July 2015 – Compliance Building

Compliance Bricks and Mortar – Pan-Mass Challenge Edition

At the time this story gets published on Friday, I will be on bike somewhere between Hillsdale, New York and Sturbridge, Massachusetts. That’s the first leg of my Pan-Mass Challenge ride to support cancer research. I’ll end up in Provincetown on Sunday afternoon.

Many of the readers of Compliance Building have generously supported my ride. Just because I’m on my bike it does not mean it’s too late to donate.

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176″]Donate to the Pan-Mass Challenge[/button]

Given all of the training and fundraising for the PMC, I have not had time to post as many stories as I usually have in the past. Thank you for your support.

Doug

Here are two stories that caught my attention when I was off the bike.

AP Offers Up New Treasure Trove of SEC-Related Videos by Bruce Carton in Compliance Week

The Associated Press and British Movietone announced on Wednesday of last week that they have made more than 550,000 video stories dating from 1895 to the present available on their YouTube channels. The AP noted that “viewers can see video from the San Francisco earthquake in 1906, exclusive footage of the bombing of Pearl Harbor in 1941, Marilyn Monroe captured on film in London in the 1950s and Twiggy modeling the fashions of the 1960s.”

Very interesting, but what about some good SEC-related clips, you ask? Well, they have that, too!

Once a Crowdfunder, Always a Crowdfunder by Broc Romanek in the CorporateCounsel.net

A lot of ink has been spilled about crowdfunding in the press, such as this Huffington Post piece that gives a plain vanilla take on crowdfunding (and here’s another piece). In addition, there are some misunderstandings in the press about the capital options that a company has – this infographic by Kiran Lingam and Anthony Zeoli can help sort that out.

Here’s some thoughts from members on crowdfunding (similar to this series of blogs a few years back): In response to a question about the effects of an initial crowdfunding investment on a possible later venture capital transaction, Patrick Reardon of The Reardon Firm had the following thoughts:

Pay to Play Rule In Effect on July 31

The Securities and Exchange Commission announced the compliance date for the ban on third-party solicitation pursuant to the Pay-to-Play rule: July 31, 2015. Rule 206(4)-5 prohibits an investment adviser from providing compensated services to a government entity, following a political contribution to certain officials of that entity.

pay to play.

Rule 206(4)-5 became effective on September 13, 2010 and the compliance date for the third-party solicitor ban was set to September 13, 2011.

The third-party solicitation ban, prohibits an investment adviser from paying a third-party to solicit advisory business from any government entity, on behalf of the adviser, unless the third party is a regulated entity:

Registered Investment Adviser;
Registered Broker-Dealer; or
Certain Registered Municipal Advisers.

When the Commission added municipal advisors to the definition of regulated person, the Commission also extended the third-party solicitor ban’s compliance date to June 13, 2012. However, at the time the final municipal advisor registration rule was not in effect. So, the SEC extended the third-party solicitor ban’s compliance date from June 13, 2012 to nine months after the compliance date of the final rule. That date is now set at July 31, 2015.

Sources:

Compliance Bricks and Mortar for July 24

These are some of the compliance-related stories that recently caught my attention in between bike rides.(It’s not too late to support my Pan-Mass Challenge ride to support cancer research.)
[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176″]Donate $___ to the Pan-Mass Challenge[/button]

14671429512_36610827e2_z

SEC hires new private funds specialist by Katherine Bucaccio in Private Funds Manangement

Jennifer Duggins will join the commission later this month to co-head OCIE’s Private Funds Unit alongside Igor Rozenblit. [more..]

Is the Word Ethical Being Used in an Unethical Way? by Roy Snell in SCCE’s The Compliance and Ethics Blog

The point here is…are we using the word ethical correctly? If ethical means right from wrong, how can both parties involved in any debate both be ethical or both be unethical?

If the word ethical could speak for itself it might tell you it’s troubled by the recent use of the word ethical. [more…]

Email Hack Costs Cetera Advisor His Career by Ann Marsh in Financial Planning

It’s the kind of case that cybersecurity experts have been warning advisors about for years – and that they only expect to see more of.

A Cetera Financial advisor lost his 17-year career after falling for an email from a hacker who impersonated a client and persuaded him to illegally transfer $160,000 to a bank unconnected with the client or his wife. [more…]

SEC won’t second guess CCOs, but will bring enforcement action in cases of significant misconduct / failures by them. Speech by Mary Jo White

To be clear, it is not our intention to use our enforcement program to target compliance professionals. We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high. That being said, we must, of course, take enforcement action against compliance professionals if we see significant misconduct or failures by them. Being a CCO obviously does not provide immunity from liability, but neither should our enforcement actions be seen by conscientious and diligent compliance professionals as a threat. We do not bring cases based on second guessing compliance officers’ good faith judgments, but rather when their actions or inactions cross a clear line that deserve sanction.[more…]

Hemingway and Trust and Respect for Compliance Leadership by Thomas Fox in FCPA Compliance and Ethics Blog

I thought about Hemingway and his writing style when reading the most recent Corner Office column by Adam Bryant in the New York Times (NYT), entitled “To Work Here, Win the ‘Nice’ Vote”, where he profiled Peter Miller, the Chief Executive Officer (CEO) of Optinose, a pharmaceutical company. Miller has some interesting leadership concepts that are applicable to the position of Chief Compliance Officer (CCO) 2.0 and how a CCO 2.0 could use influence to lead, not only in the compliance function but also across an organization. [more…]

One way to mark an anniversary – 5 years after Dodd Frank created CFPB, it fines Citibank $700m

The Consumer Financial Protection Bureau (CFPB) has ordered Citibank, N.A. and its subsidiaries to provide an estimated $700 million in relief to eligible consumers harmed by illegal practices related to credit card add-on products and services. Roughly 7 million consumer accounts were affected by Citibank’s deceptive marketing, billing, and administration of debt protection and credit monitoring add-on products. A Citibank subsidiary also deceptively charged expedited payment fees to nearly 1.8 million consumer accounts during collection calls. Citibank and its subsidiaries will pay $35 million in civil money penalties to the CFPB. [more…]

Closed is by #sebastianmarekphotos
CC BY SA

SEC Meet and Greet – Part 2

Last week I was able to share with you the introductory letter from a firm that recently registered with the Securities and Exchange Commission and quickly received a meet and greet request. That same reader was nice enough to share his experience with me and the readers of Compliance Building.

The SEC had a four office pilot program last year to do these meet and greet outreach calls. The purpose is to inform newly registered advisers of SEC resources available to them: conferences and compliance staff available on a hotline. The SEC also wants the advisor to note that exams happen and what to expect.

The meet and greet outreach program has now been picked up nationally so this letter will become more common.

The meet and greet examiner asked some basic questions about the business and what the firm is doing about compliance. The topics covered were:

1. History of the firm and confirm owners.
2. Do you have a program and manual?
3. How often do you access the program?
4. The business strategies of the funds.
5. Experience of the leadership of the people of the firm
6. Experience of the compliance staff of the firm
7. How do you communicate track record?
8. Affiliate relationships and approvals
9. How do you satisfy custody?
10. What is your biggest compliance challenge?

If you are a firm that is getting ready to register or have recently registered, get ready to answer these questions.

Pan-Mass Challenge: It’s not too late to show your support for me and cancer research. The Pan-Mass Challenge donates 100% of every rider-raised dollar to Dana-Farber Cancer Institute through its Jimmy Fund.

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176=25″]Donate $25 to the Pan-Mass Challenge[/button]

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176=50″]Donate $50 to the Pan-Mass Challenge[/button]

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176=100″]Donate $100 to the Pan-Mass Challenge[/button]

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176″]Donate $___ to the Pan-Mass Challenge[/button]

Compliance Bricks and Mortar for July 17

These are some of the compliance related stories that recently caught my attention.

Bricks and Bikes

Deflategate (Part Two): My texts runneth over by Joshua C. Garbarino in The FCPA Blog

The spontaneous nature of texts, often with photos, and sending them before anyone thinks about the consequences, means the texts can be a very revealing source of eDiscovery.

Several courts have addressed the discoverability of employee text messages. In this post and in the final one of this series, I’ll look at some of those cases.[More…]

Cybersecurity ‘Not Owned’ by Compliance but Shared: FINRA Exec in ThinkAdvisor

Cybersecurity is an “an operational risk issue, not generally owned” by a firm’s chief compliance officer and legal department, Daniel Sibears, FINRA’s EVP of regulatory operations said Tuesday at the joint FINRA and Securities and Exchange Commission Broker-Dealer Compliance Outreach Seminar in Washington. [More…]

An Example of Cooperation Credit from the SEC by Thomas O. Gordon in SEC Actions

The Commission’s recent settlement with cooperator Frank Tamayo is an illustration of cooperation credit given by the agency, according to an agency press release. SEC v. Tamayo, Civil Action No. 3:14-cv-09844 (D. N.J.). Mr. Tamayo was the man in the middle of an insider trading ring composed of three friends. He had been friends with Steven Metro since law school. Mr. Metro later became a managing clerk at Simpson Thatcher. He has also been friends with Vladimir Eydelman, a registered representative with Oppenheimer & Co., for years. [More….]

SEC’s White: Compliance officers not a target of the agency by Mark Schoeff Jr. in Investment News

“To be clear, it is not our intention to use our enforcement program to target compliance professionals,” Ms. White told about 1,000 broker-dealer compliance officials at SEC headquarters in Washington. “We have tremendous respect for the job you do. You have a very tough job in a complex industry where the stakes are extremely high.” [More…]

U.S. Chamber: 28 Recommendations on SEC Enforcement Practices by Bruce Carton in Compliance Week

The report offers several recommendations about a topic that is currently generating considerable controversy: SEC administrative proceedings. It also recommends reforms in areas including the Wells process; the SEC’s policy on requiring admissions in settlements; document requests and production; SEC press releases and litigation releases; and much more. [More…]

Pan-Mass Challenge: It’s not too late to show your support for me and cancer research. [Donate] The Pan-Mass Challenge donates 100% of every rider-raised dollar to Dana-Farber Cancer Institute through its Jimmy Fund.

If you are reading this on Friday morning I’m in the middle of this grueling 130-mile training ride. Support me in my suffering.

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176=25″]Donate $25 to the Pan-Mass Challenge[/button]

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176=50″]Donate $50 to the Pan-Mass Challenge[/button]

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176=100″]Donate $100 to the Pan-Mass Challenge[/button]

[button link=”http://www2.pmc.org/e.asp?tid=7200&q=https://www2.pmc.org/egifts/DC0176″]Donate $___ to the Pan-Mass Challenge[/button]

Bike on Wall is by Josh Zakary

BE-10 Survey Requirements: What Private Equity Funds Need to Know

Under the International Investment and Trade in Services Survey Act of 1977, the U.S. Bureau of Economic Analysis in the Department of Commerce conducts a “benchmark survey” of U.S. direct investment abroad every five years. U.S.-based companies with ownership of “foreign affiliates” are required by law to participate in the survey by completing and submitting a series of forms known as the BE-10 survey. It’s been a while since fund managers have seen this request and my wonder if it applies. (It does.)

Private funds may be required to participate in the BE-10 survey if they own “foreign affiliates,” either directly or through portfolio companies they control. The initial deadline for completion of the survey was June 30, bu the BEA has granted extensions for private funds that requested them through August 31.

In particular you should note that willfully failing to fill out the survey could result in criminal punishment. At least that it is what the instructions say.

The Association for Corporate Growth and the U.S. Bureau of Economic Analysis will be holding a webinar on Thursday, July 16 at 2:00 p.m. ET to discuss how the BE-10 survey applies to private funds and answer questions. This webinar will explain the filing requirements, offer tips and answer questions to assist private funds in completing the survey.

Click here to register.

The BEA wants to hear from you! Submit your questions for this webinar in advance to [email protected] or [email protected].

SEC Meet and Greet

The Securities and Exchange Commission tackled a large group of new advisers, Post-Dodd-Frank, with the Presence Exam initiative. Then tackled a backlog of exams with the never-before examined initiative.

The SEC stated that it wanted to start reaching out to advisers soon after they register to get on top of things from the onset. A reader of Compliance Building whose firm recently registered received one of these meet and greet letters. He was nice enough to forward it to me to share with the other readers.

SEC Meet and Greet Letter

SEC Seal 2

Unlike the presence exams or never before examined examinations, there is no document request list. The SEC is letting the firm know that the examiners are out there and keeping an eye on you.

I would expect that the examiner is looking for the newly registered firm to recognize the need for compliance, have a compliance program in place, and to properly manage the potential conflicts in the firm.

I’ll let you know if I hear more.

Compliance, Cycling and the Tour de France

For me, July starts with the red, white and blue, then quickly turns to yellow. The yellow jersey worn by the overall leader of the Tour de France.

I’ve been a big fan of the Tour de France for the past decade and a half. I admit that it was the success of Lance Armstrong that brought me to it. The dethroned champion taught us a few compliance lessons. The cheating did not keep me from sticking with the sport.

Any fan of professional cycling knows that there is long history of drug abuse in the peleton. Many Tour de France riders had been subject to disciplinary action for doping. Only two of the podium finishers in the Tour de France from 1996 through 2005 have not been directly tied to likely doping through admission, sanctions, public investigation or exceeding the UCI hematocrit threshold. The sole exceptions were Bobby Julich – third place in 1998, and Fernando Escartin – third place in 1999. The official records have no winners during the Lance Armstrong years.

You can’t ignore the history of cheating in the Tour de France, just as you cannot ignore the steroid era of baseball. The cheaters were ahead of the organization’s will to enforce and ahead of the organization’s ability to catch the cheaters.

Those with incentives to win are going throw resources at staying ahead of the regulators. We saw that in cycling. We saw that in baseball. We saw it on Wall Street.

It now seems that cycling’s governing bodies are serious about keeping doping out of the sport. It also appears that the science of detection has caught up to the science of cheating. There is less incentive to cheat if you think the chances of getting caught are remote. Mr. Armstrong was tested hundreds of times. The few times that an anomaly was spotted, it was washed away by the poor testing or whitewashed by the governing body.

Sports, as with finance, are filled with rules that don’t always make sense. We can look at football and the enforcement being levied against Tom Brady and the Patriots organization. Missing from all of this is whether it matters how the balls are inflated.

I think some will see some parallels between the competition of sports and the competition of finance.

Weekend Reading: A History of the World in Sixteen Shipwrecks

Shipwrecks are tragic, but have been a part of human history since we started making ships. There are an estimated three million ships sitting on the bottom of the oceans, seas, lakes, and rivers of the world. Of that staggering number, Stewart Gordon picked sixteen to tell the story of human history.

A History of the World in Sixteen Shipwrecks does not tell the story of the most famous wrecks. From the cover, you may think the Titanic makes the list. It does not. There are a few shipwrecks that you will recognize, but most you will not. The book explores how small local maritime travels merged into larger and larger networks of human activity. Technology and finance are the main driving forces.

The one oversight I think is missing from the collection is a container ship. The use of containers and the ships that carry them are main driving force for international commerce. China would not be the global behemoth it has become, if not for the cheap, easy shipping through container ships.

Regardless, the book is well-written and enjoyable to read. Although I was skeptical of the premise, Mr. Gordon does a remarkable job of putting large swaths of history into focus through these sixteen shipwrecks.

The publisher provided a copy of the book for me to review.

ReTIRE Initiative

The SEC said it would focus on matters relating to retail investors saving for retirement and the SEC followed through with the new exam focus: the ReTIRE Initiative.

risk alert

We’ve seen this coming. The National Exam 2015 priorities list stated that OCIE will focus on how retail investors at or nearing retirement are being served by investment advisers and broker-dealers.

Unlike some of the past initiatives, this one seems to look in a different direction than private funds. Unless of course the private fund is being marketed to retirement accounts.

(On a side note, I have mixed feelings about the forced acronym for the initiative. I admit that I said the “Never-Before Examined Initiative” lacked pizazz and a snappy title like “presence exam.”)

SEC examiners will be looking for signs of harm to these investors, in particular with retirement accounts, on four areas:

Reasonable basis for recommendations
Conflicts of interest
Supervision of compliance controls
Marketing and disclosure

These areas are not different or new compared to past initiatives. It just seems the focus is on advice around retired investors and retirement accounts. That may be an interesting challenge if a firm is not tracking the types of accounts.

For private funds, the Form PF asks a breakdown of fund investors in 14 different categories. Retirement accounts is not one of those categories in Question 16. I’m not sure this is a category that many private funds actually track.

Perhaps the focus may be for self-directed IRAs and the risk of fraud seen in other cases for alternative investments.

Sources:

If you enjoy reading Compliance Building, please consider making a donation to my Pan-Mass Challenge bike ride. 100% of your donation goes to support cancer research.

Click here to make a donation.