited resources.

The policy has been applied to instances of “rampant non-compliance” involving serious, significant rules, White said, noting that she considers the initiative a huge success.

For example, the SEC brought three groups of cases in a key area, the prohibition against short selling ahead of an IPO by individuals who then participated in the IPO, since 2013, she said. Each year, there have been fewer cases, with the most recent number at around 12, White said.

GAAP VS. NON-GAAP

Also on Tuesday, the SEC released guidance about how certain accounting practices could potentially mislead investors that White called “consequential.”

Companies are increasingly using non-Generally Accepted Accounting Principles, or non-GAAP, to report earnings, permitting them to back out certain expenses from earnings figures, such as non-cash costs. But critics say the practice can also mislead investors by creating a rosier picture of a company’s profits.

The SEC’s current rules allow companies to report with figures that do not comply with GAAP, as long as certain conditions are met and White said the guidance spells out those conditions, such as a requirement that “the GAAP measure has to be of equal or greater prominence than non-GAAP.”

Non-GAAP “is not supposed to supplant GAAP and obviously not obscure GAAP,” she said.

She declined to say if the SEC is considering enforcement actions against companies that might be misleading investors with non-GAAP, but noted the SEC would not hesitate to bring one if it uncovered an “actionable violation.”

For months now, the SEC has only had three commissioners, down from its full complement of five, and the U.S. Congress has stalled on confirming two nominees.

“We’re really functioning on all cylinders,” White said, ticking off a list of projects the commission has recently completed.

She added that, to comply with rules on meetings and disclosures, commissioners typically meet one-on-one.

“If there are only three of you, it’s shorter-circuited to some degree,” she said. “There are some advantages, too.”

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(Additional reporting by Sarah N. Lynch)