Waves of Reform Impacting ERM Efforts

As Enterprise Risk Management ("ERM") has evolved as a discipline over the last decade, it has been largely shaped by waves of reform efforts resulting from corporate fraud in the early 2000's to economic catastrophes and widespread corruption in the latter half of the decade. According to a recent article by Mary Driscoll in Business Finance Magazine (a partner publication of The ERM Current), a new wave of ERM change and focus is at hand. Through several sources, Mary offers her view of the most recent wave and the one on the horizon.

The third wave, which is proving just as significant, came in early 2010 in the form of SEC Rule 33-9089, which "mandates disclosure of risk oversight and risk reporting lines, risk assessment by business unit, and assessment of the risk associated with compensation plans," explains Paul Walker, Associate Professor of Commerce at the University of Virginia and a leading academic in the field.

"Furthermore, the recent Dodd-Frank Wall Street Reform and Consumer Protection Act has raised the risk bar by mandating risk committees and risk experts on those committees. Add to this the fiduciary duty pressure on boards and the potential risk-related lawsuits, and you end up with risk getting attention at every level of the organization," adds Walker.

Now consider this twist. According to an article by Deloitte Financial Advisory Services LLP's Toby Bishop, "The Dodd-Frank Act has created a large financial incentive for whistle-blowing in companies across all industries." An area of particular concern relates to violations of the Foreign Corrupt Practices Act, and that could mean higher potential liabilities for companies moving aggressively into emerging markets where local officials expect to trade access for cash.

What has your company done to prepare for the potential impacts of these waves?  If you would like to learn more about practical, cost-effective solutions, let us know by emailing us at NavigateSuccessfully@WheelhouseAdvisors.com.

The Time for ERM is Now

The Dodd Frank Act of 2010 that was recently signed into law by President Obama will require not only banks but also nonbank financial companies to have a formal risk committee and enterprise wide risk management program. Specifically, the Act has a mandatory provision for public companies with total assets greater than $10 billion to have these risk management practices in place and an option for the Federal Reserve to require public companies with fewer assets to have the same.  Here is an excerpt directly from the new law pertaining to the new risk committee requirement.

RISK COMMITTEE.—A risk committee required by this subsection shall—

(A) be responsible for the oversight of the enterprise wide risk management practices of the nonbank financial company supervised by the Board of Governors or bank holding company described in subsection (a), as applicable;

(B) include such number of independent directors as the Board of Governors may determine appropriate, based on the nature of operations, size of assets, and other appropriate criteria related to the nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a), as applicable; and

(C) include at least 1 risk management expert having experience in identifying, assessing, and managing risk exposures of large, complex firms.

These requirements will become effective in one year, so the time is now to begin working on your enterprise risk management practices.  Wheelhouse Advisors is uniquely qualified to help companies establish a practical, business-focused risk management program that is cost-effective.  Visit www.WheelhouseAdvisors.com to learn more.

Prepare Now for the Tsunami of New Rules

Nearly two years after the worst of the financial crisis of 2008, financial regulatory reform legislation has been signed into law by President Obama. The Dodd-Frank Act of 2010 officially became law yesterday in a signing ceremony at the Ronald Reagan Building in Washington, DC.  Weighing in at over 2,000 pages, the new Act is chock full of mind numbing details.  However, the most important details are still yet to come. The Act provides authority for regulatory bodies such as the Federal Reserve to create new rules for financial institutions to follow. This will serve to significantly increase the compliance risk for these companies.  Here is what the Wall Street Journal reported yesterday.

The legislation is a major revamp of U.S. financial-market oversight, streamlining regulation and giving agencies such as the Fed much broader authority to deal with the most complex financial institutions. Many of the new rules will depend on regulators to write specific restrictions and regulations, and Bernanke said the onus is on officials to ensure that they are “sufficiently tough that the risk of another crisis is very low.”

Financial services companies should brace themselves for an onslaught of new rules and also should ensure they have the appropriate infrastructure to respond in a quick and efficient way. Much like the formation of a tsunami, the Act is essentially the earthquake preceding the gigantic wave.