Timekeeping with Lego Bricks

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The life of a law firm lawyer typically involves a great deal of time-keeping. During my thirteen years at a big law firm I saw lots of different systems. All were flawed and all had weaknesses. Certainly, none were fun.

But this Lego brick time keeping system looks like fun! As the author points out, one big flaw is someone coming into your office and reassembling your time bricks into new sculptures.

Now if you could just figure out a way to incorporate the ABA Task Codes into the system. . .

Generational Differences in the Use of Workplace Technology

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Is there a gap between generations of legal and white collar professionals in terms of technology in the workplace? LexisNexis conducted a survey to see if there really is a gap and how big it is: LexisNexis Technology Gap Survey (.pdf).

After looking at the survey results, I see that there clearly is a gap. But it is not as big as most people think. There are statistically significant differences but not the tidal wave of change. I also think that some of the differences can be attributed to the level on seniority, not the generational difference. The Baby boomers are more likely to have more senior roles than Gen X and especially Gen Y.

For example one question asked “how many times do you access a social networking site during the day?” The percentage of those who said zero was 86% for Baby boomers. But was still 38% for Gen Y. Certainly, there is a big gap. But  you should not assume that every Gen Y is on rabid user of social networking and that Baby Boomers do not know what it is.

This difference was one of the biggest in the result. Most of the other data show a much narrower gap in the use and perception of technology in the workplace.

References:

Investor Relations 2.0 After This Proxy Season

Hopefully your annual meeting of investors or shareholders went better than the annual meeting for Fortis. Shareholders in Ghent, Belgium threw shoes, coins and ballot boxes. (There is even video.)

Broc Romanek put together his thoughts on Proxy Season Developments: Ten Signs that Things are Changing Online.

  1. First Use of Live Internet Voting
  2. Soliciting Shareholder Feedback on Compensation Practices
  3. Soliciting Shareholder Feedback on Disclosures
  4. Emergence of Proponent Sites Designed to Solicit Mutual Funds
  5. Easier Ability to Track Voting ResultsUse of “RSS Street” to Follow Developments
  6. Use of Corporate Blogs (and Third-Parties) to Solicit Questions
  7. Use of Twitter to Describe Live Events
  8. Investors Communicating Through Social Sites
  9. Much Easier Use of Video Changes Everything

There is also an opportunity to review the success of the online delivery of materials through the Notice and Access Rules. Dominic Jones of the IR Web Report pointed out some statistics on its effectiveness. According to the Broadridge Notice and Access Resource Center there is a big cost savings, but also a big drop in shareholder participation.

But 2.0 tools are giving more power for investors to voice their views as part of the annual meeting. Shareholder activist Robert A.G. Monks posted a transcript of his presentation of five proposals at the Exxon meeting. You can also hear the entire meeting.

References:

Supreme Court to Decide on Investment Company Act Case

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There has been a lot of focus on the Supreme Court’s acceptance of the PCAOB case: Free Enterprise Fund v. PCAOB (08-861). It squarely addresses an interesting administrative law question. I also find it interesting that this case originates from the last bout of financial fraud in the press (the collapse of Enron) and comes to the Supreme Court during the media coverage of the next bout of financial fraud.

Although it is less interesting, the Supreme Court also agreed to hear another case that may interest compliance professionals: Jones v. Harris Associates, L.P., (No. 08-586). This case focuses on the fees paid to the investment adviser of a mutual fund.

Harris Associates advises the Oakmark complex of mutual funds. Plaintiffs own shares in several of the Oakmark funds and contend that their fees are too high and in violation §36(b) of the Investment Company Act of 1940.

The Oakmark Fund paid Harris Associates 1% per year of the first $2 billion of the fund’s assets, 0.9% of the next $1 billion, 0.8% of the next $2 billion, and 0.75% of anything over $5 billion. These fees are roughly the same as other funds of similar size and investment goal. Mutual funds are largely captive to their investment advisers. There is an ability to change advisers and there is a requirement for independent directors. In my view the market really controls the fees. If one fund charges less in fees than another fund with  similar performance  and investment goal, investors will put their money in the less expensive fund.

Plaintiffs’ claim that the fees are excessive because they far exceed those charged to independent clients. Like many investment advisers, Harris charges less for institutional clients that invest in funds similar to the Oakmark funds. The plaintiffs take the position that a fiduciary should not charge a different price to its controlled clients than it does to its independent clients.

Under §36(b) of the Investment Company Act of 1940 the “the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company.”

The traditional standard was that a breach of fiduciary duty occurs when the adviser charges a fee that is “so disproportionately large” or “excessive” that it “bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Gartenberg v. Merrill Lynch, 694 F.2d 923 (2nd Cir. 1982)

The district court concluded that Harris Associates had not violated the Act and granted summary judgment in its favor. The Court of Appeals for the Seventh Circuit upheld that ruling. But they rejected the traditional standard and crafted a new one. Instead, the court adopted a standard that an allegation that an adviser charged excessive fees for advisory services does not state a claim for breach of fiduciary duty under § 36(b), unless the adviser also misled the fund’s board of directors in obtaining their approval of the compensation. Section 36(b) does not say that fees must be “reasonable” in relation to a judicially created standard.

I find it funny that the plaintiffs had argued that the court should not follow the traditional standard in Gartenberg. They won on that point, but still lost with the new standard.

Since one part of the country is subject to the traditional standard in Gartenberg and another part is subject to this new standard, I assume the Supreme Court took the case to clean up this split. It will give the Court an opportunity to clarify the proper scope of the fiduciary duty that investment advisers owe to fund shareholders with respect to their compensation.

In the end, I do not think the ruling will have much impact on consumers. No plaintiff has succeeded on a § 36(b) claim against a fund advisor. But it is likely to have an impact on compliance and governance programs.

References:

SEC Releases Proposed Custody Rules for Investment Advisers

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On May 14, the Securities Exchange Commission said they were proposing New Custody Rules for Investment Advisers. They summarized the proposed rules but did not release the actual text of the proposed rules.

Now the proposed rules are available in Release No. IA-2876 (.pdf). Comments must be received on or before July 28, 2009.

SUMMARY: The Securities and Exchange Commission is proposing amendments to the custody rule under the Investment Advisers Act of 1940 and related forms. The amendments, among other things, would require registered investment advisers that have custody of client funds or securities to undergo an annual surprise examination by an independent public accountant to verify client funds and securities. In addition, unless client accounts are maintained by an independent qualified custodian (i.e., a custodian other than the adviser or a related person), the adviser or related person must obtain a written report from an independent public accountant that includes an opinion regarding the qualified custodian’s controls relating to custody of client assets. Finally, the amendments would provide the Commission with better information about the custodial practices of registered investment advisers. The amendments are designed to provide additional safeguards under the Advisers Act when an adviser has custody of client funds or securities.

The proposed rule is a sign of re-regulation in the industry. Some of the proposed rules were in place prior to 2003, when they removed through de-regulation. (Investment Advisers Act Release No. 2176, September 25, 2003 [68 FR 56692]).

The proposed rules are amendments to Rule 206(4)-2 [17 CFR 275.206(4)-2], Rule 204-2 [17 CFR 275.204-2] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (the “Advisers Act” or “Act”), to Form ADV [17 CFR 279.1], and to Form ADV-E [17 CFR 279.8].

SEC Implements New Compliance Program (On Itself)

After the embarrassing news that two of its attorneys are accused of insider trading, the SEC has decided to strengthen its internal compliance program to guard against inappropriate employee securities trading.

“It only makes sense that we have a world-class compliance program – just as we expect from those we regulate,” said Chairman Schapiro. “The employees at the SEC have a well-deserved reputation for integrity and professionalism. These measures will further bolster our standing by helping to prevent not only an actual impropriety, but the appearance of one as well.”

There are some common sense controls being put in place:

  • Employees must pre-clear all their securities transactions to ensure, among other things, the company whose stock they are trading is neither being investigated by the SEC nor is involved in an offering.
  • Prohibit ownership of securities in publicly-traded exchanges and transfer agents, in addition to existing prohibitions against owning securities in broker-dealers, registered investment advisers and others directly regulated by the SEC.
  • Require that all employees authorize their brokers to provide the agency with duplicate trade confirmation statements.
  • As part of the pre-clearance and compliance process, periodic reviews will be conducted by supervisors to compare transactions against the employee’s work projects to guarantee compliance with the rules.
  • A new computer system to automate employee reporting of personal securities transactions which would simplify the reporting process for employees and ensure accurate pre-clearance checks. (The new system would also provide for easy verification of transactions by comparing reported trades against confirmation statements provided directly by each employee’s brokerage firm.)
  • Consolidating the compliance and reporting responsibilities within the SEC’s Ethics Office. Previously, responsibility within the SEC for ensuring staff compliance was spread between two offices.

JD Supra Launches Law Centers

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JD Supra is a repository of free legal information shared by legal professionals. It gives you a platform to publish work to a wide audience, maintain a profile and get credited for your experience.

Today, JD Supra launched a new feature they call Law Centers. This feature focuses JD Supra content  into subject areas for easier consumption.

For compliance professionals, you may be interested in these JD Supra Law Centers:

I am a founding contributor and (currently) a top ten contributor to JD Supra: Doug Cornelius on JD Supra.

FCPA and the Wall Street Journal

Not since the Siemens FCPA case have I seen the Foreign Corrupt Practices Act show up on the front page of the Wall Street Journal.  That case was highlighted because of billion dollar fine.

The big part of today’s story was the number of active FCPA cases. According to the story there are at least 120 active cases: U.S. Cracks Down on Corporate Bribes. There are two big names on the list of companies currently under Justice Department review: Sun Microsystems Inc. and Royal Dutch Shell PLC. the Sun disclosure probably came from the diligence in connection with its acquisition by Oracle.

Dionne Searcy, author of the article, believes the renewed emphasis on enforcing the FCPA “began in the wake of a series of business scandals earlier this decade, including the collapse of Enron, that stirred up a new corporate-reform movement.”

When the FCPA was first passed there was concern that it would limit the competitive of the United States. If Non-U.S. companies were paying bribes to win contracts, then U.S. firms would lose the business unless they broke the law. The online comments to the article bring up those same thoughts.

References:

Why We Think it’s Okay to Cheat and Steal (Sometimes)

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Behavioral economist Dan Ariely studies the bugs in our moral code: the hidden reasons we think it’s OK to cheat or steal (sometimes). In this presentation at the February 2009 TED Talks he summarizes some of his studies on cheating. It sounds like he has conducted some fascinating research on cheating. I think it provides some very useful insight for compliance officers. It may help you think about what factors exist in your workplace that may encourage bad behavior or may discourage bad behavior.

In the first four minutes Ariely discusses some of his research on pain. But then he moves into his studies on cheating. This video is worth watching.

Ariely concluded was that people have a “personal fudge factor” that allows them to gain the benefits of low-level cheating without damaging the view of themselves.

Ariely also found that paying people in tokens that they could exchange for cash doubled the amount of cheating compared to paying people directly in cash. The example for your office is that people are much more likely to take home a pack of pens than a dollar bill sitting on the shelf in the supply closet.

Ariely also found that when people saw an outsider cheating, cheating among the group went down, but when a colleague cheated, cheating among the group went up. In one experiment, he planted an actor as cheater wearing a college sweatshirt. The actor/cheater stood up only a few minutes after the test started, said he was done, collected the cash and left. There was much less cheating when the actor/cheater wore a sweatshirt from another school. Cheating increased when the actor/cheater wore a sweatshirt from the same school as the the rest of those participating in the experiment. This seems to show that there is big influence by peers on cheating behavior.

References:

Now Available on the Kindle

kindle-blogCompliance Building is now available on the Kindle from Amazon: Compliance Building (Kindle Edition).

I have added the Kindle subscription as a third choice on the Subscribe page.

(Amazon sets the Kindle subscription price. I would have made it available free if it were an option.)

Buy a Kindle or the bigger (and more expensive) Kindle DX.