Compliance Bricks and Mortar for February 21

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

SEC claims drunk lawyer had insider tipple By Kara Scannell in FT.com

The SEC sued Tibor Klein, a New York investment adviser, in September for allegedly buying securities of King Pharmaceuticals after learning from one of his clients that the drug company was in talks to be acquired by Pfizer. Mr Klein’s client and friend, Robert Schulman, a patent attorney at Washington law firm Hunton & Williams, allegedly became intoxicated after drinking several glasses of wine over dinner and “blurted out to Klein, ‘It would be nice to be King for a day,’” according to the SEC complaint filed in a Florida court.

Chasing Compliance: JPMorgan has paid out billions in penalties. Did it fix the problems? by Sue Reisinger in Corporate Counsel

A spokesman said bank officials would not comment for this story. But under pressure from regulators, the bank hired more than 3,000 employees last year to enhance its risk and compliance efforts. It also hired a new compliance chief and removed the compliance function from the purview of general counsel Stephen Cutler. In statements to shareholders and employees, chairman and chief executive Jamie Dimon expressed humiliation over bank mistakes. He said the bank spent over $1 billion in 2013 on reforms, and he vowed, “Our control agenda is now priority No. 1.”

Turning Blind Eye to Tippers No Protection From Charges by Patricia Hurtado in Bloomberg

U.S. prosecutors may bring charges for ignoring the source of illegal information used for trading, an appeals court ruled in its second decision in as many days widening the scope and penalties for insider cases

The Uneasy Connection Between Securities Disclosure and Job Creation by Ian K. Peck in the CLS Blue Sky Blog

The Jumpstart Our Business Startups Act (the “JOBS Act” or “the Act”) was signed into law in the spring of 2012, amidst the ongoing fallout from the 2008 financial crisis as well as a hotly-contested presidential election. Having received uncharacteristic bi-partisan support, the JOBS Act’s explicit goal is “To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies”. In order to accomplish this goal, the Act seeks to reduce the perceived regulatory burden that U.S. securities laws place on companies, mostly firms in the early stages of existence. This lessened burden focuses primarily on the amount and timing of required disclosure firms owe investors and potential investors.

Mark Cuban Visits D.C. to Speak About SEC Case, Enforcement Policy by Bruce Carton in Compliance Week

Cuban repeated a criticism that he also made from the courthouse steps in October following his victory at trial: that the securities laws, including the insider trading laws, are ineffective because the public often has no idea what is legal and what is illegal. How can a “Broken Windows” strategy work for the SEC, has asked, if people don’t even know what a broken window is in the securities law context?

Take Two Video: “The SEC’s Disclaimer” by Broc Romanek in The Corporate Counsel.net

Did you know that the disclaimer that SEC Staffers give when they speak is actually required by law? [Broc] recently learned that on my own even though I gave that disclaimer many times when I spoke in my capacity as a Staffer. Here is a 1-minute video about the disclaimer’s origins – [Broc] tried to inject some humor at the end:

Image of Brick work, Belconnen, Canberra is by Rebecca Dominguez
CC BY NC SA

 

Compliance Bricks and Mortar for February 14

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

New SEC investor advocate says he has investor-protection genes by Mark Schoeff Jr. in Investment News

Mr. Fleming will head an office that is responsible for ensuring that the concerns of retail investors are elevated at the commission, as well as at self-regulatory organizations such as the Financial Industry Regulatory Authority Inc. He will identify problems investors are having with financial firms and products and make recommendations on how rules and regulations can better protect them.

Are you keeping track of your compliance costs? by Jeff Kaplan in Conflicts of Interest Blog

Compliance costs come in various forms. Among the most prominent are salaries and related expenses for in-house personnel doing C&E work on a full- or part time basis (i.e., not just C&E officers but, to some extent, personnel in HR, Legal and Audit). Another category of out-of-pocket C&E costs are those incurred for external products/services, such as computer-based training, hotline providers, case management or other GRC software or C&E program assessments . Out of pocket costs, of course, are fairly easy to calculate – and are, I believe, often taken into account by government officials in weighing the efficacy of C&E programs. – See more at: http://conflictofinterestblog.com/2014/02/are-you-keeping-track-of-your-compliance-costs.html#sthash.ZWhofIfd.dpuf

On Beauty and Biking in Freakonomics

Sole author Erik Postma also asked the participants to rate the man’s masculinity and likeability, and asked whether the rater, if female, was on hormonal contraception. The results were clear. The most attractive men were also, unbeknownst to raters, the riders that performed best.

K&L Gates discusses Third Party Certification Procedure Designed to Comply with New SEC Rules Permitting General Solicitation in Reg D Private Offerings by Gary J. Kocher in CLS Blue Sky BLog

Consistent with this view, we have prepared the attached sample Status Certification Letter that is designed to allow an individual investor to approach one of his or her existing trusted advisors that is a Permitted Third Party Verifier (lawyer, CPA, etc.) to provide a certification of the underlying information on which the issuer may base its determination of the status of the investor. The form is designed so that a non-lawyer can easily check a box as to the level of income/net worth and type of information that has been reviewed within the scope of the rule. Because the certification can be made by an existing trusted advisor, the advisor may already be in possession of the information on which the certification is made, thereby reducing the burden on the investor. The form also clearly specifies that the Permitted Third Party Verifier assumes no liability for (i) the accuracy of the information provided by the investor or (ii) the ultimate determination as to whether the investor meets the requirements to be accredited.

Bad Apple: REITs fined $1.5 million for disclosure violations by Bruce Kelly in Investment News

The Apple REITs failed to value the REITs properly, disclose numerous related-party transactions and divulge executive compensation of four REITs, according to a SEC cease-and-desist order, which was a settlement between the SEC and the various respondents.

Compliance Bricks and Mortar for January 31

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

Five Golden Rules of What Works – The Internal Marketing of Compliance by Tom Fox

I am attending the ACI Foreign Corrupt Practices Act (FCPA) Boot Camp in Houston. … One of the presentations was on how to tell your compliance story. It presented several interesting aspects of how to not only communicate your internal compliance story but how to also market compliance within your organization. Céline Gearson, Chief Ethics and Compliance Officer at Cameron International, had an interesting perspective on how she internally markets her compliance function. She termed these as “The Five Golden Rules of What Works”.

1. Socialize, Socialize, Socialize
2. Communicate metrics and near misses
3. Create engagement and excitement
4. Become a marketing guru and IT expert
5. Embed your initiatives into business processes

Did Dennis Rodman violate the FCPA? By Richard L. Cassin in the FCPA Blog

Among the more than $10,000 in gifts Dennis Rodman delivered to North Korea dictator Kim Jong Un in Pyongyang this month were “hundreds of dollars’ worth of Irish Jameson whiskey, European crystal, an Italian suit, a fur coat, and an English Mulberry handbag for Kim’s wife, Ri Sol-ju,” the Daily Beast said Friday. The U.S. government is now investigating whether Rodman violated the law against importing luxury goods into North Korea.

Keep emergency plans updated, or face disastrous consequences from regulators in Investment News

Financial advisory firms need to think seriously about disaster planning and should be conducting annual tests of their preparedness plans if they want to stay out of hot water with regulators. Each year, registered investment advisers need to document the testing of their continuity plan, as well as any updates to these plans, Les Abromovitz, a senior consultant at National Compliance Services Inc., said at a pre-conference session at TD Ameritrade Institutional’s national conference in Orlando on Wednesday.

SEC’s turf threatened, Commissioner Michael Piwowar says by Dina ElBoghdady in the Washington Post

In one of his first public speeches since joining the SEC in August, Republican Commissioner Michael Piwowar said that the Financial Stability Oversight Council is “reaching into the SEC’s realm” and posing “an existential threat” to the agency and other regulators. The council, also known as the FSOC, was charged by Congress with heading off risks to the financial system. It consists of regulators from the Federal Reserve, the Federal Deposit Insurance Corp. and others — including the SEC. Each of the top regulators on the council has a voting member, and for the SEC, that’s been the commission’s chairman.

Clifford Chance Adopts Continuous Improvement Program by Ron Friedmann in Prism Legal

This week Clifford Chance, one of the largest law firms in the world, published a white paper called Applying Continuous Improvement to high-end legal services.  I view it as a potential turning point in BigLaw. A few other law firms, especially Seyfarth Shaw with SeyfarthLean, have promoted process improvement, a sibling of continuous improvement.  But Clifford Chance is a Magic Circle with much bigger throw weight than most firms.

Facebook debunks Princeton study in Flowing Data

Researchers at Princeton released a study that said that Facebook was on the way out, based primarily on Google search data. Naturally, Facebook didn’t appreciate it much and followed up with their own “study” that debunks the Princeton analysis, blasted with a healthy dose of sarcasm. They also showed that Princeton is on their way to zero-enrollment.

Compliance Bricks and Mortar for January 24

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It’s been a busy week with guests in the house. I haven’t been able to publish any stories, but these are a few that caught my eye.

Finders Are Not Always Keepers! in the Word of Wisdom Blog from Latham & Watkins Capital Markets Group

Let’s start with the basics. Section 15(a) of the Exchange Act requires that persons engaged in “broker” or “dealer” activity must register with the SEC unless an exemption is available. In general, a “broker” is any person “engaged in the business of effecting transactions in securities for the account of others” and a “dealer” is any person “engaged in the business of buying and selling securities for such person’s own account.” Based on no-action guidance from the SEC Staff, activities that may be deemed (alone or in combination) to confer “broker” status include: …

Where are the Jobs in the Jobs Act? An Examination of the Uneasy Connection between Securities Disclosure and Job Creation by Ian K. Peck on SSRN:

The JOBS Act, passed in April 2012, is designed to produce American jobs through removing various regulatory barriers for small companies to access investor capital. As the regulations continue to be implemented, commentators have dissected the various ways in which the JOBS Act attempts to achieve this goal. One of the methods involves making the IPO process initially less burdensome, through scaling back financial and corporate governance disclosures. Crowdfunding, which will eventually permit companies to raise investor capital through an online “funding portal”, has garnered both deep criticism from regulators and praise from small business owners. Yet little attention has been paid to the notion that the very reason for disclosure reform is job creation. This matters because job creation has not historically played a direct role in the reform of securities disclosure statutes and regulations. This Article analyzes what role, if any, job creation should occupy in the reform of securities disclosure laws. After establishing the normative baseline for disclosure theory and reform, this Article highlights various unintended consequences of using job creation as a justification for reform and proposes a framework for understanding job creation-based disclosure reforms going forward.
(Pointed by Securities Law Prof Blog)

Odds Raised Slightly SEC Will Knock on Your Door This Year in fi360 Blog

In past years OCIE has typically focused on higher risk RIAs – those with custody or the larger complexes that pose more risk to the markets. The vast majority of adviser firms registered with the Commission, however, have 10 or fewer non-clerical employees. Over the next two years, OCIE plans to inspect 1,000 of these rarely or never-inspected RIA firms. In recent years, the SEC has inspected roughly 9 percent of all firms annually.

The fault lies not in our agencies, but in our Congresses by William Carleton

There’s nothing the SEC can do to make non-accredited crowdfunding under Title III of the JOBS Act cost-efficient. The essential problem is that Congress wrote a mini-registration law, rather than authorizing the agency to craft a crowdfunding exemption.

Image is from Vault of Roman Bath in Bath – England by Heinz-Josef Lücking
CC BY SA

Compliance Bricks and Mortar for January 17

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It’s been a busy week at the office, but a few compliance-related stories caught my eye.

Compliance Networks as Knowledge Networks by Tom Fox

As compliance programs mature, they become less top down driven and more inculcated into the DNA of a company. The more doing business ethically and in compliance becomes part of the way your company does business, the better off you will be down the road. One of the methods that you can use is to set up a compliance network within your organization. I recently read an article in the Fall issue of the MIT Sloan Management Review, entitled “Designing Effective Knowledge Networks”, by Katrina Pugh and Laurence Prusak, in which they discussed knowledge network design as a mechanism to facilitate desired behaviors and outcomes. I found their ideas very useful in the compliance context.

What Can an Ethics Course Really Do? by Chris MacDonald

Typically, skepticism about ethics education is rooted in a mistaken view of what the goals of such education are. If you think that giving students a course in ethics is supposed to “make them into good people,” then of course you’re going to think it’s useless. An ethics professor can’t turn bad people into good ones, any more than she can turn water into wine. Luckily, that’s really not what’s needed, and so doing so it’s not the aim of any sane ethics course.

Gold dust for compliance officers by Richard L. Cassin

What’s the first thing compliance officers need to do? We’d say it’s convincing management and board members they need an effective compliance program. That’s not easy. It takes advocacy, and advocacy takes credibility.

Jury Gives SEC Split Verdict In Insider Trading – Front Running Trial by Thomas O. Gorman

The Commission was handed a split verdict in its insider trading – front running case against Siming Yang and his investment company, Prestige Trade Investments Limited by an Illinois jury yesterday. SEC v. Yang, Case No. 12-cv-02473 (N.D. Ill. Filed April 4, 2012). The jury found for the defendants and against the Commission on an insider trading claim but in favor of the SEC and against defendant Yang on a front running charge and two false filing claims.

Compliance Bricks and Mortar – JP Morgan ALM Edition

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JP Morgan paid $2 billion in fines and disgorgement for failing to file a suspicious activity report against Bernie Madoff. I provided my two cents. Here are some other views.

The invincible JP Morgan by Felix Salmon

This is sheer unmitigated — and, yes, probably criminal — incompetence. It takes a very special kind of banker to not notice that an account has more than a billion dollars in it, for a period of roughly four years, from 2005 through most of 2008. As Matt Levine says, “Madoff Banker 1 is like the one banker on earth who underestimated his client’s business by a factor of 100 or so. ‘Boss, I’ve made the firm thousands of dollars this year,’ he probably said, ‘and I deserve a bonus of at least $200.’”

What the JPMorgan Settlement Means by Peter Henning in Dealbook

In the end, JPMorgan decided that paying more than $2 billion was better than trying to fight claims that it aided the biggest Ponzi scheme in history. The winners in the settlements are Mr. Madoff’s victims, who will never be made whole but are at least a step closer to receiving a measure of compensation, due in part to a creative use of the law by federal prosecutors.

How Much Did J.P. Morgan Lose from Doing Business With Madoff? in WSJ.com’s Law Blog

Linus Wilson, a finance scholar at the University of Louisiana at Lafayette, has tried to crunch the numbers. In a 2011 paper, he calculated how much J.P. Morgan earned from the direct deposit and custodial accounts at the bank containing the vast majority of funds that Madoff victims thought that they had invested with Madoff Securities.

The Madoff settlement is an enormous win for a guilty JPMorgan by Michael Hiltzik in the LA Times

If the government were really determined to root out white-collar crime and prevent outfits like JPMorgan from condoning lawbreaking that unfolds in front of its own eyes, it had the tools to do so: Indict the bank executives and officials who knew Madoff was crooked and did nothing, and threaten to revoke the bank’s charter. Would that be a great loss to the financial system? JPMorgan has been racking up multibillion-dollar settlements over white-collar misdeeds on an almost monthly basis lately. It hasn’t been operating like a bank, but like a criminal enterprise. And as this case now shows, it has been aiding and abetting its fellow criminals along the way.

Compliance Bricks and Mortar for December 20

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

SEC Enforcement Statistics: A Work in Progress? by Thomas O. Gorman in SEC Actions

The SEC released Enforcement Division statistics for government Fiscal Year 2013 along with a table and chart listing the number of actions filed each year as well as the amount of disgorgement and penalties ordered. The SEC Press Release states also states that in the last fiscal year the program obtained a record $3.4 billion in “monetary sanctions against wrong doers.” That amount is 22% higher than fiscal 2011 when the agency brought a record number of enforcement actions.

How These 5 Dirtbags Radically Advanced Your Digital Rights by David Kravets in Wired.com’s Threat Level

Bad facts make bad law, as the legal saw goes. But it cuts both ways: Sometimes bad people make good law. Consider the following exhibits: a cocaine dealer, a child pornographer, a purveyor of suspect penis-enlargement pills, and two accused hackers. The courtroom challenges they brought resulted in rulings that dramatically expanded your rights, from helping to keep your email and whereabouts private to reducing gadget searches at the U.S. border and limiting the legal definition of unlawful hacking.

Jan. 8 Webcast: SEC Enforcement – Key Developments in 2013 in Securities Docket

In this webcast analyzing key developments in SEC enforcement, our panel will discuss notable events from 2013 and emerging issues for 2014.

Hedge Fund Advisers’ Systemic Risk Disclosures in Bankruptcy by Wulf Kaal in The CLS Blue Sky Blog

The significant increase of hedge fund participation in the bankruptcy process, among other factors, resulted in an increased emphasis in the literature on the role of hedge funds in bankruptcy. Scholars, practitioners, and members of the federal bankruptcy bench voiced concern over hedge funds’ hidden agendas and offsetting positions, hedge funds’ attempts to manipulate the negotiation and reorganization process, and their seeking control of the debtor at the expense of other stakeholders. Because of their perceived detrimental impact on the bankruptcy process, some commentators have labeled distressed hedge fund investors as “vultures.” Others emphasize the liquidity provided by hedge funds and the corresponding enhancement of the restructuring process.

Compliance Bricks and Mortar for December 13

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

How Financial Institutions May Benefit from Changes to the Rule Against Perpetuities by Reid K.Weisbord in the CLS Blue Sky Blog

Now that most jurisdictions have repealed or abrogated the Rule Against Perpetuities, estate planning practitioners have started to consider whether a trust created to comply with the Rule could, after the Rule’s repeal, be extended in perpetuity to provide for future generations of the settlor’s descendants. In my forthcoming article, Trust Term Extension, I examine the issue of whether trust law doctrines would permit this type of modification. In particular, the article focuses on the trust law doctrines of equitable deviation and modification to achieve the settlor’s tax objectives.

An SEC Investigation Can Be A Bad Day, But It Can Get Worse by Thomas O. Gorman in SEC Actions

Becoming involved with an SEC investigation is a bad day for any company and its executives. There are things that can be done to make it better. There are also ways to make it worse, much worse. Executives at Vitesse Semiconductor Corporation, when face with a possible option backdating investigation, are an example of how to make it worse.

For Bitcoin, Square Peg Meets Round Hole Under the Law by Peter J. Henning in Dealbook

There is a Wild West quality to Bitcoin, created out of a libertarian bent that connotes a world beyond government regulation. Like any currency, it carries with it a degree of anonymity, much as the phrase “cash is an orphan” signals that money can be largely untraceable once put into circulation. More than ordinary cash, though, Bitcoin operates largely outside the current banking system, making it even more difficult to trace transactions.

An important real-world conflict of interest experiment in Conflict of Interest Blog

The results of this real-world experiment powerfully demonstrate the impact on the ethicality of conduct that financial incentives can have – even on the judgment of individuals who, by virtue of their professional norms, are supposed to be resistant to COIs.

Senator Levin Urges SEC to Toughen Proposed Monitoring of Reg. D Post Ending of General Solicitation Ban in Jim Hamilton’s World of Securities Regulation

Senator Carl Levin (D-MI) said that the SEC’s proposal to monitor concerns over permitting issuers to engage in general solicitation under Rule 506 pursuant to the JOBS Act do not go far enough to protect investors from fraudulent offerings on what the Senator called “the soon-to-be “Wild West” that now exists under the final Rule 506. In a letter to the SEC, he urged the Commission to further enhance the proposal to ensure that investors in Rule 506(c) offerings are provided with full disclosure information and that such investors are actually accredited investors as required by Congress.

Compliance Bricks and Mortar for December 6

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

When blowing the whistle is a conflict of interest in Conflicts of Interest Blog

Employees generally owe duties of loyalty to their companies (at least under US law), but for some time whistleblowing has not seen as a breach of such duty. This was the underpinning of an important Supreme Court case thirty years ago – Dirks v SEC – which held that an employee who told a securities analyst about a fraud at the employee’s company had not breached a fiduciary duty to the company (and hence under applicable law the securities analyst could not be prosecuted for insider trading based on this disclosure). But not all duties of loyalty are the same, and lawyers (and other professionals) are typically seen as having a stronger duty in this area than are employees in general.

When Good People Do Bad Things by Peter J. Henning in DealBook

That is the conundrum of many white-collar crime cases: successful business people act in ways that put careers and personal fortunes at risk for seemingly modest gains, and sometimes the misconduct benefits their company but themselves only indirectly.

SEC CustodyFest Vol. 2: Electric Boogaloo by David Smyth in Cady Bar the Door

I know you’ve been eagerly awaiting the return of SEC CustodyFest. Let’s turn to the second matter brought by the SEC on October 28th: Further Lane Asset Management. This case actually did not revolve around the investment adviser custody rule; other issues were at play as well.

Hedge-fund ‘Fight Club’ traded illegal tips instead of punches by Bloomberg in CTpost.com

The hedge-fund analysts vacationed together in the Hamptons, gambled in Las Vegas and adopted a creed that parodied the rules in the Brad Pitt film “Fight Club.” Instead of trading punches, they traded illegal tips that allowed their portfolio managers to reap tens of millions of dollars in profit. Having pleaded guilty to insider trading, four of the men are now set to be witnesses against SAC Capital Advisors fund manager Michael Steinberg.

Notes for building a chart comparing crowdfunding exemptions by William Carleton

On the working theory that more states are going to establish investment crowdfunding exemptions, I’m thinking it makes sense to start building a chart to compare them all. And to compare state exemptions against the prospective federal exemption under Title III of the JOBS Act.

AML: A Corporate Governance Issue by Wilmer Hale (.pdf) in the Banking Law Journal

Bank Secrecy Act (“BSA”) was passed, there is no doubt those efforts have picked up intensity in recent years and that this increased focus will continue. Indeed, the comptroller of the currency has said that “[i]n the wake of the financial crisis, too many banks inappropriately cut staffing and spending for BSA and anti-money laundering compliance as austerity measures.”

Compliance Bricks and Mortar for November 20

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

JP Morgan’s Twitter Mistake by Emily Greenhouse in the New Yorker

This is Twitter’s very purpose: to allow any individual to share the same space with, for instance, a hugely powerful bank. With this space comes attention and authority. Unlike at JPMorgan’s Park Avenue headquarters, there are no security guards keeping undesirable elements out of Twitter. If JPMorgan executives expected that #AskJPM would attract only future job applicants—the kind who would don snappy new suits and genuflect nervously—they must have been stunned at the reckoning.

Missouri recognizes same-sex marriage exclusively for tax purposes by Darla Mercado in Investment News

As far as Missouri’s reasoning for the decision, the impression among tax experts seemed to be that recognizing same-sex marriages for income tax purposes is a way to avoid an administrative mess. “For states that have their own filing status tied to the federal status [as is the case with Missouri], it would begin to create a logistical nightmare” if they did not recognize same-sex marriages for income tax purposes, said John McGowan, senior vice president, national practice leader for the LGBT and non-traditional family practice at Northern Trust Corp.

Crowdsourcing a Title III Crowdfunding Cost Model by kiranlingam in SeedInvest

A successful $99,999 crowdfunding raise with no audited financials will result in negative cash flow to the company of about $38,000.

SEC Releases Fiscal 2013 Whistleblower Report by Kevin LaCroix in the D&O Diary

In 2012, the first full fiscal year in which the program was in place, the agency received 3,001 whistleblower tips. The number of whistleblower reports increased in fiscal 2013 to 3,228, an increase of about 7.5%, bringing the total number of whistleblower reports since the program’s inception to 6,573.