Year: 2009

Regulating Private Investment Funds

Capital_BuildingLast week the Subcommittee on Securities, Insurance, and Investment of the United States Senate Committee on Banking, Housing and Urban Affairs held a hearing on regulating private investment funds. [You can see an archive of the hearing.] The video shows lots of empty Senator chairs at the hearing.

Senator Reed pushed his Private Fund Transparency Act. Senator Bunning sees some need for more disclosure, but is skeptical that regulation would do much.

Mr. Donohue’s statement gives a great summary of the history of the regulatory approaches to private investment funds and a summary of the current exemption available to private investment funds.

The questions from the Senators also provided some interesting insight of the legislators and SEC. Mr. Donahue’s pitch for regulation was that the Investment Advisers Act was put in place to regulate people who manage other people’s money. Private fund advisers indirectly manage other people’s money.  He does not like the idea of putting private funds under the Investment Company Act. Senator Reed pointed out that bringing private funds under the SEC registration umbrella would require additional resources and technology.

Senator Bunning cut into Mr. Donohue, wanting to know who in the SEC is “smart enough.” The Senator was highly critical of the SEC.

Senator Bayh focused on the international issues and the EU’s Directive on Alternative Investment Fund Managers. He also wondered if over-regulation could lead to forum shopping by fund managers.

Mr. Singh pushed for “smart regulatory framework.” He pointed out the MFA’s Sound Practices for Hedge Fund Managers (.pdf).

Mr. Chanos pitched the idea of having a special Private Investment Company law specifically tailored for SEC regulation of private investment funds. (In my view, the best approach.)

Mr. Loy gave the view of venture capital funds and how they operate differently than hedge funds. He pointed out that venture capital funds do not provide systemic risk.  Senator Bunning showed a lack of understanding of venture capital.

Mr. Tresnowski presented on behalf of The Private Equity Council and showed the differences between private equity and hedge funds. Senator Bunning also showed a lack of understanding of private equity.

Mr. Bookstabber focused on systemic risk.

Mr. Dear gave the viewpoint of an investor in private funds.  He also pointed out the superior returns they have experienced with private investment funds.

The HITECH Act

Pillsbury Winthrop Shaw Pittman LLP

I sat in a webinar on CyberSecurity Law: The Best Offense is a Good Defense sponsored by Pillsbury Winthrop Shaw Pittman LLP.  One aspect of the presentation was the Health Information Technology for Economic and Clinical Health Act.

This created the first federal data breach notification law.  It also substantially revised HIPAA regulations regarding privacy and security.

A “Breach” means:

  • Unauthorized access, use or disclosure of Public Health Information
  • That compromises the security, privacy or integrity of the Public Health Information
  • Does not include unintentional disclosures if made in good faith and within course and scope of employment or business associate relationship, provided that the Public Health Information is not further acquired, accessed used or disclosed

The difference between the HITECH Act and the state date breach notification laws deals with encryption, not security. It focuses on medical information, not just financial/identification information. Only California and Texas include medical information in data breach notification law.

The regulations from the FTC are very detailed. You must notify each US citizen and resident whose information was acquired by an unauthorized person and FTC. The Burden is on the company to demonstrate that all required notifications are made

Sending the breach notification:

  • By 1st class mail to last known address
  • By email “if specified as preference by the individual” (express affirmative consent required – pre-checked boxes and disclosures in TOS/Privacy Policy are NOT sufficient)
  • May provide notice via telephone or other means if Breach is deemed to require urgency (e.g.,due to possible imminent misuse of PHI)

Notification may be delayed for law enforcement purposes consistent with HIPAA Privacy Rule

If more than 10 individuals, Covered Entity must:

  • post notice on home page (and “landing pages” for existing account holders (FTC))
  • provide notice to major print/broadcast media in relevant geographic area, including tollfree phone number
  • must be prominent, clear and conspicuous, stated in plain language and run multiple times

Jurisdiction is split between the FTC and Health and Human Services. You are still subject to state enforcement of data breaches under state law.

SEC Proposes Measures to Curtail “Pay to Play” Practices

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At yesterday’s Open Meeting, the SEC voted unanimously to propose measures intended to curtail “pay to play” practices by investment advisers that seek to manage money for state and local governments. In 1999, the SEC considered a proposal to curb adviser pay to play practices modeled on MSRB Rule G37 that applies to underwriters of municipal bonds. This new proposed rule is both broader in its coverage and narrower in its applicability that the 1999 proposed rule.

The new proposed rule has four primary aspects:

1. Restricting Political Contributions

An investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.

The contribution prohibition would also apply to certain executives and employees of the  investment adviser.

Additionally, the range of restricted officials would include political incumbents and candidates for a position that can influence the selection of an adviser.

There is a de minimis exception that permits contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

2. Banning Solicitation of Contributions

The proposed rule also would prohibit an adviser from coordinating, or asking another person or political action committee to:

  1. Make a contribution to an elected official (or candidate) who can influence the selection of the adviser.
  2. Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.

3. Restricting Indirect Contributions and Solicitations

There would be prohibition on engaging in pay to play conduct indirectly, if that conduct would violate the rule if the adviser did it directly. That would include directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser.

4. Banning Third-Party Solicitors

There is prohibition on paying a third party, such as a placement agent, to solicit a government client on behalf of the investment adviser.

Comments and Publication

The full text of the proposed rule is not yet available. There will be a 60 day comment period.

References:

SEC to Consider Pay to Play Rule for Investment Advisers

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At the SEC open meeting on Wednesday July 22, the Commission will consider whether to propose a rule to address “pay to play” practices by investment advisers. The proposal is designed, among other things, to prohibit advisers from seeking to influence the award of advisory contracts by public entities through political contributions to or for those officials who are in a position to influence the awards.

You can watch the meeting through the SEC Open Meetings Webcast, starting at 2:00 pm (EDT).

Complying with Massachusetts Data Protection Regulations

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The current deadline for complying with the Massachusetts Data Privacy Law is January 1, 2010. Since the law protects personal data of the citizens of the Commonwealth of Massachusetts, its reach extends well beyond the state borders. TechTarget  recently held a  seminar on 201 CMR 17.

It is tough law to deal with. Even its creators are unsure about what it actually says. At the Compliance Decisions conference, a presenter from the state government overstated the requirements of the law: No easy answers for complying with data protection regulations.

Based on some coverage of the seminar, some interesting items came out.

When it comes to wireless standards: “You have to look at what is considered industry back practices. Specific to a wireless control, don’t go out and look at WEP. Don’t go out and look at WPA. Both of those protocols have been breached. You’ve got to go to WPA2.”

When it comes to compliance and enforcement: “It is true that the attorney general is going to decide what is in compliance or not.”

References:

The Rise in Financial Crime in America

The Economist is reporting that there were over 730,000 counts of suspected financial wrongoing recorded in America last year. Financial institutions filed nearly 13% more reports of fraud compared with 2007. The number of mortgage frauds rose by 23% to almost 65,000.

This poses the classic compliance conundrum: Is there more fraud occurring, or is more fraud being detected/reported?

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Preparing for the strictest privacy law in the nation: MA Privacy Law 201 CMR 17

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Join me for a webinar on the Massachusetts Data Privacy Law.

Knowledge Management Associates, LLC is sponsoring a webinar on Preparing for the Strictest Privacy Law in the Nation: MA Privacy Law 201 CMR 17.

  • I will provide an overview of the law.
  • Roberty Boonstra will share some of his best practices around implementation and compliance with the law.
  • Sean Megley, of Knowledge Management Associates, will provide a look at their SharePoint-based compliance management solution to to address 201 CMR 17.00

The webinar will be on July 29, 2009 from 12:30pm – 1:30pm (Boston time). And it’s free. You can register on their webinar registration page.

Ask for Usernames, Don’t Ask for Passwords

Flag-map_of_Montana.svg

From a compliance perspective it is good to monitor what your employees are doing in the various social media sites. If you operate in a heavily regulated industry it may not only be a good idea, but be necessary.

Don’t cross the line and ask for the passwords to those accounts. Learn from the City of Bozeman Montana.

Back in June, the City started asking job applicants for the list of social networking sites that they used, their usernames and their passwords. The city of 30,000 people became the subject of online outrage.

I think it is okay to ask employees and job applicant’s for a list of the sites they use. Most HR people include an internet search as part of their background check for job applicants. Focusing on some of the social networking sites is just an evolution in the process. You should investigate your potential employees to see if they are using the proper discretion. After all, if they list you as an employer, what they post will reflect back on your company.

But I think it was improper to require submission of the password. It violates the terms of service for some of these site.  Facebook explicitly prohibits the sharing of a password in its Statement of Rights and Responsibilities. If the City needed to see what the person was posting, then they could require them to be a Facebook friend or the equivalent to gain access to the person’s postings.

One caution in reviewing an applicant’s online profiles is the potential for job discrimination. I think it is better to do this review later in the hiring process, after an interview. The sites can expose information that you are not allowed to use in the hiring process, such as marital status, race and ethnicity. If you find something online that you takes the candidate out of consideration, document it in the file. Print the screen, highlight the offensive information and make it part of the applicant’s file.

If you do ask for the social media usernames, make sure you actually do monitor what is being posted by your employees. Use an RSS feedreader or equivalent to receive updates and store the information.

References:

Image by Darwinek, made available under a GNU Free Documentation License: Flag Map of Montana.

The State of Legal Social Networking

I have been a long time fan of social networking for lawyers. Capturing the conversation among colleagues is one of the best ways of capturing knowledge and finding expertise. Connecting with peers is the best way to stay up-to-date on the law. That was one of the primary reasons that bar associations formed. Can these online networking opportunities be as effective as your local bar association? Are they worth your time?

Here is my take:

lexisnexis
Martindale-Hubbell Connected
11,359 members

Currently, this appears to be the biggest social networking site focused on the legal market. So they come first in this article.

Connected is in the position of being backed by large company with significant resources and lots of substantive legal content. The site’s focus has been on creating a trusted community and validating the identity of the user. This resulted in a lengthy and error prone process for joining the site. (They just revamped the process: New Registration Workflow Launches.)

There is very little substantive legal content. The lure of this platform has been the potential of harnessing the vast Lexis database of substantive legal information to the individual. So far that potential remains untapped. The downside of having a big company behind the site is the slow speed and legacy systems that hamper the development of the site.

There are not many discussions taking place in the platform. The few discussions are focused on social networking itself. They continue that trend by devoting the week of July 20 as Social Media Policy & Guidelines Week. An interesting topic, but it will be subject to the limited audience and participants in this site. The people I would look to for guidance on this topic are not users of the platform.

If you are interested in finding out more about social media policies, the discussions next week may be interesting. But there is much more information and discussion on this topic outside the platform.

legal-onramp

Legal OnRamp
9,242 Members

Legal OnRamp is the most innovative of these sites. It has vibrant conversations with people that I consider to be thought leaders in the business of law.

Legal OnRamp started with a focus on connecting in-house counsel with each other and giving them a platform to collaborate. Then they started allowing private practice lawyers into the platform to help with the collaboration and sharing of information.

Certainly, I joined and contributed because the platform was full of in-house counsel. At the time I joined, I was a private practice real estate lawyer. I stood out as real estate lawyer when most of the other members were focused technology practices and at technology companies. That quickly changed as the membership base grew.

The site does have robust content on substantive legal topics. They require private practice lawyers to submit FAQs on legal topics or otherwise contribute to the content and discussion on the platform. Failing to contribute gets you kicked out of the platform.

I was feeding my old blog (KM Space) into the platform. Now this blog is fed into the platform. It’s interesting to see more robust conversations take place inside Legal OnRamp than on the originating blog itself.

One of the mantras of Legal OnRamp is that the practice of law is changing, so you would expect lots of discussion about how the practice of law changing and how it should change. There are. I would prefer to see more conversation about substantive legal issues. The conversations are interesting. I would just prefer some different conversations.

Legal OnRamp also recently joined forces with the Corporate Executive Board to bring new resources to law department members of the General Counsel Roundtable, a program of the Corporate Executive Board.

legally-minded
Legally Minded
2,000 members

There is very little activity other than new users adding their profiles. This platform is sponsored by the American Bar Association so there was much hope that this site would be able to tie into the big store of information that the ABA holds. So far, that does not seem to be the case. The other thought would be to move some of the email discussion list-serv to the platform. That did not seem to happen.

That leaves the platform as a wasted opportunity by a large legal organization.

lawlink
LawLink
5,000 Members

This platform claims to be the first social network for the legal community. I had not been to the site for months until the recently launched a Twitter Forum, pulling in Tweets from members. Other than this new forum, there is not much activity here. Being first does not make you the best.

LinkedIn-Logo

LinkedIn
88,284 Lawyers
291,500 Attorneys
324,168 listed as being in Legal Services.

Obviously LinkedIn is not limited to the legal community. But there are hundreds of thousands of lawyers and legal industry professionals using the platform to stay connected. For years, LinkedIn groups were merely badges to add to your profile. Now they are robust communities with lots of discussions and news being shared.

The groups rival the size of the legal specific platforms above. For example the Patent Law Group on LinkedIn has almost 4,000 members. The limitation is the inability to collaborate and store information in the group.

SEC Case Against Mark Cuban is Dismissed

The SEC alleged that Dallas Mavericks owner Mark Cuban was involved in insider trading when he sold shares in an Internet search engine company, Mamma.com Inc., after receiving confidential information about a private offering in 2004. The SEC said Cuban avoided a loss of $750,000 by selling his 600,000 shares, which represented a 6.3 percent stake in the company.

U.S. District Judge Sidney A. Fitzwater granted Cuban’s motion to dismissed an civil insider trading lawsuit. Judge Fitzwater gave the Securities and Exchange Commission 30 days to file an amended complaint.

Judge Fitzwater found that the SEC needed to allege that Cuban entered into an agreement (a) not to disclose material, nonpublic information about the offering, and (b) not to trade on or otherwise use the information. In his ruling, Judge Fitzwater wrote that the SEC didn’t accuse Mr. Cuban of promising not to trade based on the confidential information he received. So, the SEC couldn’t hold him liable for illegal insider trading. It is not enough that the person who gave Mr. Cuban the information expected him not to disclose it or act on it.

References: