February 2010 – Compliance Building

Compliance Bits and Pieces for February 26

Here are some interesting compliance related stories from the past week:

List of Troubled Banks at 16-Year Peak, F.D.I.C. Says by Eric Dash in the New York Times

After weathering the nation’s worst run of bank failures in nearly two decades, the Federal Deposit Insurance Corporation announced Tuesday that it had added 450 institutions to its list of challenged lenders in 2009 and warned that the industry was likely to remain under stress.

Rakoff Backs BofA Accord, Unhappily By DAN FITZPATRICK, KARA SCANNELL And CHAD BRAY in the Wall Street Journal

A federal judge harshly criticized but approved a $150 million settlement Monday between Bank of America Corp. and the Securities & Exchange Commission, resolving claims the bank should have disclosed billions in losses at Merrill Lynch & Co. before it was acquired by the bank. U.S. District Judge Jed S. Rakoff said the fine was “paltry” when considering the Merrill merger “could have been a bank-destroying disaster if the U.S. taxpayer had not saved the day.”

SEC Announces Efforts to Educate Investors About Participating in Corporate Elections – SEC Press Release

The series of measures include amending the SEC’s e-proxy rules, issuing an Investor Alert, and creating new Internet resources that explain the proxy voting process in plain language.

Supreme Court Sets Oral Argument in Quon v. Arch Wireless for April 19, 2010 in the Hunton & Williams Privacy & Information Security Law Blog

The U.S. Supreme Court has set oral argument for April 19, 2010, to review the Ninth Circuit’s 2008 decision on employee privacy in Quon v. Arch Wireless Operating Co. Although Quon concerns the scope of privacy rights afforded to public employees under the Fourth Amendment, the case also has forced private employers to renew their focus on ensuring robust and consistent enforcement of employee monitoring policies. Unlike government employers, private employers are not subject to the Fourth Amendment’s prohibition against unreasonable searches and seizures; instead, they must comply with federal wiretap statutes and state law.

The All-In-One FCPA Enforcement List from the FCPA Blog

This is really it. A snapshot of (we think) all FCPA-related ongoing prosecutions, pending sentencings, extraditions, at-large fugitives, and appeals.

How To Write a Code of Ethics by Josh Spiro in Inc.

A code of ethics can help a business determine its priorities and values. It can also help you down the line if one of your employees or vendors drags you into legal trouble.

Another Charge in Madoff Fraud

The SEC has charged Daniel Bonventre, Madoff’s Director of Operations, with securities fraud.

“According to the SEC’s complaint, Bonventre was responsible for the firm’s general ledger and financial statements that were materially misstated because they did not reflect the manner in which investor funds were maintained and used. Bonventure ensured that BMIS financial reports did not reflect the firm’s massive liabilities to investors or the corresponding assets received from investors. To hide the fact that BMIS normally operated at a significant loss, the firm used more than $750 million in investor funds to artificially improve reported revenue and income.

The SEC alleges that Bonventre also helped Madoff, his lieutenant Frank DiPascali, Jr., and others orchestrate lies to investors and regulators when investment advisory operations at BMIS came under review. With Bonventre’s assistance, they made serial misrepresentations to external reviewers by manufacturing reams of false reports and data.”

…

This is the SEC’s seventh enforcement action in the Madoff fraud since the scheme collapsed in December 2008. The Commission previously charged Madoff and BMIS, DiPascali, and auditors David G. Friehling and Friehling & Horowitz CPAs, P.C., who have all pleaded guilty to criminal charges related to their conduct. The SEC also charged certain feeder funds with committing securities fraud, and charged two computer programmers at Madoff’s firm for their roles in covering up the scheme.

Sources:

SEC Press Release – SEC Charges Madoff’s Director of Operations with Falsifying Accounting Records and Siphoning Investor Funds

SEC Decides to Think Further About IFRS

The Securities and Exchange Commission voted to issue a statement that lays out its position regarding global accounting standards. They want to make it clear that “the Commission continues to believe that a single set of high-quality globally accepted accounting standards would benefit U.S investors.”

By 2011, the SEC will decide whether to incorporate IFRS into the U.S. financial reporting system, and if so, when and how. In trying to reach a decision, the SEC has published a Work Plan. It has six key areas:

Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System
- Comprehensiveness
- Auditabilitity and Enforceability
- Consistent and High-Quality Application
The Independence of Standard Setting for the Benefit of Investors
Investor Understanding and Education Regarding IFRS
Examination of the U.S. Regulatory Environment that Would Be Affected by a Change in Accounting Standards
The Impact on Issuers, Both Large and Small, Including Changes to Accounting Systems, Changes to Contractual Arrangements, Corporate Governance Considerations, and Litigation Contingencies
Human Capital Readiness

Certainly it would be better to have a single universal accounting standard. But is IFRS better than GAAP, worse than GAAP, or just different?

Sources:

SEC Press Release – SEC Approves Statement on Global Accounting Standards
Commission Statement in Support of Convergence and Global Accounting Standards (.pdf) Release Nos. 33-9109; 34-61578

Keeping Your Colleagues Honest

Mary C. Gentile put together a great piece on how to challenge unethical behavior at work in the March issue of the Harvard Business Review: Keeping Your Colleagues Honest.

She starts with four rationalizations for staying silent when encountering an ethical problem:

It’s standard practice.
It’s not a big deal.
It’s not my responsibility.
I want to be loyal.

The meat of the article is about helping a manager to speak up when confronted with an ethical problem.

Treat the conflict as a business matter.
Recognize that this is part of your job.
Be Yourself.
Challenge the rationalizations.
Turn newbie status into an asset.
Expose faulty either/or thinking.
Make long-term risks more concrete.
Present an alternative.

I particularly liked her use of the rationalization argument.

“If people make the point that an issue is not your responsibility, you are in a strong position to press ahead—in using this rationalization, they have already conceded that the behavior is wrong, or at least questionable. They are not arguing with your assessment; they’re looking for a way to avoid the conversation.”

She also pulls out the New York Times technique on rationalization: “If it is expected , are we comfortable being public about it?” I usually amplify this to ask “Would you be comfortable with this being told in a story on the front page of the New York Times?”

The full article is behind the paywall at HBR.org.

Mary C. Gentile is a senior research scholar at Babson College in Wellesley, Massachusetts. Her book Giving Voice to Values is forthcoming from Yale University Press in September 2010.

SEC Commissioner is a Blog Commenter

So you write a blog post about the fiduciary duty of financial service providers to their clients. Actually, the real story is about the lack of fiduciary duty that brokers have to their customers. Then an SEC Commissioner chimes in.

Tara Siegel Bernard writes for New York Times blog, Bucks: Making the Most of Your Money. On February 16 her post was Will You Be My Fiduciary? Her proposal was to arm consumers with fiduciary rights, regardless of what the law says. Merely ask our provider to sign a fiduciary pledge so they have a contractual obligation to be a fiduciary.

Perhaps to her surprise, she got a comment from Elisse Walter, Commissioner, Securities and Exchange Commission:

This well-written, easy-to-understand proposal captures the way that all financial professionals should treat investors. It recognizes that all financial professionals should be subject to a fiduciary duty. And in a simple and straightforward way it articulates the scope of the duty and cuts through what has become non-productive debate on this issue.

This articulation allows us to move on to another critical issue: financial professionals are unfortunately subject to different obligations when they are performing virtually identical services for investors. For example, a person cannot start a brokerage firm unless she demonstrates to a securities regulator that she has the expertise and operational capacity to engage in the type of business she proposes to start. No equivalent process exists for investment advisers. And, the law requires an adviser to disclose to his client the full range of circumstances where their interests may conflict, while the law governing brokerage firms does not impose that blanket obligation.

These are only two examples of the obligations that should be harmonized. I’m ready to see us get on with that work.

According to a message I got from Mark Story, the SEC’s Director of New Media, it’s only the second time that a senior-level SEC official has commented in a public forum.

The first was when former SEC Chairman Christopher Cox commented on a blog post by Jonathan Schwartz: Sunlight on a Cloudy Day….

It looks like an SEC Commissioner posts a blog comment every three and half years. Plan ahead for 2013.

Actually, I’m surprised that the SEC Commissioners have commented at all. I recognize that high-level government officials have to be much more cautious about what they say in a public forum. They run into a similar problem with the dissemination of information that public companies have with Regulation FD. Surprisingly (or not), that just so happens to be the subject of that first SEC comment.

Wrap Up of the Global Ethics Summit 2010

Dow Jones and Ethisphere put on a great conference addressing ethics and compliance professionals. The Global Ethics Summit 2010 had a stellar line up of panels and presenters.

As with most conference’s it lacked power and wifi access. Fortunately, my company’s sturdy laptop battery and AT&T wireless access card allowed me to live blog from the sessions. Below are the blog posts that contain my notes from each session.

For pictures, DowJones has published some photos on Flickr: Global Ethics Summit 2010 Photos. There is also a stream of updates on Twitter from the conference: #GlobalEthics.

Since the posts were live from the sessions they are probably riddled with typos and grammatical errors. At least it’s better than my handwriting.

Compliance 2010 – What’s Next?
New challenges abound amid advancing best practices, not to mention the continually escalating rate of enforcement both by U.S. regulators and overseas officials. What’s on the horizon for compliance? This roundtable discussion comprised…Read more »

Working Toward a Healthier Organization: Pfizer’s Compliance Program
There are a number of challenges associated with maintaining integrity as a top priority in a highly competitive global business. But sometimes, despite company’s most earnest efforts to effectively implement compliance metrics and…Read more »

Tone at the Top: The Board’s Role
Understanding and supporting a prudent ethical and compliant tone throughout an organization is a core responsibility of the board of directors. Board actions are more transparent than ever to employees, investors, regulators, media…Read more »

Global Insights into the Anti-Corruption Landscape
Dow Jones Risk & Compliance presents the results of a recent survey of current anti-corruption regulation, emerging trends and the impact on corporations around the world.The speaker was Rupert de Ruig, Managing Director,…Read more »

Doing More with Less: Compliance During Tough Economic Times
Let’s face it: compliance is usually seen as a cost center. While there’s been some good and interesting research about the positive impact on the business of a good ethical culture and brand,…Read more »

Training a Diverse Workforce: Best Practices
Having a code of ethics is not enough to ensure compliance. Training is the vital step that brings these standards to life—effective training helps ensure that key tenets are retained and applied. While…Read more »

Don’t Be Evil: Imagination at Work with Google and GE’s Compliance Programs
General Electric and Google are two very different, yet equally substantial powerhouses with varying businesses to each company’s name. Ensuring compliance with U.S. and foreign regulations while maintaining Google and GE’s respective competitive edges…Read more »

Transparency – What, How Much and When?
How much should a company be disclosing to shareholders, investing communities, regulatory authorities and customers about its compliance program and other ethics-related activities? What risks does a company shoulder when it takes a…Read more »

When the Government Comes Knocking
What’s the best course of action when addressing a regulatory inquiry? Many have suggested that having a better than average compliance program to showcase will certainly help your case. But what are some…Read more »

Does Compliance Matter?
When trouble arises, one of the factors prosecutors consider during an investigation is the existence of a strong compliance program. Recently proposed amendments to the Federal Sentencing Guidelines would formally lower the sentencing…Read more »

Does Compliance Matter?

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

When trouble arises, one of the factors prosecutors consider during an investigation is the existence of a strong compliance program. Recently proposed amendments to the Federal Sentencing Guidelines would formally lower the sentencing range for companies with certain compliance mechanisms in place. But is there enough incentive for companies expending resources, particularly in tough economic times, or will they just get in trouble anyways? And at a time when a company’s brand value is increasingly dependent on intangible assets such as reputation, what are the financial repercussions on compliance? Do companies with ethical reputations really outperform those not known for their good behavior?

Panel:

Joan Meyer, Partner, Baker & McKenzie LLP
Jeffrey Benjamin, Vice President & General Counsel, Novartis
Patricia Nazemetz, Chief Ethics Officer, Xerox
Charles Elson, Director, HealthSouth
Gregory S. Nixon, Senior Vice President, General Counsel, Corporate Secretary & Chief Compliance Officer, DynCorp International

Jeff noted the importance of a “Speak Up” culture at a company. You need employees to report problems up the chain. Leaders at all level can chill a “Speak Up” culture.

Since Greg’s company is a government contractor, they need to make the government happy or they lose their biggest customer.

Jeff thinks one of the key elements of an effective compliance program. Live training is by far the most effective. (He gives an “F” to the summit because there was not much interaction.) He makes sure that the trainees get lots of documentation and information before the training session. He makes sure that annual training is different each year.

Patricia sees alignment as a key you need to make sure the compliance program is aligned and in the context of the underlying business. Access is key so that people have an open door to ask questions. Analysis is key to make sure that you spot issues. Adjudication needs to be in place so that bad acts are punished. You need to think about how much disclosure you make internally and externally.

Charles emphasized the need for repetition is needed. You need to keep sending out the message. He also though compliance and legal departments should be looked at as profit centers, not cost centers.

Greg emphasized the need to have a way for people to come forward and for the company to know what to do when someone comes forward.

Charles compared the hotline to the moon mission. People complained that going to the moon was a waste of time and money. But there were tremendous collateral benefits from the moon mission. (Love that Tang and Velcro.) The same is true for the hotline. It can provide tremendous insight to the corporate operations even if nothing material as a compliance issues comes from the hotline.

When the Government Comes Knocking

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

What’s the best course of action when addressing a regulatory inquiry? Many have suggested that having a better than average compliance program to showcase will certainly help your case. But what are some strategies for engaging with your lawyers in these unique cases? And how distant or directly should a company be involved in the discussions with DOJ or other regulators?

Panel:

Ty Cobb, Partner, Hogan & Hartson
Thomas O’Neil, Advisor, Wellcare Health Plans
Eric Feldman, Senior Advisor to the Director for Procurement Integrity, National Reconnaissance Office
Hank Bond Walther, Assistant Chief, U.S. Department of Justice
Brady Long, Vice President, General Counsel & Secretary, Pride International

Hank started off by sharing his thoughts. It is always good to have a compliance program. When the DOJ comes in, they don’t look at the paper program for compliance, they want to see how it works in execution. The DOJ looks behind the facade. They want to know about training, they want to know what the risks are and how they addressed those risks. Off-the-shelf compliance will not make the DOJ happy.

Eric pointed out the the new Federal Acquisition Regulations require the agency to include ethics and compliance programs as part of their evaluation of potential contractors. Everyone focused on the mandatory disclosure requirements. The government is focused on the due diligence prior to entering into the contract. They want to prevent problems from occurring.

Thomas pointed out that abroad, they think about fear peddling. Largely because the US approach to compliance has not made its way abroad. You need to have integrity, you need effective self-policing and you need to engage in responsible self-reporting. You need to integrate that into the “marrow” of your enterprise.

The problems at Pride came from acquisitions years earlier. Those organizations were not properly integrated into the overall organization.

Hank agreed that enforcement abroad is not as strong as the US. However, the US is no longer the “only sheriff in town.” Enforcement for corporate misdeeds is on the rise and sharply on the rise in some areas and some jurisdictions.

Hank also pointed out that he sees significant differences between the outcomes for companies that self-disclosed as opposed to those who got caught. (It sounds like there is room for some empirical studies on the treatment. Maybe there are some and I have not seen them yet.) Eric agreed that the end result would be dramatically better if they self-disclosed as a government contractor.

Thomas put a challenge back to Ty about how are big laws positioning themselves to really help companies, in-house counsel and compliance officers be better. The days of talking about waiving privilege and whether to report are over. Law firms need to prove their that their advice is an effective part of the compliance program.

Hank chimed in and agreed with Thomas’s take on the use of outside law firms. The DOJ sends FBI agents to interview executives, to seize records and run stings. They are less likely to do so when you self-disclose.

Transparency – What, How Much and When?

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

How much should a company be disclosing to shareholders, investing communities, regulatory authorities and customers about its compliance program and other ethics-related activities? What risks does a company shoulder when it takes a more transparent approach than not, and what are the risks associated with non-disclosure? And, when a possible transgression has been uncovered, when and how is disclosure appropriate, what are the benefits to the company of disclosure in this case, and how should third parties (such as outside counsel) be engaged when doing so?

Panel:

Alex Brigham, Executive Director, Ethisphere Institute, Ethisphere
Nancy Zucker Boswell, President & CEO, Transparency International USA
David Andrews, Board Member, Union Bank of California
Wendy Hallgren, VP, Corporate Compliance, Fluor
David Howard, Partner, Dechert

Wendy tells how Fluor uses transparency as a competitive advantage. Public disclosure makes for public identity. You want your employees and customers know that getting down on time is one factor. Getting it done right is the most important goal.

Nancy pointed out that the correlation between to trust and transparency. If people are watching, then you are going to act better. As companies focus on corruption, sustainability and ethical issues in their reporting there will be pressure for others to also report. Transparency helps with commitment and measurement of steps towards compliance.

The panel took on this issue of whether additional disclosure creates more liabilities. There have been some rumblings that there could more liability to the company.

David Andrews pointed out the board has a standard of care that they need to meet. There is a responsibility to get information out to the shareholders. Frankly, if you are doing something good, you should let people know that you are doing something good.

David Howard, wearing the lawyer, pointed out that no compliance program is perfect and issues will fall through the cracks. If you publicize that you have a complete program, you need to be careful that you are not making false statements.

Inevitability what you do today in 2010 will be judged by the standards in place in 2015. You need to stay ahead of the game.

When reporting to the board you need to be careful that you do not overwhelm them with information. You need to highlight issues if you really want their input.

There are two disclosure tests. (1) Do you need to disclose to the shareholders? and (2) Do you need to disclose to the government? The next step after whether you “have to disclose” is “should you disclose?” Theoretically, you will get better treatment if you voluntarily disclose. However, there is no empirical evidence that you actually get treated better. You show your stakeholders that you are committed to doing the right thing. It does not prevent the cost of an expensive and lengthy investigation. You may still be subject to government action even if the sentence is reduced. You also open yourself to civil litigation. You need to make a “gut check.”

Don’t Be Evil: Imagination at Work with Google and GE’s Compliance Programs

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes from this session:

General Electric and Google are two very different, yet equally substantial powerhouses with varying businesses to each company’s name. Ensuring compliance with U.S. and foreign regulations while maintaining Google and GE’s respective competitive edges in today’s increasingly complex and competitive marketplace can be daunting, to say the least. Brackett Denniston, Senior Vice President and General Counsel for GE, and Andy Hinton, Chief Compliance Officer and Associate General Counsel for Google, compare notes about how each company tackles critical issues, what has worked and what hasn’t and what issues most concern them going forward.

This session was held during lunch so my notes are sparse.

My first observation is that Brackett showed up in a dark suit, white shirt and a blue tie, looking very GE-ish. Andy was dressed in jeans and sport jacket, looking very Google-ish. (Although Andy came from GE and is a self-proclaimed GE disciple.)

Andy uses lots of measurements in his compliance program. He is trying to model the Google program on his experience at GE. GE has a reputation for lots of measurement

It is important to let people know that their jobs are at risk for compliance failure. You don’t want to just find scapegoats. You need to find the real bad actor.

You also need to reward employees for good behavior. It is important to point out the good stuff and the bad stuff.

Response is they key part of the process. Get the facts fast and disclose fast after you have those facts.

Google relies even more on their brand than GE. It’s hard to replace a nuke reactor. It’s easy to switch search engines.

Without your reputation, it’s hard to business. Your company’s reputation is a big part of a company’s value.

Build a case for value. You are better off missing the numbers than creating a reputational risk. Balance the risk and cost of the violation against the small dollar value of the gain from the bad act.

As long as you have board and CEO buy in then you can do a lot with limited resources.

You want to hire and promote people you can trust and that live and breathe the company culture.

The compliance group at Google is not trying to be cutting edge, unlike the rest of the company. The want to be block and tackle.

In regulated enterprises you need to have heightened awareness and a different approach to compliance. And there is more regulatory risk coming. Even China is promulgating thousands of regulations.

You have to be better than merely meeting the base regulations.