Ethics in Finance – Class 10

Erin.roach@ryerson.ca for internship stream at rbc, email for application process and more info

Financial Regulation
One problem with financial regulations is it happens after a financial disaster

Sarbanes-Oxley Act
Executives are personally accountable of big mistakes
Improved corporate government regime – giving right incentives
External auditors – take responsibility and have the right incentives
Enhanced & timely disclosure – leveled playing field for insiders
Reforming wall street – leading to more fairness and toilets
Lawyer – setup rules to make them responsible, and/or change incentives

Legal Reaction to corporate and accounting scandals

1. Personal accountability of management
CEO/CFO certifications: be accountable of what’s going on, such as information put on financial statements
Ban on personal loans: companies can offer senior managers a loan, lower interest rates on loan
Forfeiture in the event of restatements: if things aren’t right you lose last years bonus, you lose what you already made
CEO & CFO must reimburse issue for
Any bonus or other incentive-based or equity-based compensation
Any profits realized from sale of securities of the issuer
During 12 months following first publication of financial statements
Ban on insider stock transactions during pension blackout periods
Effective January 26, 2003
Directors and executive officers prohibited from trading issuer equity securities acquired in connection with service or employment during blackout period in 401(k) or similar pension plan
Enhanced sanction: on existing forbidden activities

2. New corporate governance regime
Strengthening the role of independent directors
Majority of board must be “independent”
Proposed phase-in over 2 years after final adoption
Tighter definition of independence
Proposals continue to differ on details
Independent directors must meet regularly in executive sessions
Board committee structure
Enhanced audit committee responsibilities
Shareholder approval of option plans
Whistleblower protections
US and foreign reporting companies prohibited from taking any retaliatory action against employees for blowing whistle to federal agencies, Congress or supervisors on violation of US securities or antifraud laws
Lawyer’s responsibilities
By January 26, 2003, SEC must issue riles requiring attorneys appearing and practicing before the SEC in representation of issuers
To report “evidence” of “material violation of securities law or breach of fiduciary duty or similar violation” by issuer (or agent) to chief legal counsel or CEO

3. Auditing oversight and accounting changes
Public Company Accounting Oversight Board
Auditor independence
Can only audit a company for 4 years then the company has to go to someone else
Cant consult for company if auditing them

4. Enhanced and more timely disclosure
Accelerated Form 10-K & 10-Q filing
Enhanced MD&A disclosure
Increased SEC reviews

5. Reforming Wall Street
Analyst Conflicts of Interests
Right incentives/compensation
May not be tied to specific investment banking transactions
Firm Compensation
Must disclose whether firm managed or co-managed underwriting o received compensation of investment banking in past 12 months or except in next 3 months
Personal trading by analyst
Analyst and household barred from investing in issuer securities prior to IPO if in business sector analyst covers
Blackout on analyst trading in issuers covered for 30 days before and 5 days after issuance of report on issuer
Analyst may not trade against most recent recommendation
Regulation Fair Disclosure (FD)
Access to info
Ban of selective disclosure
Corporate America takes it seriously
Over 65% of public companies have adopted disclosure policies (designated spokespersons and procedures)
One-on-one analyst communication not ceased but changed
Earning guidance in nonpublic communication reduce very dramatically