Compliance Bricks and Mortar for June 30

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


SEC’s Clayton Vows to Do More Exams with Less Funding in AdvisorHub

SEC Chairman Jay Clayton testified to Congress on Tuesday morning that the agency will increase its examinations of investment advisers by 20% in the current fiscal year and nudge the numbers up a further 5% in fiscal 2018, despite requesting a slightly lower budget than in the current year. [More…]


My Retirement – Search for Successor by Roy Snell

I am retiring in March of 2020. At the outset, I would like to thank you for the opportunity to serve as CEO of this organization for the past 16 years. It has been a tremendous privilege to lead this organization and work with thousands of talented professionals.

In order to facilitate a smooth transition, we have a succession planning committee assisting in the process of finding a new CEO for SCCE and HCCA. [More…]


THE CCO AS A FUTURIST by Tom Fox in FCPA Compliance & Ethics

The Compliance Week 2017 Annual Conference opened this year with a Futurist, Dr. Brian David Johnson, who talked to the assembled group about where the compliance profession might be heading down the road. I thought about Dr. Johnson’s talk when I read an article in the most recent issue of the MIT Sloan Management Review by Amy Webb, entitled “The Flare and Focus of Successful Futurists”. One of the things that struck me was her opening line which reads, “Futurists are skilled at listening to and interpreting signals, which are harbingers of what’s to come. They look for early patterns — pre-trends, if you will — as the scattered points on the fringe converge and begin moving toward the mainstream.”[More…]


Supreme Court to Review Whether Dodd-Frank Anti-Retaliation Provisions Protect Internal Whistleblowers by Kevin LaCroix in The D&O Diary

[Y]ou might well have overlooked the fact that on Monday the Court also agreed to take up the question of whether or not the Dodd-Frank Act’s anti-retaliation provisions apply to and protect individuals who did not make a whistleblower report to the SEC. The lower courts have struggled with the question of whether or not the anti-retaliation protections extend to individuals who file internal reports within their own companies. A split on the issue has developed and now the U.S. Supreme Court will have the opportunity to address the question in the case of Digital Realty Trust v. Somers. The Court’s June 26, 2017 order granting Digital Realty Trust’s petition for a writ of certiorari can be found here. [More…]


Columbia professor Jackson leads field for SEC job by Sarah N. Lynch and Svea Herbst-Bayliss in Reuters

Columbia University law professor Robert Jackson is a leading contender for one of the two commissioner vacancies on the U.S. Securities and Exchange Commission, according to people familiar with the matter.If ultimately nominated by U.S. President Donald Trump and confirmed by the Senate, Jackson would fill a vacant spot reserved for a Democrat on the five-member panel. [More…]


If you enjoy Compliance Building, please join many of my other readers and donate to support my Pan-Mass Challenge bike ride to fight cancer. (Thank you to those who have already donated.) I’m pedaling from the New York border to Provincetown on August 4-6. 100% of your donation goes to the fight against cancer. You can read more and donate here: http://profile.pmc.org/DC0176

SEC Releases New Form ADV Frequently Asked Questions

Earlier this month, the Securities and Exchange Commission released 23 new frequently asked questions (“FAQs”) on Form ADV to provide guidance on recent amendments to Form ADV. Those amendments become effective in October.

These new FAQs include guidance on (i) the umbrella registration approach that many private fund sponsors use to register multiple affiliates and (ii) the reporting of significant new information concerning separately managed accounts (not separate accounts).

There are four new FAQs on social media accounts. They are a bit weird. An adviser does not need to report a social media account if a third party controls the account content. So if you have a third party controlling your firm social media account under the firm name, it does not show up. On the other side, the firm does not have to report an employee’s account when the firm controls the account content.

There is an interesting FAQ on the differences between a private fund and a pooled investment vehicle in Item 5D. “[P]ooled investment vehicles include, but are not limited to, private funds.”

“Additionally, the staff believes for purposes of Item 5.D there are some facts and circumstances in which it may be appropriate for an adviser to treat a single-investor fund (also known as a “fund of one”) as a pooled investment vehicle. For example, an adviser could reasonably treat a single-investor fund as a pooled investment vehicle where the fund seeks to raise capital from multiple investors but has only a single, initial investor for a period of time, or where all but one of the investors in the fund have redeemed their interests. However, an adviser generally should not consider a single-investor fund to be a pooled investment vehicle if that entity in fact operates as a means for the adviser to provide individualized investment advice directly to the investor in the fund.”

As for distributing audited financial statements to meet the custody rule, the new FAQ in 7b makes it clear that

You may answer “Yes” if you will distribute the audited financial statements as required, but have not yet done so at the time of filing the Form ADV.

The SEC revised its FAQ on Item 1.O and points out question that many people trip over in Item 1.O. The question is whether the adviser has over $1 billion in assets. It’s not whether the adviser as more than $1 billion in AUM. “Non-proprietary assets, such as client assets under management, should be excluded when responding to Item 1.O, regardless of whether they appear on an investment adviser’s balance sheet.”

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Compliance Bricks and Mortar for June 16

I want to clarify my Pay-to-Play and Yard Signs post from earlier this week. I think an early draft of the post was sent through the email system that was incorrect. A senior SEC official clearly stated that yard signs are not limited by the Pay-to-Play Rule and that the speaker who made the statement was 100% incorrect. (After the speaker’s statement I thought I could turn my compliance forensic testing into bike rides past all of my employees’s house to check for political signs. Oh well, back to the office.)

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


SEC identifies adviser cyber security flaws by Jason Wallace in Reuters

In the wake of the recent WannaCry ransomware attack, the Securities and Exchange Commission’s exam team is warning investment advisers that many are failing to perform steps critical to fighting cyber security attacks.

In specific, a relatively high percentage of advisers examined are failing to conduct continuous cyber-risk assessments, nor are they performing penetration or venerability tests. The shortcomings were far higher among investment advisers than among broker-dealers, and concerns raised by the WannaCry attack were particularly relevant to smaller firms. [More…]


SEC DERA, We Love You! by Matt Kelly in Radical Compliance

DERA joined on March 20. As of this morning, the Division had posted 193 tweets. I haven’t done a thorough analysis of the humor-to-boring ratio, but I can safely say that DERA is far more witty than the general SEC News feed, and light years beyond the Enforcement Division’s feed, which is a total snoozer.

We also love the wry self-awareness that DERA has about economists. They get a bum rap as nerds even in the corporate compliance field—and really, who are we to throw stones here?—but DERA knows how to bring it. [More…]


New ACC Survey Finds ‘Dramatic’ Gender Pay Gap for In-House Counsel by Sue Reisinger in Corporate Counsel

A new report from the Association of Corporate Counsel draws “a dramatic picture of gender pay disparity” for women in-house lawyers, while it shows their male colleagues may be sitting in denial.

The “Global Perspectives: ACC In-House Trends Report,” released Tuesday, indicates that a higher percentage of women than men occupy lower-level categories when it comes to in-house salaries. [More…]


The Never Ending Story: Money Laundering by Monica Ramirez Chimal in SCCE’s Compliance & Ethics Blog

Did you know that one of the sources to finance terrorism and trigger for money laundering is counterfeit goods? Due to the actions of law enforcement, the criminal is making money laundering more complex; they are looking for those countries, industries, companies and persons which can help them to launder lots of money at a low cost in a very quick time. [More…]


How Principles of Good Governance Can Improve Oversight of Financial Regulatory Institutions by Hadar Jabotinsky and Mathias Siems in the CLS Blue Sky Blog

Financial regulatory institutions are at the center of intense debates over how to supervise financial firms and markets. They are also the focus of an important and growing body of literature that is mainly concerned with the question, “Who should regulate the regulators.” Financial regulatory institutions are usually audited as part of the review of a particular country by international organizations such as the International Monetary Fund, the World Bank, or the OECD. In practice, this means that the structure of financial regulatory institutions and the conduct of financial regulators are not regularly and consistently monitored.

In our recent paper, we argue that the debate should include not just who should regulate the regulators, but also how they should be regulated. We examine how the principles of corporate governance address conflicts of interests between shareholders and other stakeholders in corporations, and apply those principles, with necessary adjustments, to financial regulatory institutions. We believe that this would solve many of the problems with monitoring financial regulatory institutions and holding them accountable.  [More…]


Raising the Corporate Veil in Kleptocracy Initiative

For actors looking to take advantage of the U.S.’s transformation into a global offshore haven, there are few tools more popular than limited liability companies (LLCs). From states like Nevada and Wyoming to high-rises in Miami and New York, LLCs have become one of the most prominent features of the U.S.’s shell company industry. And due to the U.S.’s lack of a beneficial ownership registry, actors both foreign and domestic continue to use LLCs to mask their identity – and their wealth.[More…]


What all urban planners should be asked: would you let your child cycle here? by Klaus Bondam

Connie Hedegaard, former Danish EU commissioner for climate action, puts it this way: “One might say that Europe faces a choice. Do we want to pursue an American-style approach where kids depend on their parents to take them to school for many years? Or do we want a Nordic-style approach in which mobility considerations are integrated into urban planning, and where the necessary infrastructure is provided so kids can bike to school by themselves? I know which I prefer.” [More…]


It would have been my friend Jeff’s birthday this week, except cancer killed him. This week I’m matching PMC donations. If you enjoy Compliance Building, please join many of my other readers and donate to support my Pan-Mass Challenge bike ride to fight cancer. (Thank you to those who have already donated.) I’m pedaling from the New York border to Provincetown on August 4-6. 100% of your donation goes to the fight against cancer. You can read more and donate here: http://profile.pmc.org/DC0176

Yard Signs and Pay to Play

I was fortunate to be able to attend the Securities and Exchange Commission’s CCO Outreach in Boston yesterday. I’ll post more later, but today I wanted focus on one topic that one panel discussed: the pay to play rule.

The CCO Outreach stated that they were not trying to play “gotcha” as part of the exam process. Personally, I find the pay to play rule to be one of the biggest “gotchas” in the Investment Adviser Act’s regulatory environment.

It was clear that the panelists were very focused on political contributions as part of the exam process. They slowly turned the screws.

They wanted firms to have policies and procedures around campaign contributions. Of course.

They wanted compliance to be verifying contribution disclosures against the records of campaign contributions. This is easier said than done. They noted the ease of using OpenSecrets.org. They were going off tracks. OpenSecrets has very little state information and is focused largely on federal money on federal campaigns. It is not federal candidates that are subject to the rule. The only time a federal candidate is implicated by the pay to play rule is when a state elected official is running for a federal office. Those instances are a gotcha cases. It’s the state and local campaigns that are directly in the cross-hairs of pay-to-play rule. State and local camapign contribution records vary widely from state to state.

Then a panelist said you need apply the prohibition across the whole firm. That’s a broader statement than required by the rule. The rule applies the limitation to “Covered Associates”, not all employees of an investment adviser. Perhaps the panelist misspoke. Or maybe it was a further indication that the panel had gone off the tracks.

Then, the big bang. Several of us in the audience were shocked when a panelist said yard signs were covered by the pay-to-play rule. The panelist stuck to this after some push back. Perhaps the panelist misspoke and was trying to indicate that fundraising for a Official is subject to the pay-to-play rule. Or maybe it was a further indication that the panel had gone off the tracks.

We met with the some senior SEC officials after the panel, who stated very clearly that the rule does NOT interfere with the Constitutional right to plant a political sign in your yard. [So the panelist misspoke? But now there is the specter of an examiner looking at yard signs. Are signs over a certain size covered?]

I understand the corrupting influence of money in politics. I recognize that several political officials have been convicted or accused of demanding political contributions in exchange for an assignment to invest government money.

[Begin the airing of grievances.]

But the SEC’s pay-to-play rule does little to stop that and is overreaching.

Bribing political officials is already illegal. The pay-to-play rule removes the need to prove the illicit intent and makes it a violation merely for making a contribution.

The contribution limits are absurdly low. Candidates raise tens of millions of dollars to run for governor. A contribution of $150 or $350 is meaningless. The SEC should raise the limit.

I still question the pay-to-play rule’s ability to protect investors. The decision to make the investment may be tainted, but the investment itself is not necessarily harmful to the financial returns for the pension plan. The plan is not getting the best investment choice because of an illicit bribe. What politician is going risk violating the bribery law for taking a $1000 campaign contribution to influence government pension money?

The pay-to-play rule is written overly broad and implicates failed candidates and PACs that may or may not have anything to do with state pension money. An investment adviser was trapped by the pay-to-play rule for an employee giving a $500 donation for a failed candidate for governor. That’s even though the state pension plan had already made the commitment to the private fund.

My impression from the panel is that the examiners are using the rule as a “gotcha” to trap investment advisers in foot faults that do nothing to harm or put the investing public at risk.

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Financial Choice Act Passes the House

While the political lens was focused on the James Comey testimony, the House of Representatives passed the Financial Choice Act. The bill is big change to many of the Dodd-Frank. For private funds, the most interesting section is: TITLE IV—Unleashing Opportunities For Small Businesses, Innovators, And Job Creators By Facilitating Capital Formation.

The Financial Choice Act does some interesting things and overreaches in many other ways. I personally think Dodd-Frank missed the mark. But it was in response to the financial crisis. There was a lot of political will to pass something to hold Wall Street accountable for the financial crisis.

I don’t think there is the political will to de-regulate financial institutions, which means there is not a good political pitch for this bill. The main theme has been to provide relief to Main Street. Smaller banks are having a harder time dealing with the banking regulations. The bigger banks, with their bigger operations and bigger balance sheets, are better able to deal with the complexity and costs.

Most think the bill is dead in the Senate. Perhaps some part of it will get passed, but it will look little like the bill passed by the House.

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Compliance Bricks and Mortar: Post-Comey Edition

Politics aside, one of the key items I saw in the Comey testimony yesterday was the effect of perception on interactions between a boss and his employees. Mr. Comey said he did “take as a direction” the president’s words to mean he should drop the investigation. That may or may not have been the intention of President Trump. Mr. Comey likened the statement to one made by King Henry II, referring to the archbishop of Canterbury, Thomas Becket, “Will no one rid me of this meddlesome priest?” That resulted in the murder of Thomas Becket.

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


DLA Piper’s 2017 Compliance & Risk Report: Compliance Grows Up

Chief Compliance Officers (CCOs) are less worried than they were a year ago about personal liability – likely a result of program improvements and increased independence and prominence of the compliance function, according to a new survey released by DLA Piper.

But DLA Piper’s 2017 Compliance & Risk Report still found that 67 percent of CCOs are at least somewhat concerned, and see significant areas for improvement – including in regard to compliance’s relationship with boards of directors. This year’s survey was expanded to query directors, who noted a higher level of concern than their CCO counterparts. [More…]


How to Improve Corporate Compliance with the Law by Vincent DiLorenzo in the CLS Blue Sky Blog

Regulatory philosophy in the U.S. and U.K. long reflected an assumption of corporate commitment to law-abiding behavior. Mainstream corporations were viewed as embracing an ethical obligation to comply with legal mandates. The result was a light-touch approach to enforcement policy—a policy relying on agreements to cease violations and not emphasizing the imposition of civil penalties. When law-abiding behavior was absent and a breach of legal standards was substantial, recurrent, or systemic, then financial penalties were imposed. More recently, regulatory philosophy has been modified to embrace the view that corporate actors are rational decision makers, choosing to comply, evade, or violate legal obligations based on cost-benefit evaluations. This regulatory philosophy reflects a neoclassical economic view, which assumes that corporate actors will comply with legal requirements if all potential costs of noncompliance exceed their benefits. In this scenario it is assumed that corporate actors assess risk based on a full appreciation of all the short-term and long-term consequences of their actions. The related assumption is that corporate decisions are linear, so that increasing the size of fines, for example, will have a direct and proportional impact on future decisions concerning legal compliance. This is both a reductionist and a linear view of human decision-making. The 2008 financial crisis has revealed flaws in both of these viewpoints. [More…]


The Limits of Gatekeeper Liability by Andrew F. Tuch in the HLS Forum on Corporate Governance and Financial Regulation

In The Limits of Gatekeeper Liability, I assess an original and provocative strategy intended to address many of the challenges facing gatekeeper liability. Proposed by Professor Stavros Gadinis and Mr. Colby Mangels in their paper Collaborative Gatekeepers, the strategy is inspired by rules that have proven effective in anti-money laundering regulation. [1] In my response, I examine some of the often overlooked subtleties involved in both justifying gatekeeper liability regimes for controlling corporate wrongdoing and in calibrating the deterrent force of these regimes. [More..]


SEC Names Stephanie Avakian and Steven Peikin as Co-Directors of Enforcement

Ms. Avakian was named Acting Director of the SEC’s Division of Enforcement in December 2016 after serving as Deputy Director of the Division since June 2014. Before being named Deputy Director, Ms. Avakian was a partner at Wilmer Cutler Pickering Hale and Dorr LLP, where she served as a vice chair of the firm’s securities practice and represented financial institutions, public companies, boards, and individuals in a broad range of investigations and other matters before the SEC and other agencies. . . .

Most recently, Mr. Peikin was Managing Partner of Sullivan & Cromwell’s Criminal Defense and Investigations Group. His practice focused on white-collar criminal defense, regulatory enforcement, and internal investigations. Mr. Peikin also is Adjunct Professor of Law at New York University Law School, where he teaches a class on the criminal enforcement of securities and commodities laws.

[More…]


SEC Administrative Law Judges: The Sequel by Greg Morvillo in the NYU Law’s Compliance & Enforcement

Back in February, I wrote a blog piece on the state of the law as it relates to the litigation over SEC Administrative Law Judges.  As, I’m sure you know, all good sequels recap the previous incarnation without belaboring the point so here goes:  a circuit split is brewing.  In Lucia v SEC, the D.C. Circuit held that SEC ALJs are not inferior officers and do need not be constitutionally appointed. Thereafter, the Tenth Circuit, took the exact opposite position in Bandimere v. SEC.  ALJ’s are inferior officers under Article III and if not appointed by the head of a department, are unconstitutionally presiding over cases before them.  While it is not as exciting as seeing an old Luke Skywalker at the end of Star Wars: The Force Awakens, it is, in fact, where we left off in February. [More…]


If you enjoy Compliance Building, please join many of my other readers and support my Pan-Mass Challenge ride to fight cancer. (Thank you to those who have already donated.) I’m pedaling from the New York border to Provincetown on August 5-6. 100% of your donation goes to the fight against cancer. You can read more and donate here: http://profile.pmc.org/DC0176

 

 

A Continuing Look as CCO Liability in the Stanford Ponzi Scheme

Eight years ago,  Stanford Financial Group collapsed and was labeled a Ponzi scheme. The Securities and Exchange Commission is continuing to seek penalties for those involved. One of those is Bernerd Young, who served as the Chief Compliance Officer at Stanford Group Company, the Texas-based registered investment adviser and broker dealer that promoted the Stanford CDs to US investors.

The SEC claims that Young approved Stanford’s false and misleading disclosures despite red flags about the products. An SEC Administrative Law Judge found that Young was

“at least negligent in allowing the use of marketing material that promised depositor security on the basis of facts about SIB’s portfolio that could not be verified and on the basis of a discussion of insurance that [he] knew had no relevance to depositor security but that might confuse a potential investor into thinking that it did.”

Young did not challenge most of the relevant facts about the underlying fraud at Stanford. He just disputes his liability by claiming that he reasonably carried out his compliance and due diligence responsibilities in good-faith reliance on Stanford officials, outside professionals, and regulators.

The ALJ found him subject to liability and barred Young from the industry, ordered almost $600 thousand in disgorgement and a civil penalty of $260,000. The disgorgement was for about half of his salary since half of Stanford’s income was fraudulent.

The Commission upheld the holding of the ALJ.

Young is appealing the decision to the US Circuit of Appeals for the DC Circuit. Mr. Young’s challenge is an attack on the ALJ proceeding in line with Lucia and Bandimere.

I also noted in the SEC order that Mr. Young had challenged the proceedings based on the statute of limitations. Although I don’t think it gets him in the clear, yesterday’s Kokesh puts a hard cap on the disgorgement to five years and opens the possibility of limiting the disgorgement remedy even more. In this case, Young’s salary is being disgorged based on some abstract ratio of fraud to legitimate activity at Stanford. I think it would interesting to see how this disgorgement held up to court scrutiny.

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Supreme Court Limits One of the SEC’s Remedies

The Securities and Exchange Commission has essentially been claiming that its remedy of disgorgement is not subject to a statute of limitations. To the SEC, disgorgement is not punitive but remedial in that it lessens the effects of a violation by restoring the status quo.

Charles Kokesh decided to fight back against this position. In the SEC’s case against him, the SEC wants to go back ten years. Between 1995 and 2006, Kokesh pilfered $34.9 million from the business-development companies for which his firm was acting as investment adviser. The SEC brought charges in 2009. The court ordered disgorgement of all of the pilfered funds.

Mr. Kokesh argues that 28 U.S.C. §2462 limits the disgorgement to five years by stating that “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued”. If the five-year limit is imposed, Mr. Korkesh’s penalty would be reduced to $5 million.

Yesterday, the Supreme Court agreed with Mr. Kokesh and set a limit on the SEC’s powers.

Disgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462. Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.

In addition to limiting the period susceptible to disgorgement, the Supreme Court indicated that a facial attack on the disgorgement remedy in footnote 3:

Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to §2462’s limitations period.

The Supreme Court noted that the SEC specifically has the powers of injunction and civil penalties. Perhaps the disgorgement could be tested. In the decision, the Supreme Court noted that the “SEC disgorgement sometimes exceeds the profits gained as a result of the violation” and, ” as demonstrated by this case, SEC disgorgement sometimes is ordered without consideration of a defendant’s expenses that reduced the amount of illegal profit.”

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Compliance Bricks and Mortar Post-Paris Edition

President Trump announced that the United States will withdraw from the Paris Climate Agreement. The U.S. is the world’s second-largest emitter of carbon, with China in the top spot. China affirmed its commitment to meeting its targets under the Paris Climate Agreement and recently canceled construction of 100 coal-fired power plants, with plans to invest billions in massive wind and solar projects. The Paris Climate Agreement is far from perfect and may hurt the US more than the other 195 countries given its massive carbon emissions.

Compliance with the agreement would be hard. It would take big investments in energy that does not come from fossil fuel. That’s especially hard when fossil fuel is so inexpensive.

Looking at the Constitutional process, the agreement was never ratified by the Senate, as is required for a treaty. Withdrawal from the agreement is no surprise. President Trump stated he would do so during his campaign.

Climate change is real. The hope was to avoid a tragedy of the commons. There is no other deal to be made on climate change.

Now what?

From NASA’s Global Climate Change library

In other news, these are some of the compliance-related stories that recently caught my attention.


Potential Liability for PE Firms When Preferred Stock Is Redeemed by a Non-Independent Board—Hsu v. ODN by Gail Weinstein & Robert C. Schwenkel, Fried, Frank, Harris, Shriver & Jacobson LLP

The plaintiff contended that, over the two-year period prior to the exercise date of Oak Hill’s redemption right, rather than managing the Company to maximize its long-term value for the benefit of the common stockholders, the directors had operated the Company so that it would be in a position to redeem the maximum amount of Preferred Stock as quickly as possible after the redemption right was exercised.

The Delaware Court of Chancery, giving the benefit of all reasonable inferences to the plaintiff (as required at the pleading stage), declined to dismiss the plaintiff’s claims. [More…]


Ex-Obama Officials Find There’s No Place Like Their Old Law Firms by Elizabeth Olson in the New York Times

The revolving door between government and law firms is decades old, as the newest political overseers arriving in Washington recruit their own legal hands for savvy counsel to prevent — or rescue them from — misdeeds or mistakes. And, as white-collar practices at major law firms have been booming in the wake of the regulatory overhauls that followed the economy’s 2008 crisis, that swinging door typically means a big payday for most lawyers. [More…]


What are you doing about outside business disclosures by Joshua Horn in Securities Compliance Sentinel

The purpose of requiring outside business disclosures is for a firm to make sure that it and its clients know about any conflicts of interest that their brokers may have. For example, the firm would want to know if the broker had a real estate broker’s license because that business may compete with the time the broker can give to her securities investing clients. [More…]


Are Hedge Funds Worth As Much As They Say They Are? by Pierre-Axel Gide in the CLS Blue Sky Blog

I tried to determine whether hedge funds provide investors with diversification benefits and deliver risk-adjusted returns above market returns. As a market benchmark, I used the S&P 500 Index and ran multiple regression analyses of monthly index returns. Doing so resulted in various alphas and betas corresponding to different hedge fund styles (also called tilts). [More…]


Matching Business Models and Processes with Cybercrime Insurance Programs by David Bergenfeld in the D&O Diary

Time and again, insureds seek payment for cybercrime claims only to be denied by their insurers and the courts that review the subsequent lawsuits that are inevitably filed by insureds. As courts strictly interpret cybercrime policies, insureds need to ensure that their cybercrime policies provide adequate coverage for the known risks and perils of their businesses. Such coverage can only be achieved through a diligent review of business models and processes to match them with a proper insurance program. Recently, federal appellate and district courts denied insureds’ claims for cybercrime coverage where the insureds’ insurance program did not match their business models and processes. [More…]


When ‘Political Intelligence’ Meets Insider Trading by Peter Henning in the New York Times’s DealBook

A case involving insider trading charges based on government information dispensed by a “political intelligence” operative raises interesting questions about how some of the tricky rules for proving the offense will be applied when information is leaked from a federal agency rather than a corporation. [More…]


Shareholder Proposals for Climate Change

Later today, we will hear President Trump announce from the Rose Garden about whether the US will pull out of the Paris climate accord. Meanwhile, ExxonMobil shareholders have stated that they do care about climate change.

As an ExxonMobil shareholder, I see that the firm is the frequent subject of activist shareholder items. There were nine such items on the agenda for the meeting yesterday.

Preliminary results of the vote on Wednesday had 62.3 percent in favor of the climate change proposal, up from the 38 percent who voted in favor of a similar resolution last year.

“RESOLVED: Shareholders request that, beginning in 2018, ExxonMobil publish an annual assessment of the long-term portfolio impacts of technological advances and global climate change policies, at reasonable cost and omitting proprietary information. The assessment can be incorporated into existing reporting and should analyze the impacts on ExxonMobil’s oil and gas reserves and resources under a scenario in which reduction in demand results from carbon restrictions and related rules or commitments adopted by governments consistent with the globally agreed upon 2 degree target. This reporting should assess the resilience of the company’s full portfolio of reserves and resources through 2040 and beyond, and address the financial risks associated with such a scenario.

The company’s board of directors has recommended a “no” vote.

ExxonMobil recognizes the dual challenge of meeting the world’s growing energy demand to support the economic growth needed for improved living standards, while simultaneously addressing the risks posed by climate change. In this regard, we believe the risks of climate change are serious and warrant thoughtful action.

It’s thoughtful action is just different than the shareholder proposal. ExxonMobil supports the Paris accord that President Trump appears to be ready to reject. (Why hold a Rose Garden conference to say you’re not changing?) ExxonMobil has also stated that it supports a carbon tax.

The New York State Common Retirement Fund (one of my firm’s investors) was the lead proponent of the resolution. Patrick Doherty, director of corporate governance for the New York State Office of the State Comptroller, which runs the New York State Common Retirement Fund stated: “We have a very, very strong financial interest in the long-term health of the company.”

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