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Investment firms that fix misconduct should be celebrated, not punished – The Globe and Mail

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The policy of giving prosecutorial discounts in deserving cases is meant to lighten the punishment that gets meted out. But what we really should be asking is: why are these firms being prosecuted and punished at all? THE CANADIAN PRESS/Adrien Veczan

Adrien Veczan/The Canadian Press

Bad things can happen in any financial services firm. None are immune to internal errors or systemic failure – and transgressions by wayward employees are, unfortunately, an occasional hazard of real life. What matters most, though, is how management responds when misconduct comes to light.

In particular, do the firm’s executives react by containing the problem and implementing robust measures to prevent a recurrence? Do they report the matter to regulators immediately? Does the firm compensate every harmed client in full promptly?

Smart firms do all this. They then qualify for special treatment in regulatory prosecutions that flow from the incident. For example, they receive “credit for co-operation” that can reduce fines substantially – by millions of dollars in one recent case alone.

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In some jurisdictions such as Ontario, these firms also become eligible for “no-contest” settlements, which resolve enforcement proceedings without the firm having to make an admission of wrongdoing that could come back to bite it if any clients sue afterward.

This policy of giving prosecutorial discounts in deserving cases is meant to lighten the punishment that gets meted out. But what we really should be asking is: why are these firms being prosecuted and punished at all?

By their own initiative, they’ve promptly put things right, including, most importantly, compensating everyone who was affected adversely. Firms that do so are poster children for corporate responsibility. If we want to encourage more such behaviour, spanking them doesn’t make a whole lot of sense.

Instead, we should be lauding them and easing the path for others to follow their example. So, why not simply create an administrative process allowing them to submit paperwork detailing what happened and documenting, specifically, these six key things:

  1. Their non-compliance was inadvertent or the result of rogue employee misconduct that the firm did not encourage, countenance or know about.
  2. The problem did not arise and its detection was not delayed by a lack of diligence on management’s part.
  3. The firm didn’t ignore or attempt to cover up the incident.
  4. Internal processes have been strengthened sufficiently to ensure the problem won’t occur again.
  5. Appropriate disciplinary action has been taken against every employee who engaged in deliberate wrongdoing.
  6. Every client harmed by the error or misconduct has been identified, the extent of the harm they’ve suffered has been accurately determined, and the firm has fully compensated them.

Let regulators pore over the material and investigate further as they deem necessary. But ultimately, if they’re satisfied that these six criteria have been met, the only action they should take against the firm is to identify it in a news release about the incident.

That bulletin should set out a description of the wrongdoing in enough detail to let the public understand the nature and gravity of it. Measures taken by the firm in response should be mentioned, including the fact that all affected clients have been made whole. Regulators should state they are satisfied the firm dealt with the event appropriately.

And that’s it.

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No need for officials to crank up their costly enforcement battle machinery, as a state of compliance has already been restored. No need for the firm to deploy reputation management countermeasures. No stigma. Best of all, no need for investors to spend money and incur angst to secure recompense. Everybody wins – except any employees who went rogue, if that’s what caused the problem. They would still get prosecuted, and deservedly so.

Neil Gross, president of Component Strategies, a capital markets policy consultancy in Toronto.

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Currently, regulators are limited to issuing a “no action” letter when they approve of the firm’s response and want to hold off taking enforcement action. The letter forms part of the firm’s record but is not disclosed publicly. That’s less than ideal as it fails to provide transparency. It also doesn’t capitalize on the opportunity for encouraging others to follow the firm’s good example.

Moreover, this approach keeps the matter pinned to a narrative that’s essentially negative in slant (we’ve decided not to prosecute you) instead of a celebratory one (you dealt with the situation well).

So, again, why not move these cases out of enforcement altogether and into a purely administrative process that isn’t freighted with prosecutorial overtones and limitations.

Perhaps there would be concerns about diminished deterrence – i.e., won’t this initiative foster a cavalier attitude toward supervision if companies can just clean up any messes when they occur and then walk away, penalty free?

Another related concern might be optics: will this make regulators appear soft on misconduct?

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The short answer to both questions is no. Recall that the program would excuse only non-compliance arising where there has been either no complicity or lack of diligence by the firm[PF1] . Those who have turned a blind eye to wrongdoing or have been lazy in their oversight duties won’t qualify for exemption. They’ll still face fines, denunciation and suspensions or bans and deregistration, where warranted.

So, this approach isn’t soft on malfeasance. Yet, it offers maximum redemption for those who act responsibly when “stuff happens.” It’s a big carrot, to be sure, but the deterrent stick’s still there to whack anyone in management who enables transgressions.

In addition, this approach emphasizes that the true dividing line between culpable misconduct and pardonable error lies in whether the wrongdoing was intentional or inadvertent, and whether good or bad choices are made once the problem surfaces.

Finally, this approach prioritizes getting redress for harmed investors – something regulation hasn’t always focused on as much as it should. That’s the right priority. So let’s actualize it now by stepping up from a system that offers credit for co-operation to one that strategically sets punishment aside and gives kudos for accountability instead.

Neil Gross is president of Component Strategies, a capital markets policy consultancy in Toronto.

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More China coal investments overseas cancelled than commissioned since 2017

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More China-invested overseas coal-fired power capacity was cancelled than commissioned since 2017, research showed on Wednesday, highlighting the obstacles facing the industry as countries work to reduce carbon emissions.

The Centre for Research on Energy and Clean Air (CREA) said that the amount of capacity shelved or cancelled since 2017 was 4.5 times higher than the amount that went into construction over the period.

Coal-fired power is one of the biggest sources of climate-warming carbon dioxide emissions, and the wave of cancellations also reflects rising concerns about the sector’s long-term economic competitiveness.

Since 2016, the top 10 banks involved in global coal financing were all Chinese, and around 12% of all coal plants operating outside of China can be linked to Chinese banks, utilities, equipment manufacturers and construction firms, CREA said.

But although 80 gigawatts of China-backed capacity is still in the pipeline, many of the projects could face further setbacks as public opposition rises and financing becomes more difficult, it added.

China is currently drawing up policies that it says will allow it to bring greenhouse gas emissions to a peak by 2030 and to become carbon-neutral by 2060.

But it was responsible for more than half the world’s coal-fired power generation last year, and it will not start to cut coal consumption until 2026, President Xi Jinping said in April.

Environmental groups have called on China to stop financing coal-fired power entirely and to use the funds to invest in cleaner forms of energy, and there are already signs that it is cutting back on coal investments both at home and abroad.

Following rule changes implemented by the central bank earlier this year, “clean coal” is no longer eligible for green financing.

Industrial and Commercial Bank of China, the world’s biggest bank by assets and a major source of global coal financing, is also drawing up a “road map” to pull out of the sector, its chief economist Zhou Yueqiu said at the end of May.

 

(Reporting by David Stanway; Editing by Kenneth Maxwell)

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Bank of Montreal CEO sees growth in U.S. share of earnings

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Bank of Montreal expects its earnings contribution from the U.S. to keep growing, even without any mergers and acquisitions, driven by a much smaller market share than at home and nearly C$1 trillion ($823.38 billion) of assets, Chief Executive Officer Darryl White said on Monday.

“We do think we have plenty of scale,” and the ability to compete with both banks of similar as well as smaller size, White said at a Morgan Stanley conference, adding that the bank’s U.S. market share is between 1% and 5% based on the business line, versus 10% to 35% in Canada. “And we do it off the scale of our global balance sheet of C$950 billion.”

($1 = 1.2145 Canadian dollars)

 

(Reporting by Nichola Saminather; Editing by Leslie Adler)

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GameStop falls 27% on potential share sale

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Shares of GameStop Corp lost more than a quarter of their value on Thursday and other so-called meme stocks also declined in a sell-off that hit a broad range of names favored by retail investors.

The video game retailer’s shares closed down 27.16% at $220.39, their biggest one-day percentage loss in 11 weeks. The drop came a day after GameStop said in a quarterly report that it may sell up to 5 million new shares, sparking concerns of potential dilution for existing shareholders.

“The threat of dilution from the five million-share sale is the dagger in the hearts of GameStop shareholders,” said Jake Dollarhide, chief executive officer of Longbow Asset Management. “The meme trade is not working today, so logic for at least one day has returned.”

Soaring rallies in the shares of GameStop and AMC Entertainment Holdings over the past month have helped reinvigorate the meme stock frenzy that began earlier this year and fueled big moves in a fresh crop of names popular with investors on forums such as Reddit’s WallStreetBets.

Many of those names traded lower on Thursday, with shares of Clover Health Investments Corp down 15.2%, burger chain Wendy’s falling 3.1% and prison operator Geo Group Inc, one of the more recently minted meme stocks, down nearly 20% after surging more than 38% on Wednesday. AMC shares were off more than 13%.

Worries that other companies could leverage recent stock price gains by announcing share sales may be rippling out to the broader meme stock universe, said Jack Ablin, chief investment officer at Cresset Capital.

AMC last week took advantage of a 400% surge in its share price since mid-May to announce a pair of stock offerings.

“It appears that other companies, like GameStop, are hoping to follow AMC’s lead by issuing shares and otherwise profit from the meme stocks run-up,” Ablin said. “Investors are taking a dim view of that strategy.”

Wedbush Securities on Thursday raised its price target on GameStop to $50, from $39. GameStop will likely sell all 5 million new shares but that amount only represents a “modest” dilution of 7%, Wedbush analysts wrote.

GameStop on Wednesday reported stronger-than-expected earnings, and named the former head of Amazon.com Inc’s Australian business as its chief executive officer.

GameStop’s shares rallied more than 1,600% in January when a surge of buying forced bearish investors to unwind their bets in a phenomenon known as a short squeeze.

The company on Wednesday said the U.S. Securities and Exchange Commission had requested documents and information related to an investigation into that trading.

In the past two weeks, the so-called “meme stocks” have received $1.27 billion of retail inflows, Vanda Research said on Wednesday, matching their January peak.

 

(Reporting by Aaron Saldanha and Sagarika Jaisinghani in Bengaluru and Sinead Carew in New York; Additional reporting by Ira Iosebashvili; Editing by Sriraj Kalluvila, Shounak Dasgupta, Jonathan Oatis and Nick Zieminski)

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