Posts Tagged ‘Risk’

Cyber Security, Cyber Governance, and Cyber Insurance

Posted by Paul Ferrillo, Weil, Gotshal & Manges LLP, on Thursday November 13, 2014 at 9:07 am
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Editor’s Note: Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on an article authored by Mr. Ferrillo and Christine Marciano, President of Cyber Data Risk Managers.

JP Morgan Chase. Community Health Systems. The Home Depot. Kmart. There has been no shortage of data breaches in recent weeks—with new developments on an almost daily basis. The age of cyber hactivisim, cyber extortion, and cyber terrorism is here, and it is not going away any time soon.

Data security issues are no longer just an IT Department concern. Indeed, they have become a matter of corporate survival, and therefore companies should incorporate them into enterprise risk management and insurance risk transfer mechanisms, just as they regularly insure other hazards of doing business. As the number of data breaches has increased, the demand for cyber insurance has likewise dramatically increased more than that for any other insurance product in recent years. Every board of directors should be questioning its officers and management as to “whether or not its company should be purchasing cyber insurance to mitigate its cyber risk.” If management answers, “Oh, it costs too much,” or “Oh, it will never pay off,” second opinions should be obtained. Rapidly. Because neither answer is correct.

…continue reading: Cyber Security, Cyber Governance, and Cyber Insurance

Ten Key Points from the Final Risk Retention Rule

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday November 2, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from PricewaterhouseCoopers LLP and is based on a PwC publication by Christopher Merchant, Frank Serravalli, and Daniel Sullivan.

This week six federal agencies (Fed, OCC, FDIC, SEC, FHFA, and HUD) finalized their joint asset-backed securities (ABS) risk retention rule. As expected, the final rule requires sponsors of ABS to retain an interest equal to at least 5% of the credit risk in a securitization vehicle.

1. A win for the mortgage industry: The final rule effectively broadens the original proposal’s exemption from risk retention requirements for Qualified Residential Mortgages (QRM) by tying the definition of QRM to the Consumer Finance Protection Bureau’s definition of Qualified Mortgage (QM). This alignment abandons the proposal’s most stringent requirements to obtain the QRM exemption, including that a residential mortgage have at least a 20% down payment. The final rule also provides an additional exemption for certain mortgages that would not meet the QRM standards, e.g., community-focused residential mortgages. The immediate impact of the rule on the industry is further muted, given the significant amount of mortgages issued by government sponsored entities (i.e., Fannie Mae, Freddie Mac, and Ginnie Mae) that are currently exempt from the rule’s requirements. It may however be too soon for the industry to celebrate, as the final rule states that the agencies will reassess the effectiveness of the QRM definition at reducing securitization risk at most four years from now, and every five years thereafter.

…continue reading: Ten Key Points from the Final Risk Retention Rule

Risk Governance: Banks Back to School

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday September 14, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication.

On September 2, 2014, the Office of the Comptroller of the Currency (“OCC”) finalized its risk governance framework for large banks and thrifts (“Guidelines”) that was proposed in January 2014. [1] The Guidelines formalize the heightened risk management standards that the OCC has been communicating through the supervisory process for several years, but do so somewhat more flexibly than the January proposal (“proposal”) did. Although many firms have been working to enhance their risk management programs to meet the proposal and supervisory communications, most still have work to do in order to meet the Guidelines’ requirements.

The Guidelines maintain the proposal’s emphasis on risk governance at the bank level to ensure safety and soundness, and affords the OCC greater flexibility (prescribed under regulations) to take enforcement actions in response to a bank’s compliance failure. The responsibility to oversee risk management remains with the Board of Directors which retains its ultimate risk governance oversight role; however, the Guidelines clarify that the Board need not take on responsibility for day-to-day managerial duties as the proposal had suggested.

…continue reading: Risk Governance: Banks Back to School

Cyber Security and Cyber Governance: Federal Regulation and Oversight—Today and Tomorrow

Posted by Paul Ferrillo, Weil, Gotshal & Manges LLP, on Wednesday September 10, 2014 at 9:00 am
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Editor’s Note: Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on an article authored by Mr. Ferrillo and David J. Schwartz.

In our June 4, 2014 article on cyber security and cyber governance [1] we noted that for many reasons, boards of directors and executives of U.S. companies needed to reexamine how they protect (and respond to the successful hacking of) their most critical intellectual property and customer information. One of the reasons was that all signs out of Washington, D.C. pointed towards increasing federal regulation and oversight of cyber security for public and private companies, and particularly for those in the financial services sector. Further, we foresaw not only heightened scrutiny from regulators, but increasing class action litigation, with plaintiffs accusing boards and management of not taking the appropriate steps to protect company and client data. Our predictions were correct on all fronts.

…continue reading: Cyber Security and Cyber Governance: Federal Regulation and Oversight—Today and Tomorrow

Shift from Voluntary to Mandatory Disclosure of Risk Factors

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday July 17, 2014 at 9:23 am
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Editor’s Note: The following post comes to us from Karen K. Nelson, the Harmon Whittington Professor at Accounting at Rice University, Jones Graduate School of Business, and Adam C. Pritchard, the Frances and George Skestos Professor of Law at University of Michigan Law School.

In our paper, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, we investigate public companies’ disclosure of risk factors that are meant to inform investors about risks and uncertainties. We compare risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act, adopted in 1995, and the SEC’s subsequent disclosure mandate, adopted in 2005.

…continue reading: Shift from Voluntary to Mandatory Disclosure of Risk Factors

The Fed’s Wake-Up Call to Bank Directors

Posted by Edward D. Herlihy and Lawrence S. Makow, Wachtell, Lipton, Rosen & Katz, on Wednesday June 18, 2014 at 4:00 pm
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Editor’s Note: Edward D. Herlihy and Lawrence S. Makow are partners in the Corporate Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Herlihy and Mr. Makow; the complete publication, including footnotes, is available here.

The Dodd-Frank Act was undoubtedly a thorough re-working of the regulatory paradigm for banks and other financial institutions. But no less resolute are the intentions of U.S. banking regulators to carry regulatory reform further, based in significant part on perceived “macroprudential” authority after Dodd-Frank. The new regulatory paradigm will increasingly leave behind bank regulation’s traditional moorings in the protection of federally insured deposits and safe and sound operation of banking organizations. Instead, “macroprudential” regulation will rest on the goals of protecting U.S. financial stability and reducing systemic risk—broad, malleable concepts that elude precise definition. It will seek to influence activities not just of banking organizations but also activities conducted by non-bank entities not traditionally subject to prudential regulation. And, according to an important speech given last week by Federal Reserve Governor Daniel K. Tarullo, the new regulatory paradigm embraces consideration of a potentially unprecedented expansion of the fiduciary duties of directors of banking institutions. This would give such directors very potent incentives to prioritize supervisory goals—including macroprudential objectives.

…continue reading: The Fed’s Wake-Up Call to Bank Directors

Boards of Directors, Corporate Governance and Cyber-Risks: Sharpening the Focus

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on Tuesday June 17, 2014 at 9:06 am
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the recent “Cyber Risks and the Boardroom” Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am pleased to be here and to have the opportunity to speak about cyber-risks and the boardroom, a topic that is both timely and extremely important. Over just a relatively short period of time, cybersecurity has become a top concern of American companies, financial institutions, law enforcement, and many regulators. I suspect that not too long ago, we would have been hard-pressed to find many individuals who had even heard of cybersecurity, let alone known what it meant. Yet, in the past few years, there can be no doubt that the focus on this issue has dramatically increased.

…continue reading: Boards of Directors, Corporate Governance and Cyber-Risks: Sharpening the Focus

The Executive Turnover Risk Premium

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday June 12, 2014 at 9:34 am
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Editor’s Note: The following post comes to us from Florian Peters, Assistant Professor of Finance at the University of Amsterdam and Alexander Wagner, Professor of Finance at the University of Zurich.

In our forthcoming Journal of Finance paper, The Executive Turnover Risk Premium, we make the simple point that forced turnover risk explains an important part of the cross-sectional variation of compensation for the CEOs of public U.S. corporations. The empirical magnitude of the turnover risk premium—about 7% greater subjective compensation for a one percentage point increase in turnover risk—is in line with calibrated theoretical predictions.

To identify the turnover risk premium, we use sources of job risk that are arguably outside the CEO’s control such as changing industry conditions. This strategy relies on the idea that, in practice, firing occurs not only when the CEO reveals low general ability. Rather, a board may fire a CEO when industry conditions change in such a way that his skill set no longer matches the new industry requirements. It is this kind of exogenous risk exposure that should plausibly be compensated in CEO pay.

…continue reading: The Executive Turnover Risk Premium

Labor Representation in Governance as an Insurance Mechanism

Posted by E. Han Kim, University of Michigan, Ross School of Business, on Tuesday May 27, 2014 at 9:12 am
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Editor’s Note: E. Han Kim is Professor of Finance at the University of Michigan.

Worker participation in corporate governance varies across countries. While employees are rarely represented on corporate boards in most countries, Botero et al. (2004) state “workers, or unions, or both have a right to appoint members to the Board of Directors” in Austria, China, Czech Republic, Denmark, Egypt, Germany, Norway, Slovenia, and Sweden. Such board representation gives labor a means to influence corporate policies, which may affect productivity, risk sharing, and how the economic pie is shared between providers of capital and labor.

…continue reading: Labor Representation in Governance as an Insurance Mechanism

Risk Choice under High-Water Marks

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday March 20, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Itamar Drechsler of the Department of Finance at New York University Stern School of Business.

High-water mark (HWM) contracts are the predominant compensation structure for managers in the hedge fund industry. In the paper, Risk Choice under High-Water Marks, forthcoming in the Review of Financial Studies, I seek to understand the optimal dynamic risk-taking strategy of a hedge fund manager who is compensated under such a contract. This is both an interesting portfolio-choice question, and one with potentially important ramifications for the willingness of hedge funds to bear risk in their role as arbitrageurs and liquidity providers, especially in times of crises. High-water mark mechanisms are also implicit in other types of compensation structures, so insights from this question extend beyond hedge funds. An example is a corporate manager who is paid performance bonuses based on record earnings or stock price and whose choice of projects influences the firm’s level of risk.

…continue reading: Risk Choice under High-Water Marks

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