Today's Top Stories Also Noted: Spotlight On... Hedge funds need to adapt quickly News From the Fierce Network:
Today's Top News1. Get ready for more actively managed ETFs
Actively managed exchange-traded funds (ETFs) have been on the investing horizon for quite a while now. The category remains small, but the concept is intriguing on many levels. Most people think of ETFs as a way to marry investing in passive index funds with the ease of buying and selling stocks. Managed ETFs might strike them as a way to marry the benefits of asset allocation funds with all the ease of owning a stock. Asset allocation mutual funds have been popular over the past three years, as investors shifted their prime focus away from price appreciation and more toward safety and soundness. Advisors have been on the bandwagon, touting the notion that the real performance derives more from broad asset allocation than security selection. Investment News notes, "While some trace their history to as early as 2000, most were launched in just the last five years. Looking at the market size, the Morningstar managed ETF database puts total market assets at just under $57 billion as of last September, representing 486 strategies from about 120 firms." That's a drop in the bucket in the scheme of things, but the growth of the category is bound to accelerate. One of the largest firms in the arena is Windhaven, which is owned by Charles Schwab. "Besides owning Windhaven, Schwab provides market access to 15 firms that offer a competitive product in the managed ETF market. Heavyweight BlackRock does not directly own any providers of managed ETF portfolios but sponsors more than 200 firms that sell managed account portfolio solutions that invest wholly in ETF assets," Investment News notes. But there's one huge threat to this category, which is that the surge of the market may be re-orienting clients to the stock market as a growth vehicle. Some think that they will transition soon out of defensive mode and right back into growth mode, shrugging off the lingering after effects of the financial crisis. If so, all asset allocation products might take a hit. For more: Related articles: Read more about: ETFs, exchange traded funds
2. Bank of America CEO required to hold stock longer
Compensation committees are in the spotlight like never before in the banking industry, with lots of attention focused on them from both regulators and shareholder activists. There will likely be lots of tinkering by committees bent on proving that they are not in league with management and are coming up with sound principle by which executives are paid. Reuters has highlighted an interesting wrinkle in the Bank of America compensation plan for CEO Brian Moynihan. He is now being asked to hold a minimum number of Bank of America shares beyond his retirement date. Previously, Moynihan was required to "hold at least 500,000 shares of the company's common stock and retain at least 50 percent of the net after-tax shares from future equity awards," until he retired. "But the new policy changes the holding period to 'until one year following retirement' from 'until retirement.'" Other top executives are required to hold at least 300,000 shares of the bank's common stock, plus half their after-tax award shares "until retirement." So the CEO is singled out for special treatment. The goal here would appear to be to give the CEO a vested interest in the performance of the company even after he steps down, which seems reasonable enough. But banks would be wise to move also to a policy of clawbacks that would extend the right to retrieve compensation for several years after an executive resigns if the executive is found to be complicit in various acts of wrongdoing. Clawbacks would be far superior to an extended period of required stock holding, though they are certainly complementary. For more: Related articles:
Read more about: Bank of America, CEO 3. JPMorgan in crosshairs of prosecutors
JPMorgan emerged from the financial crisis with its reputation intact, and CEO Jamie Dimon became the industry's new power broker in part because of his Washington connections. But the bank has unfortunately squandered a lot of its hard-won political capital over the past year, and Dimon's reputation has taken some big hits, especially in regulatory circles. DealBook puts the bank's travails in perspective: "All told, at least eight federal agencies are investigating the bank, including the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Securities and Exchange Commission. Federal prosecutors and the F.B.I. in New York are also examining potential wrongdoing at JPMorgan." Some of the cases have received little publicity, such as the ones exploring whether the bank failed to alert authorities about Bernard Madoff-related suspicions and the recent misstatement of how the bank harmed 5,000 homeowners in foreclosure proceedings. Now, at this very sensitive time, the JPMorgan board is letting it be known that it is concerned. The article notes that two directors are "worried about the mounting problems, and some top executives fear that the bank's relationships in Washington have frayed as JPMorgan becomes a focus of federal investigations." The board also has issued a statement fully supporting Dimon as chairman and CEO. If only two directors are worried, then something is seriously wrong with the board. My guess is that this is a huge issue with the entire board, which cannot afford to do nothing. Proactive steps at the board level are called for. The most dramatic outcome would be for the board to split the CEO and chairman job, but that's not likely to happen, unless the upcoming shareholder vote delivers an impossible-to-refuse mandate. But there are a host of other steps the board could undertake, and now is the time to do so. The danger is that the bank ends up being painted as something of a rogue institution in the manner that Goldman Sachs was painted over the past few years. Of course, other large banks face that risk as well. For more: Related:
Read more about: Enforcement Action, JPMorgan Chase 4. Goldman Sachs settles warrants exercise with Buffett
Warren Buffett executed his first transaction in what became a storied career 50 years ago. The investment bank that handled the trade was Goldman Sachs, and they've been partners ever since. That long partnership has proved profitable for both sides, reaching its apex during the financial crisis, when the "Sage of Omaha" rode to the rescue of the wounded bank. Goldman Sachs extended a sweet deal calling for Buffett to invest $5 billion preferred shares carrying a souped-up interest rate (10 percent) and to receive warrants to buy another $5 billion common shares at $115 each at any time up until October 1, 2013. The bank has agreed to sweeten the deal even further, amending the agreement away from cash settlement to net settlement with common stock. Goldman Sachs will deliver to Berkshire Hathaway a chunk of common stock equal to the difference between the average closing price over the 10 trading days preceding October 1, 2013 and the exercise price of $115 multiplied by the number of shares of common stock covered by the warrant. So the bank is essentially paying the paper profits on Buffett's warrants in stock, allowing Buffett to settle up without using any cash. Buffett has pledged to remain a long-term investor in the bank. "I have been privileged to have known and admired Goldman's executive leadership team since my first meeting with Sidney Weinberg in 1940," he said in a release. What would be interesting to know is whether the bank tried to lock in Buffett in terms of owning the shares for a set number of years. For more: Read more about: Goldman Sachs, Warren Buffett 5. Citigroup again hit for AML violations
Citigroup has become an all too familiar target of regulators when it comes to money laundering lapses. Last year, the Office of the Comptroller of the Currency (OCC) accused the bank in a consent decree with all kinds of violations of the Bank Secrecy Act, noting numerous compliance lapses, such as due diligence failures that could allow the bank to facilitate all sorts of transactions on behalf of criminal entities. In August, the FDIC and the California state regulators ordered the U.S. arm of Banamex to enhance its compliance program. The bank has been plauged by these types of charges at least the last 15 years or so. It's given some people the perception that the bank is not vigilante enough in its efforts to avoid doing business with people like dictators, drug lords, or organized crime fronts. That image has not yet been fully eradicated and the Federal Reserve Board has inked a deal with the bank to settle yet more charges of AML violations. The Fed did not impose a monetary penalty, but it did require the bank to improve its controls and compliance program, especially at its acclaimed Banamex consumer banking unit in Mexico. The bank has been ordered to submit a plan soon. "The board plan should include funding personnel and resources based on the risks of different units - policies that instill a 'proactive approach' to identifying and managing money-laundering risks - and measures to ensure employees adhere to those compliance policies, the Fed said," as reported by Reuters. It also noted that, "The Fed also ordered Citigroup to submit a plan to improve its compliance operations that deal with anti-money laundering and sanctions requirements, and complete a review of how effective its firmwide compliance program is within 90 days." Citigroup released a statement saying that it will continue to improve its AML processes. For more: Related articles: Read more about: Citigroup, Compliance Also NotedSPOTLIGHT ON... Hedge funds need to adapt quickly So how do you stand out in the hedge fund industry these days? It's not getting any easier. A survey of institutional investors has bubbled forth some recommendations about how funds can enhance their appeal. "Success in identifying, securing, and retaining institutional and private client assets today requires new tactics. These include a defensibly true and transparent investment process and a competitive edge that is verifiable internally and corroborated by the investor," one industry executive was quoted in hedgeweek. "Managers must know how to defend their edge against competitors, investment instruments, and vehicles investors now have at their disposal to meet their risk/return targets." Of course, the number one thing a fund can do is deliver strong returns year over year, but that's a lot easier said than done. Article Company news:
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Thursday, March 28, 2013
| 03.28.13 | Goldman Sachs settles warrants exercise with Buffett
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