Doug Cornelius on compliance for private equity real estate
Francine McKenna, of re: The Auditors, put together a great study on how the Fortune 100 are using Web 2.0 for investor relations. There are some. But for the most part, they are not using web 2.0.
The Downside:
The Upside:
The SEC charged Nature’s Sunshine Products Inc. with violating the Foreign Corrupt Practices Act after its Brazilian subsidiary made cash payments to customs officials to get their products imported into the country. The SEC also included two officers of the company in those charges. That part of the case was fairly standard.
What was new was that that the officers were not accused of being directly involved in creating the false books and records or authorizing the payment of the bribes. Instead, the SEC used Section 20(a) of the Exchange Act, which provides for control person liability.
Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
It sounds like the SEC really wanted to get these two officers but did not have enough evidence to show their direct involvement in the bad acts. It really shows the SEC’s willingness to use all the tools at its disposal to hold individuals liable for acts within a company. They want corporate officers to know that there is personal liability associated with their bad acts.
This case may foreshadow broader SEC enforcement against corporate officers who fail to adequately supervise employees.
References:
As part of its renewed efforts to combat overseas corruption, the United Kingdom’s Serious Fraud Office published its new Approach of the Serious Fraud Office to Dealing with Overseas Corruption 
.
Previously, the Serious Fraud Office saw its role as an after-the-event investigator and prosecutor, difficult for a company to engage except in the context of a formal investigation. The new policy statement shows a very different approach in which the Serious Fraud Office is offering to work with a company to avoid criminal prosecution.
What does this mean?
The Serious Fraud Office wants to encourage self-reporting. The benefit is that the Serious Fraud Office will more likely consider a civil, rather than criminal, outcome and the opportunity to manage publicity proactively. A negotiated settlement rather than a criminal prosecution means that the mandatory debarment provisions under Article 45 of the EU Public Sector Procurement Directive in 2004 will not apply.
What about the US Department of Justice?
If the case is within the jurisdiction of the DOJ and the Serious Fraud Office, they expect to be notified at the same time.
What do you need to do to avoid criminal prosecution?
Very soon after they receive the self-report and the acknowledgment of a problem, they want to establish the following:
They are not offering an “unconditional guarantee” that there will not be a prosecution.
What about corporate officers?
There are no guarantees. There are a few questions that will influence their course of action:
Conclusion
The Serious Fraud Office is trying to take the same approach that the Department of Justice is taking. Companies should self-investigate, self-report and negotiate to avoid the harshest sanctions.
References:
(45Kb)from the WrageBlog
I missed the introduction of the Pension Security Act. Rep Michael Castle introduced the bills in January and it was referred to the Committee on Education and Labor. It’s a short bill, but would have a big effect on the disclosure of investments in private investment funds.
The bill revises a section of the Employee Retirement Income Security Act (ERISA) and require of disclosure of which hedge funds the defined benefit pension plan has invested and the dollar amount of the investment.
The bill had a broad definition of “hedge fund”:
means an unregistered investment pool permitted under sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1), (7)) and section 4(2) of the Securities Act of 1933 (15 U.S.C. 77d(2)) and Rule 506 of Regulation D of the Securities and Exchange Commission (17 CFR 230.506).
The bill would require defined benefit pension plans on their annual financial statement to identify on a separate schedule, each “hedge fund in which amounts held for investment under the plan are invested as of the end of the plan year covered by the annual report and the amount so invested in such hedge fund.”
The Secretary of Labor, in consultation with the Securities and Exchange Commission, would be charged with issuing initial regulations within one year.
References:
In Douglas Adams’ The Hitchhiker’s Guide to the Galaxy, 42 is the number from which all meaning could be derived.
A group of hyper-intelligent pan-dimensional beings demand to learn the answer to the Ultimate Question of Life, the Universe, and Everything from the supercomputer, Deep Thought. It takes Deep Thought 7.5 million years to compute and check the answer. The answer turns out to be 42. Unfortunately, The Ultimate Question itself is unknown.
Wolfram Alpha gives you that answer. Google gives you that answer. Bing does not give you that answer.
Are you asking the right questions? Do you know what to do with the answer?
The current buzzword in the markets is “transparency.” Companies want to be more transparent so investors, customers and partners can better understand the company. Some of this came from Enron, whose operations and financial statements were often called “opaque.”
With the growing Web 2.0 it is harder to get secrets as anyone with an internet connection can become a publisher. There are armies of “reporters” looking for the truth. Or at least saying what they believe, regardless of the factual basis.
Some companies are taking it further by making their operations and plans more open to the public. They are embracing web 2.0 to stay connected with their stakeholders. They are becoming more transparent. The Naked Corporation by Don Tapscott and David Ticoll offers an interesting perspective on this
Nobody sane strips down naked in front of their peers. Or maybe you do?
Air New Zealand’s current ad campaign is that they have “Nothing to Hide.” Maybe they took radical transparency too far?
Thanks to Mary Abraham of Above and Beyond KM for pointing out the Air Zealand videos: Why Are You Hiding?
References:
On September 21, 2009, in New York City I will be a speaker at Social Media: Risks & Rewards.
This comprehensive, dynamic event will explore the inherent challenges of social media and will arm you with the specific tools necessary to protect your company, your intellectual property and your reputation in today’s virtual world. Find out how to safeguard yourself and your business through insightful sessions focused on:
- The Social Media Sensation: Pressure to Keep up in the Digital Age
- Exposure, Liability and Consequences of Your Business and Social Media
- Develop your Company’s Corporate Policy for Social Media
- Protecting your Company’s Identity in a Virtual World
- Risks from Employees Past, Present and Future
- Safeguarding your Company’s Intellectual Property
- Best Practices for Social Media
Challenges from Social Media are only one inappropriate “tweet” away. Register for this timely program today and ensure you understand the inherent perils of the market and construct the proper policies to protect your company and ensure future growth.
I will be on two panels: Develop your Company’s Corporate Policy for Social Media and Best Practices for Social Media.
There is a discount for friends and family (and blog readers). If you want to attend, just visit the conference website at www.corpcounsel.com/socialmedia and use the code SPK for $100.00 off.
It seems like executive compensation consultants come from Lake Wobegon, where “all the women are strong, all the men are good looking, and all the children are above average.”
I think executives should be compensated for out-performing their peers. They shouldn’t be punished for a negative performance due to external forces if they still out-performed their peers. Further, they shouldn’t be rewarded for a positive performance, if they under-performed their peers.
The magic is in picking the peer group to compare. Ideally, a peer group should include companies that are similar along several characteristics (e.g., industry, size, diversification, and financial constraints). Of course matching all of those characteristics would lead to a very small group for comparison.
In an article in the Wall Street Journal, Cari Tuna points out that Tootsie Roll Industries used Kraft Foods as a peer for deciding how much to pay its executives. Tootsie had $496 million in sales and Kraft had $42.2 billion in sales.
A study by Ana Albuquerque of Boston University examined what needs to go into selecting the peer groups. She found that having the the same industry and size quartile shows the best evidence for creating a relative peer group for executive compensation. In a second study, she found that companies tend to choose peers that pay their CEOs more, which in turn translates into firms paying their CEOs more.
In their study, Michael Faulkender of the University of Maryland and Jun Yang of Indiana University came to the conclusion that “compensation committees seem to be endorsing compensation peer groups that include companies with higher CEO compensation, everything else equal, possibly because such peer companies enable justification of the high level of their CEO pay.”
You can also add into the mix that the company may not want to seen as having a CEO who is below average. If your CEO is below average, then your company may be below average.
If you’re a CEO of a public company, it’s getting harder and harder to be below average.
References:
Over the last few days there has been renewed interest in the upcoming Supreme Court case that will should rule on the fees charged by mutual funds. Back in May, I published Supreme Court to Decide on Investment Company Act Case after they agreed to hear Jones v. Harris Associates, L.P. I didn’t expect much mainstream press coverage of the case until the decision comes out next winter.
Over the weekend, Wall Street Journal columnist Jason Zweig published Can the Supreme Court Undress High Fund Fees? which pointed out that this case will “hit you right in the pocket.” Then The New York Times ran Supreme Court to Hear Case on Executive Pay which portrayed the as one focused on out of control executive pay. It sounds like the press has figured out that the case could have some broad implications on the way mutual funds decide what fees to charge.
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 Jones v. Harris case starts with the 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 its 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.
Certainly, mutual funds rarely fire their advisers. But investors do fire the advisers by moving their money to different mutual funds and investments.The decision is likely to focus more on the procedure for setting fees than the absolute value of the fees.
It sounds like this case is getting tarted up as a blast against executive compensation. But really, its about the dense language in the Investment Company Act, fiduciary duty and compliance. Since the decision could have a broad impact on lots of peoples’ investments, it will likely get lots of coverage at the oral arguments on November 2, 2009 and whenever the decision comes out.
References: