⚽ This Week in GRC: The risks of relegation
MBK Search
We connect the best risk, audit, and compliance talent with the world’s leading firms.
Welcome to Issue 73 of This Week in GRC, MBK Search's weekly digest of the news and views in the world of governance, risk, and compliance.
🔔 This Week's Opening Bell
American investors' interest in English Premier League football clubs is fading after years of heavy involvement, according to Bloomberg.
U.S. ownership accounts for nearly half of the league's teams and over a third of the 92 professional clubs across England's top four leagues. However, the poor performance of Chelsea, despite a £1 billion investment, has shaken investor confidence.
Rising financial losses, unchecked player spending, and relegation risk make the Premier League less attractive to U.S. investors, who are increasingly turning to domestic sports investments. As a result, several Premier League clubs are struggling to sell minority stakes, with some remaining unsold for months.
This shift could have significant implications for the financial landscape of English football, potentially altering the league's future.
📰 This Week's Issue
🎯 The FTC has fake reviews in its crosshairs...
🙅♂️ ... but non-competes might be another story
📋 The PCAOB defends its new standards
🏢 Plus the latest GRC jobs and more.
📰 This Week's GRC Headlines
U.K. Authority Ends Competition Probes Into Google and Apple
U.K. Authority Ends Competition Probes Into Google and Apple App Stores
The U.K.’s Competition and Markets Authority (CMA) has closed its investigations into Google’s Play Store and Apple’s App Store as it prepares for new regulations that enhance its ability to promote competition in digital markets.
The CMA announced that with the passage of the U.K.’s Digital Markets, Competition and Consumers Act in May, it expects to address competition concerns regarding the U.S. tech giants’ app stores under this new regulatory framework. The legislation grants the CMA new powers to introduce requirements on companies with strategic market status in digital activities, similar to the European Union’s Digital Markets Act.
Will Hayter, the CMA’s executive director for digital markets, stated that the authority would apply its new powers to the issues identified in its previous investigations once the new regime is in effect. This includes examining whether Google and Apple have used their market dominance to impose unfair terms on app developers, potentially harming competition.
The CMA previously rejected Google’s proposals to allow alternative payment options for app developers, indicating dissatisfaction with the effectiveness of the commitments.
FTX and Genesis Take Different Paths in Customer Repayments Amid Bankruptcy
FTX has promised to repay its customers fully, but Genesis Global, another bankrupt crypto platform, may offer its customers more due to how repayments are structured.
FTX is repaying customers in cash based on the value of their crypto assets in November 2022, when it filed for bankruptcy. At that time, the market for digital assets had hit a low, capping recoveries. Genesis, however, is repaying in cryptocurrency, allowing customers to benefit from the recent surge in crypto values.
This difference arises from how cryptocurrency claims are valued in bankruptcy. U.S. bankruptcy law requires creditor claims to be valued in dollars at the time of the bankruptcy filing. FTX's repayment plan adheres to this, fixing customer claims at November 2022 prices, but some customers are dissatisfied, arguing that the "full-pay" plan doesn't reflect current crypto values.
Genesis, by contrast, is returning customers' original cryptocurrency deposits, which have appreciated significantly. For instance, customers who lent bitcoins to Genesis are recovering about 51% of their digital assets, but due to the market rally, this equates to around 166% of their claims' value at the bankruptcy filing date.
FTX, constrained by the lack of digital assets after the actions of its former management, is repaying in cash, treating all creditors equally. Meanwhile, Genesis creditors might see further recoveries depending on the outcome of ongoing litigation.
PCAOB Defends New Quality Control Standard
The Public Company Accounting Oversight Board (PCAOB) has defended its newly finalized Quality Control (QC) standard, particularly the External Quality Control Function (EQCF) requirement for larger firms, which has faced criticism from auditors and businesses.
Opponents argue that the EQCF needs to be revised and may not meet the criteria for approval by the Securities and Exchange Commission (SEC), which oversees the PCAOB.
In a letter to the SEC, the PCAOB emphasized that many large firms already voluntarily use independent advisers to demonstrate the effectiveness of their audit work, making the EQCF requirement feasible. The letter followed the SEC's decision to delay its ruling on the standard until September 9.
The EQCF, designed to provide independent oversight of firms' QC systems, has sparked significant opposition from large audit firms and business groups, including the U.S. Chamber of Commerce, which has threatened legal action if the SEC approves the standard without addressing their concerns.
The PCAOB stressed that the EQCF requirement was shaped by extensive stakeholder input over several years and is necessary to enhance audit quality. The board argues that independent external oversight will drive improvements in QC systems, benefiting investors and other stakeholders.
Despite criticism, the PCAOB maintains that the EQCF provision is essential for ensuring rigorous evaluation of firms' QC systems and aligns with the PCAOB's mission to protect investors. The board also addressed concerns about confidentiality, stating that firms can share QC information with external advisors without violating the Sarbanes-Oxley Act.
As the SEC reviews the standard, the PCAOB continues to assert that the EQCF is both practical and vital for improving audit quality across larger firms.
🔥 This Week's GRC Hot Takes
Hot takes and analysis from those on the shop floor
1) The Internal Audit Foundation’s Vision 2035 report is generating a lot of chat, but Richard Chambers says the report highlights the sector’s ongoing perception problem.
2) Speaking of Internal Audit, Doug Anderson raises an interesting question: What insights are lost by auditing remotely?
3) There have been a slew of challenges to the CFPB’s funding gains steam. This month, four companies alone have filed challenges. American Banker looks at what this means for the CFPB’s enforcement actions.
4) Fancy another Internal Audit piece? It’s a good-un. The Audit Hub looks at the value brought to Internal Audit by COOs.
📺 This Week's GRC Podcast
In this episode of the IIA All Things Internal Audit podcast , Nick Reese, Co-founder and COO of Frontier Foundry, explores the transformative impact of quantum computing on auditing. Uncover how this advanced technology could reshape the industry and gain valuable insights on how internal auditors can prepare for these emerging changes.
✍️ What MBK Search is Talking About
1) One Star: The FTC’s fake review rule explained
The Federal Trade Commission (FTC) issued a final rule governing the use of consumer reviews and testimonials. This rule is crucial for compliance officers and risk managers who ensure that their organizations adhere to legal and ethical standards in marketing practices. The rule addresses various unfair or deceptive acts involving consumer reviews and testimonials, which have become increasingly prevalent in digital marketing.
Prohibition of Fake Reviews and Testimonials
The FTC's rule prohibits creating, purchasing, or disseminating fake consumer reviews or testimonials. This includes reviews by individuals who have not used the product or service and reviews that misrepresent consumers' experiences.
Compliance officers must ensure that their organizations do not engage in or support the use of fabricated reviews. This prohibition extends to any third-party vendors or platforms the company uses for review management. To verify their authenticity, regular audits of the processes used to collect and display reviews should be implemented.
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Under the new rule, a company found to have purchased positive reviews for its products from a review broker could face significant penalties. Compliance officers must ensure that contracts with marketing vendors include clear prohibitions against such practices and provide for regular oversight.
Clear Disclosure of Material Connections
The rule mandates that any material connections between a reviewer or testimonial giver and the company must be clearly and conspicuously disclosed. This includes any relationships with compensation or another incentive for providing a review.
Risk managers should assess the company's current practices for collecting testimonials and reviews to ensure that all material connections are disclosed. This may require updating policies, training staff, and implementing monitoring systems to ensure compliance.
A company might offer free products to customers in exchange for reviews. Under the new rule, the company must clearly disclose that the reviewer received the product for free if these reviews are used in marketing.
Prohibition on Review Suppression
The FTC rule also addresses practices related to the suppression of negative reviews. It prohibits companies from removing or hiding negative reviews or threatening legal action to suppress unfavorable consumer feedback.
Compliance officers should establish procedures to ensure that all customer reviews are treated equally, regardless of their sentiment. This includes avoiding automated or manual processes that could unfairly filter out negative reviews.
If a company is found to be selectively deleting negative reviews while leaving positive ones intact, it would violate the rule. Implementing transparent review policies and regularly reviewing the platform's moderation processes are essential steps for compliance.
Enforcement and Penalties
The rule significantly enhances the FTC's ability to impose penalties for violations. These penalties can include substantial fines and other enforcement actions, particularly for repeat offenders or those knowingly engaging in deceptive practices.
Risk managers should evaluate non-compliance's potential financial and reputational impacts with this rule. This includes conducting a cost-benefit analysis of current review practices and implementing more robust safeguards where necessary.
A company that repeatedly engages in deceptive review practices may face escalating fines and legal actions. Developing a proactive compliance strategy that includes regular training and updates to marketing practices can mitigate these risks.
2) Non Compete Non Starter
This week, a federal judge blocked the Federal Trade Commission (FTC) from enforcing its proposed ban on non-compete clauses in employment contracts. This ruling from Judge Ada Brown in Texas halts a rule that would have significantly impacted employer agreements nationwide.
Judge Brown’s Rationale
Judge Brown’s decision reflects her earlier stance that the FTC has no legal authority to create rules governing competition in this manner. She also criticized the FTC’s approach as flawed and unjustified. This ruling goes beyond her initial decision, which only protected the plaintiffs involved in the case. Now, the judgment applies nationwide, meaning the FTC’s rule, which was supposed to take effect on September 4, 2024, cannot be enforced anywhere in the country. The judge based her decision on a law that requires courts to block rules that exceed an agency’s authority.
Mixed Rulings from Other Courts
Other courts have also weighed in on whether the FTC has the power to enforce its non-compete ban, with mixed results.
In Pennsylvania, Judge Kelley Hodge ruled against a company that tried to block the FTC’s rule, stating that the company hadn’t shown it would suffer serious harm. She also argued that the FTC does have the authority to issue such rules.
In contrast, in Florida, Judge Timothy Corrigan agreed that the company challenging the FTC rule had a strong case and could suffer significant harm. However, his decision only protects that specific company and does not apply more broadly.
What’s Next?
The FTC will likely appeal Judge Brown’s ruling, and the case may eventually reach the Supreme Court. For now, the non-compete rule is on hold nationwide, relieving companies from the obligation to notify employees about the rule by the September 4 deadline.
Even though the FTC cannot enforce the non-compete rule now, it still has the authority to investigate and take action against specific non-compete clauses that violate existing laws. Non-compete agreements may also be challenged under state laws.
Companies should review their non-compete agreements to ensure they are reasonable and legally justified. They should also seek legal advice to confirm that these agreements comply with state and federal laws.
3) Federal Agencies Propose New Standards for Financial Data Reporting
Several federal agencies have proposed new rules to standardize financial data reporting. These rules, required by the Financial Data Transparency Act of 2022 (FDTA), aim to make financial reporting clearer and more efficient across different regulatory bodies. The goal is to create a more transparent and streamlined financial data system, benefiting regulators and the institutions they oversee.
Purpose of the Proposed Rule
Developed by key agencies like the Office of the Comptroller of the Currency (OCC), the Federal Reserve, and the Securities and Exchange Commission (SEC), this rule seeks to standardize how financial data is reported. The aim is to make this data clearer, more accurate, and easier to access, which will simplify financial institutions’ reporting process and enhance the quality of information available to regulators.
Key Data Standards Introduced
The proposal outlines several important data standards that financial institutions will need to follow:
What This Means for Financial Institutions
Financial institutions must update their data management systems to comply with the new standards. This includes implementing the LEI system and updating reporting processes to include the specified financial instrument identifiers. Compliance teams and data managers should start reviewing their current systems to spot and fix any areas that need updating.
The rule also aims to reduce the burden on smaller financial institutions. The agencies plan to scale reporting requirements to ensure smaller entities can handle the new standards, minimizing disruptions and managing compliance costs.
Next Steps and Public Comment
The agencies are currently seeking public comments on the proposed rule, with a deadline of October 21, 2024. Stakeholders are encouraged to provide feedback, particularly on these data standards’ feasibility and potential impact.
After reviewing the public comments, the agencies will finalize the rule. Each agency will then adopt these standards, which are expected to be implemented within two years of the rule’s finalization.
Moving Forward
These new data standards represent an important step forward in financial regulation. By standardizing reporting, the agencies aim to strengthen oversight and provide better financial data for everyone involved. Once the standards are finalized, financial institutions should begin preparations to ensure a smooth transition.
🧑💼This Week's Hottest GRC Jobs
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