5 Financial News Stories You May Have Missed: Tempting Fate

Tempting Fate

Below are news stories from the week that were easy to miss, but may have some lasting impact.

1. Another Madoff? What Are The Odds?

In my storm-ravaged neighborhood in lower Manhattan there is a clothing store named “Superdry.”  On the 29th of October, thanks to hurricane Sandy, Superdry was under 5 feet of water… some would argue you simply shouldn’t tempt fate.  I was reminded of this when the enforcement director of the SEC, Robert Khuzami, was asked this week if he thought we might see another Madoff-style financial fraud and his response was, “The chances of it happening again are very slight” and the SEC is “better equipped to identify the early warning signs of fraud and wrongdoing.”  I hope he is right.  He didn’t elaborate on exactly what the SEC has done to become so much better equipped.  What we know from experience is that while regulators may be improving, the criminals are always learning new tricks.  Of course, Khuzami is retiring this month so he probably won’t be around should fate respond.

MarketWatch: SEC enforcer says another Madoff unlikely

2. Independence Day for Compliance Types

Compliance officers want their freedom—and they’re getting it.  This week JPMorgan Chase announced major changes in their compliance department.  The bank’s Compliance Department will no longer report to the General Counsel but rather to the operational heads of the bank, thereby cutting out any intermediaries between the compliance staff and the most senior management of the bank.  HSBC recently announced similar moves and elevated their Chief Compliance Officer to the top ranks of their management team.  Corporate Counsel magazine summarized the issue well:

it has become increasingly clear that the modern CCO requires independence and visible support from the very top of the organization to carry out its difficult and often perilous mission—and discharging its duties through a legal “filter” is no longer adequate.

Other banks should take note because there’s little doubt that regulators will be following these announcements and expecting other institutions to set their compliance officers “free.”

Corporate Counsel: JPMorgan Chase Takes a Giant Step on CCO Independence

3. Testing the Insurance Waters…Hedge Funds to the Rescue?

A recent study has shown a number of hedge funds and private equity firms are dipping their toes into the insurance pool.  While investment banks have long been lenders to insurance and reinsurance companies, recent increases in the capital reserve requirements are making it more difficult for these institutions to compete in the insurance world.  Hedge funds may be looking to at least partially fill that gap.  Steven Cohen’s SAC Capital Advisors recently started SAC Re, a Bermuda-based reinsurance firm.  Other firms are looking to lend or invest in the insurance space.  While you won’t be buying your car insurance from hedge funds anytime soon, it will not be surprising to see private firms taking larger and possibly non-passive roles in insurance transactions.

MONDAQ: Private Equity And Hedge Funds Look To The Insurance And Reinsurance Sectors

4. The Trickling Down of Cyber Insurance

Cyber-criminals are becoming indiscriminate.  They are happy to steal from small institutions as well as global giants.  Recognizing the trend, insurance carriers are beginning to develop cyber policies specifically tailored to meet the needs of medium to smaller corporations.  The Travelers Cos. this week launched a product aimed specifically at businesses with 100 or fewer employees.  These firms may not need millions of dollars in coverage like a Fortune 500 does but they still want to be protected against any potential exposures.  In this age of technology even small companies are using social media, online payment systems and retaining customer information. Criminals, meanwhile, recognize that hacking into the small firm may not reap the same rewards as the major corporation but the firewalls are much lower.  Chubb and others are introducing similar small-scale cyber policies. Chalk up one for the little guy.

Wall Street Journal: Cybercrime Insurance Takes Off As Providers Target Smaller Businesses (subscription required)

5. The Asset Management Sheriff is in Town

It’s usually considered rude to abuse your host, but that’s kind of what the co-head of the SEC’s Asset Management Unit (“AMU”) did this week.  At a Private Equity Conference he warned attendees that “it’s not unreasonable to think that the number of cases involving private equity will increase.”  Why did the regulator make such a claim?  The unit within the SEC was started less than 3 years ago with the specific focus of regulating investment advisers and investment companies.  With the introduction of private fund registration under Dodd-Frank the department will have a lot of new information to review.  Their other started concerns are insider trading, misstated credentials, suspicious performance returns (think Madoff), illegal “side pocket” deals and a host of other issues that the new unit is anxious to try their new teeth on.

LexisNexis: The SEC’s Asset Management Unit

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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