Category: Compliance Bricks and Mortar

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

Bad news. You’re promoted to compliance officer by Michael Scher in The FCPA Blog

It’s not right to lump together all compliance officers. We have to recognize that those working in America are nearly on another planet from COs working in Asia, Africa, Latin America, Russia and many other countries. While all compliance officers may be speaking the “same language,” the conditions of speaking truth to management or regulators are incomparably different.

Where is Crowdfunding? by Dave Lynn in The CorproateCounsel.net

Well over a year after the enactment of the JOBS Act, we still await movement on the SEC’s rulemaking under Title III, which provides the framework for exempt crowdfunding offerings to non-accredited investors, subject to a $1 million cap over a rolling 12-month period and dollar limits based on an investor’s financial position. As this Washington Post article notes, the SEC Staff has indicated that crowdfunding rules can be expected sometime this fall, however these would presumably be proposed rules, meaning that final rules could not be expected until well into 2014 at the earliest when you factor in the need for FINRA to also create a regulatory system for funding portals. As a result, the ability to do exempt crowdfunding offerings remains limited, except that many are anticipating the ability to do more accredited investor-only crowdfunding offerings once general solicitation is permitted under Rule 506 after the September 23, 2013 effective date of those JOBS Act mandated rule changes.

More Questions About General Solicitation by Joe Wallin in Startup law Blog

There is a lot of confusion about the SEC’s new rules that will allow, starting September 23rd, the general solicitation and general advertisement of private company securities offerings under Rule 506(c) of Regulation D.

Send in the Clowns – the NCAA and its Investigation of Johnny Football by Tom Fox in FCPA Compliance and Ethics Blog

How can you determine if an organization charged wijth compliance is corrupt or simply incompetent? It is hard today to answer that question when it comes to the National Collegiate Athletic Association (NCAA) and its enforcement division. For those of you do not know the story, the NCAA was investigating last year’s Heisman Trophy winner, Johnny Manziel a/k/a Johnny Football, for allegedly signing autographs for money, which is a violation of the near slavery conditions that NCAA scholarship athletes find themselves in today.

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

SEC Charges Two J.P. Morgan Traders With Fraudulently Overvaluing Investments to Conceal Losses

The SEC alleges that Javier Martin-Artajo and Julien Grout were required to mark the portfolio’s investments at fair value in accordance with U.S. generally accepted accounting principles and JPMorgan’s internal accounting policy. But when the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grout schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses. Their mismarking scheme caused JPMorgan’s reported first quarter income before income tax expense to be overstated by $660 million.

BREAKING: Serious Fraud Office lays its first Bribery Act charges.

“Four men connected to Sustainable AgroEnergy plc have today been charged with offences of conspiracy to commit fraud by false representation and conspiracy to furnish false information, contrary to section 1 of the Criminal Law Act 1977, in connection with the investigation by the Serious Fraud Office into the promotion and selling of “bio fuel” investment products to UK investors.

SEC’s Andrew Ceresney to Join Historic ‘Directors’ Panel’ at Securities Enforcement Forum 2013

Don’t miss the historic “Directors’ Panel” that will be one of the highlights of Securities Enforcement Forum 2013, which will be held on Wednesday, October 9 at the Mayflower Hotel in Washington, D.C. For perhaps the first time, five current and former SEC Enforcement Directors will come together on a panel to discuss today’s most important securities enforcement issues from their own unique perspectives.

Please register here!

Bad Things Come In Threes for CCOs

Whatever the origin of this folkloric belief, all I can say is that over the past couple of weeks, Chief Compliance Officers (CCOs) have taken it on the chin three times and, once again, the job of the CCO just got quite a bit harder and more challenging.

What AngelList is doing about the proposed SEC rules to overhaul startup financing

AngelList has set up a webpage to educate everyone on the SEC’s proposed rules that would impose pre-filing, information filing and mandatory legend requirements on Rule 506(c) offerings.

THE SEC’S PROPOSED REG D RULES: WHY WE CARE

The proposed rules, if they go into effect as the SEC has proposed them, will change many practices that have grown up and evolved over the last several years that are beneficial to the early stage company ecosystem.

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

JOBS Act Update: Can the Genie go back in the Bottle? by Jay B. Gould in Investment Fund Law Blog

But what happens if a fund manager is initially enamored of the new rules and decides to advertise generally, but later changes his mind? Can a fund manager go back to the old “pre-existing, substantial relationship” days, and how do you do that once the fund has been “generally offered” to the public?

SEC’s Proposed Regulation D Rules Generates Wide Ranging Concern by Alexander J. Davie in Strictly Business

In my last post, I discussed new proposed Regulation D rules which impose new obligations upon issuers of securities in private placements. In that post, I expressed some concern that these new rules could be quite burdensome, especially the rule disqualifying issuers from using Rule 506 on future securities offerings for failing to file Form D in a timely fashion. Others involved with startup capital formation have also expressed similar concerns. In this post, I’ll compile the comments I’ve seen thus far.

You Can’t Tweet That by Joe Wallin in Startup Law Blog

One of the aspects of the proposed rules that hasn’t drawn a lot of attention in the blogs and press is the new legend requirement. What is a legend? A legend is a specifically required disclosure; frequently in all caps or bold, or called out in some other manner from other text in a document so that it is less likely to be missed.

When Is A ‘Whistleblower’ Not Really A ‘Whistleblower’? by Catherine Foti

Since the promulgation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd Frank”), five federal district courts have held that employees who report suspected wrongdoing to upper management, but not to the U.S. Securities and Exchange Commission (“SEC”), are “whistleblowers” for purposes of the Act, entitled to the protection of Dodd Frank’s anti-retaliation provisions.  Going against the tide, in a recent ruling in Asadi v. G.E. Energy (USA), L.L.C., the Fifth Circuit Court of Appeals – the first Circuit Court to address this issue – has held exactly the opposite, ruling that an employee who reported a potential Foreign Corrupt Practices Act violation to his employer, G.E. Energy (USA), L.L.C., was not a “whistleblower” because he did not “provide information relating to a violation of the securities laws to the SEC.”

Colbert’s take on the SEC against the Fabulous Fab

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

At SAC, Rules Compliance With an ‘Edge’ by James B. Stewart in the New York Times

Whatever else might be said about SAC’s compliance program, the bottom line is that it failed. Whether that failure can be attributed to Mr. Cohen or his top compliance officials remains to be seen. But Mr. Pitt, for one, came away from his visit to the firm unimpressed. “My sense was that it was a check-the-box mentality, not a serious commitment,” Mr. Pitt told me.

The Indictment of S.A.C. Capital Advisors: Where Was The Auditor? by Francine McKenna in re: The Auditors

Looks like investors can’t count on “independent” auditors like PwC, which was also MF Global’s “independent” auditor, to spot illegal activity either.

Sun Capital Court Ruling Threatens Structure of Private Equity by Victor Fleischer in Dealbook

Last week, the United States Court of Appeals for the First Circuit issued a ruling that will make it harder for private equity funds to walk away from the unfunded pension liabilities of companies they have bought if the company goes bankrupt.

Specifically, the court ruled that one of Sun Capital’s private equity funds was “not merely a ‘passive’ investor” but actively involved in the operations of Scott Brass Inc., a portfolio company that went bankrupt in 2008. The case was brought by the New England Teamsters and Trucking Industry Pension Fund.

Avoiding five potential traps in “new” Rule 506 offerings by David C. Scileppi in Securities Edge

The removal of the ban is a huge change in the way private offerings may be conducted and welcome relief to the thousands of issuers each year who have tapped out their “friends and family,” but yet are too small to attract private equity funds.  With these new changes, however, bring challenges in making sure you conduct a “new” Rule 506 offering (a/k/a Rule 506(c) offering) correctly.

So, with the caveat that best practices are still being developed for Rule 506(c) offerings and issuers and attorneys are still parsing through the new rules, here are five potential pitfalls to avoid: ….

Criminal Forfeiture and SAC Capital by David Smyth and Wes Camden in Cady Bar the Door

But in the event of a conviction, the criminal case does have at least one prominent feature that the SEC’s case does not: the prospect of a massive criminal forfeiture of assets gained by any criminal conduct.  In addition to the indictment, prosecutors filed a civil forfeiture complaint for what it alleges is money laundering activity by the defendants.  The Wall Street Journal reported on Thursday that the government will seek forfeiture of around $10 billion, “according to a person familiar with the matter.”

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

Crowd-funding, private-placement ads get special focus in the Bay State by Mark Schoeff Jr. in Investment News

Massachusetts’ top securities regulator today launched a special unit to monitor crowdfunding websites and to keep track of private-placement advertising, two new fundraising methods authorized by a federal law passed more than a year ago.

The SEC’s Top Cop Is Cashing In as a Wall Street Lawyer, and You Should Feel OK About It by Matthew Yglesias in Slate.com

And here’s where I think it’s important to step in with the realization that the news media has, for various professional and economic reasons, a tendency toward a systematic negativity bias. Imagine a scenario in which S.E.C. lawyers had a really hard time getting private sector jobs and almost invariably ended up needing to take a pay cut to obtain a position outside of the government. Then we’d get lots of stories about overpaid and incompetent federal bureaucrats, living high on posh government salaries (S.E.C. lawyers don’t earn much compared to top private sector attorneys, but they definitely earn more than the average American) despite a lack of viable skills or job prospects.

SEC Charges City of Miami, Budget Director with Fraud by Thomas O. Gorman in SEC Actions

The SEC brought another action centered on the municipal bond market. This case, against the City of Miami and its former Budget Director, not only accuses the defendants of fraud in connection with three bond offerings, but also of violating a prior consent decree which is a first for the agency. SEC v. City of Miami, Florida, Civil Action No. 1:13-cv-22600 (S.D. Fla. Filed July 19, 2013).

SEC Charges Texas Man With Running Bitcoin-Denominated Ponzi Scheme

The SEC alleges that Trendon T. Shavers, who is the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments through the Internet using the monikers “Pirate” and “pirateat40.” Shavers raised at least 700,000 Bitcoin in BTCST investments, which amounted to more than $4.5 million based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold. Today the value of 700,000 Bitcoin exceeds $60 million.

Advertising Securities As Safe – A “No, No” In California by Keith Paul Bishop in California Corporate & Securities Law

The Commissioner has adopted Rule 260.302 setting forth the general standard for advertisements. One of these standards addresses the temptation (which is particularly strong amongst fraudsters) to advertise securities as “safe”:

An advertisement should not contain any statement or inference that an investment in the security is safe, or that continuation of earnings or dividends is assured, or that failure, loss, or default is impossible or unlikely.

SEC Rules Will Clip the Wings of Angel Investors by David Verrill in the Wall Street Journal

No angel investor I know would show their finances to an entrepreneur or other issuer of a private security. Third-party verification also is costly, invasive and burdensome. This financial information in the hands of an issuer is subject to far more potential for fraud and abuse than could ever emerge from self-certification.

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

Why is the ACA making a big deal about the SEC proposed ruling? by Dan Rosen

Simply put, the proposed SEC ruling is (a) trying to fix a problem that doesn’t exist; (b) will increase risk in our early-stage deals by adding a dimension of regulatory risk that isn’t there now; (c) will increase the cost and time for getting deals done; and (d) violates the Congressional intent of the JOBS Act, which recognized that using angel investment to create more jobs in startup companies was good for the US.

Finra’s lobbying expenses drop over last year but still dwarfs adviser groups by Mark Schoeff Jr. in Investment News

The Wall Street regulator of broker-dealers has decreased its spending on lobbying federal lawmakers substantially over the past year, in part because it’s not pushing for legislation that would allow it to expand its reach to investment advisers.

Hedge fund advertising by William Carleton

Here, a week after the big SEC open meeting (click here to run a rebroadcast of the live blogging Joe Wallin and I did during the meeting webcast), we are still thinking through the implications of how the proposed rules will impact startups, angels and venture capitalists. But it probably make sense to get educated enough on the hedge fund advertising critique that we can start to make some distinctions between Reg D filing requirements for funds, and proposed filing requirements for individual issuers.

Snapchat: The New Way to Tell Everyone that “Blue Horseshoe Loves Anacott Steel” by Bruce Carton

Frankly, I’m a little disappointed that I didn’t figure this angle out on my own, given (a) the amount of time I spend writing about insider trading, and (b) the fact that I have two teenagers actively using Snapchat, but hey, better late than never. This morning, the Daily Intelligencer reports, CNBC’s Jim Cramer asked Preet Bharara, the U.S. Attorney for the SDNY, if Snapchat can be used to share insider trading tips without leaving a trail. Bharara’s response: “I don’t even know what you’re talking about.”

The SEC released the final rule lifting the ban on general solicitation and advertising for private placements. Here is a collection of stories on that topic.

SEC Adopts JOBS Act Title II Rules by Dave Lynn in Corporate Counsel.net

July 4th fireworks came a week late to 100 F Street yesterday, as the SEC adopted the changes to Rule 506 of Regulation D mandated by Title II of the JOBS Act, in what was sometimes a contentious open meeting. The changes to Rule 506–permitting the use of general solicitation and general advertising in a Rule 506 offering provided that the issuer takes reasonable steps to verify that purchasers are accredited investors–were over a year late, and generated a good bit of comment and criticism.

SEC releases final rule allowing general advertising for certain private offerings by Usha Rodrigues in The Conglomerate

What exactly are “reasonable steps?” There’s the rub. The final rules track the proposed ones closely, save that the agency heeded the pleas of many, myself included, to articulate some concrete methods as to what constitutes a “reasonable step.” I asked for a safe harbor, but the SEC declined to go so far.

Get Ready for the SkyBridge Capital Holiday Bowl! by David Smyth in Cady Bar the Door

I am actually sort of fascinated to see what the upshot will be.  It will allow all manner of advertising by hedge funds in all manner of venues.  I suspect you will see hedge funds all over Google, newspapers and magazines, and even on the Twitter.  Anthony Scaramucci, of SkyBridge Capital, makes no bonesabout his plans for this liberation.  As he said last year, “I am hellbent on creating a global brand and the only way to do that is through advertising.”  At a more mundane level, other private fund managers who want to give interviews to, say, Barron’s or the Wall Street Journal will be able to do so now without fear that their comments will be construed as generally soliciting investors for their funds.

Facilitating General Solicitation at the Expense of Investors by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission

It is without doubt the responsibility of the Commission to implement Section 201 of the JOBS Act. It is equally without doubt that this responsibility cannot be separated from the Commission’s duty to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Congress established the Commission as the independent agency with the expertise and authority to administer the federal securities laws. By statute, the Commission has the power to make, amend, and rescind the rules and regulations needed from time to time to carry out the provisions of such laws.

SEC Approves JOBS Act Requirement to Lift General Solicitation Ban

Commission Also Adopts Rule to Disqualify Bad Actors from Certain Offerings and Proposes Rules to Enable SEC to Monitor New Market and Bolster Investor Protections

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

Performance Fantasies Lead to SEC Enforcement Action by Jay B. Gould in Pillsbury’s Investment Fund Law Blog

For fund managers and investment advisers, there are a number of takeaways from the D’Amato case. First, when back tested or hypothetical “performance” is used in marketing materials, full and accurate disclosure must be made to investors and potential investors. The methodology used must be sound and records must be kept. Similarly, with respect to actual performance, calculations must be accurate and verifiable and must be presented in a context that does not make otherwise accurate information misleading in any material way. Fund managers, in particular, should not dismiss the D’Amato case because it occurred in the context of mutual funds and more “retail” type investors. The SEC and state regulators are willing to go back and look at past marketing presentations for inflated or inaccurate claims, all of which are required to kept as part of an adviser’s books and records.

Some Thoughts on What Makes a Good CCO by Tom Fox

There are several prominent commentators who frequently discuss the role a Chief Compliance Officer (CCO). One such commentator is Donna Boehme, who regularly writes articles, speaks about, and even tweets on this subject. But what type of mindset does a CCO need to be successful? What are some of the skills? I thought about those questions when I read three very different articles on unrelated topics recently.

Paul Weiss discusses ISDA’s March 2013 Dodd-Frank Protocol by Manuel Frey in The CLS Blue Sky Blog

Since the effectiveness of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the Commodity Futures Trading Commission (the “CFTC”) has finalized many of the rules that implement the detailed regulatory regime outlined by the Dodd-Frank Act. A number of these rules require market participants to update their swap trading documentation to comply with this new regulatory regime. This client alert outlines coverage and adherence mechanisms of the ISDA March 2013 Dodd-Frank Protocol (the “March Protocol”), the newest installment of ISDA’s well-tested mechanism aimed at facilitating the multilateral and standardized amendment of swap trading documentation.

Why Do Family Firms Thrive? by Chris MacDonald in the Business Ethics Blog

The family in question may have not just a strong position in terms of the stock it holds; they may also bear the name that’s emblazoned on the company letterhead. And the company’s origins and evolution may be intimately bound up with the family’s own history. This adds up to considerable influence. Is that influence a good or a bad thing? In principle, at least, there’s a worry that the family’s influence might not always work in the interests of other shareholders. And this worry is exacerbated by the fact that family-controlled companies often don’t stick to widely-acknowledged best practices in terms of corporate governance.

Crisis Chronicles: 300 Years of Financial Crises (1620–1920) by James Narron and David Skeie in Liberty Street Economics

The Kipper und Wipperzeit is the common name for the economic crisis caused by the rapid debasement of subsidiary, or small-denomination, coin by Holy Roman Empire states in their efforts to finance the Thirty Years’ War (1618–48). In a 1991 article, Charles Kindleberger—author of the earlier work Manias, Panics and Crashes and originally a Fed economist—offered a fascinating account of the causes and consequences of the 1619–23 crisis. Kipper refers to coin clipping and Wipperzeit refers to a see-saw (an allusion to the counterbalance scales used to weigh species coin). Despite the clever name, two forms of debasement actually fueled the crisis.

 

Brick Wall by Aaron Smith

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

SEC Buys Itself a Headache by David Smyth in Cady Bar the Door

If you’re reading this, you’re surely aware of the several-years-old-now fight between the SEC and some federal judges regarding the SEC’s policy of settling cases while allowing defendants to neither admit nor deny the claims against them.  Very briefly, the SEC contends that its policy allows it to settle cases against companies that would otherwise take on vast liability in follow-on private litigation if it were forced to admit bad conduct that hurt shareholders.  Otherwise, the SEC says, the litigation burden would be almost overwhelming.

Recent FCPA Enforcement Actions Show Increased Scrutiny on Financial Services Sector (.pdf) by Ruti Smithline and Jarod G. Taylor of Morrison & Foerster

Last week, the U.S. Department of Justice (DOJ) announced the indictment of a managing partner of U.S. broker-dealer Direct Access Partners (DAP) for violations of the Foreign Corrupt Practices Act (FCPA), the Travel Act, and money laundering statutes. This indictment follows on the heels of last month’s indictment of two other DAP employees for the same alleged conduct, as well as the foreign official who received the bribes at issue.

The investigation into DAP was prompted by information discovered during a routine, periodic examination by the U.S. Securities and Exchange Commission’s (SEC’s) New York office broker-dealer examination staff. The discovery of the alleged conduct without the involvement of any whistleblower, self-reporting, or regulator tasked directly with FCPA enforcement should serve as a wake-up call for the need for anticorruption compliance by regulated companies.

Justice Department Fought to Conceal NSA’s Role in Terror Case From Defense Lawyers by Keven Poulsen in Wired.com’s Threat Level

When a senior FBI official told Congress the role the NSA’s secret surveillance apparatus played in a San Diego terror financing case today, nobody was more surprised to hear it than the defense attorney who fought a long and futile court battle to get exactly the same information while defending the case in court.

If You Pay More, Do You Actually Get More? by Keith Paul Bishop in California Corporate & Securities Law

The typical private fund is organized as a limited partnership or limited liability company that is managed by a general partner or manager.  The fund manager is usually compensated in three ways – an annual management fee (often 2%), a carried interest (often 20%), and an investment in the fund (often 1%).  In a recently presented paper, Professors David T. Robinson and Berk A. Sensoy tackled the question of whether private fund managers actually earn their keep.

Given the limited rights of limited partners and members and asymmetrical access to information, one might expect that these professors would conclude that fund managers who charge more, actually under perform.  Based on an analysis of 837 buyout and venture capital private equity funds from 1984-2010 to, the two scholars reach the opposite conclusion:

 

Curvy bricks by Orange Steeler
CC BY

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

Investor Alert—Don’t Trade on Pump-And-Dump Stock Emails

FINRA and the SEC’s Office of Investor Education and Advocacy are issuing this Investor Alert to warn investors to be on the lookout for email spam promoting “pump-and-dump” stock scams.

SEC Compliance Program Annual Reviews: A Guide for Newly Registered Advisers by Nathan J. Greene, Jesse P. Kanach of Shearman & Sterling

Many newly registered investment advisers will need to complete their first annual compliance review this year. This article describes SEC requirements regarding annual reviews of compliance programs and, in particular, covers who should conduct the review, planning and documenting the review, reporting review findings and responding to problematic conduct identified by the review.

SEC’s Cohen Predicts Major Whistleblower Awards Soon in Corporate Crime Reporter

In its three years of existence, the Securities and Exchange Commission’s (SEC) whistleblower program has produced only one $50,000 payout. But within the next couple of months, it will produce “incredibly impactful cases” with “some extremely significant whistleblower awards.” That’s the take of Stephen Cohen, Associate Director of the SEC’s Division of Enforcement.

If DOMA is overturned, will the discrimination in the accredited investor definition go away? by William Carleton

To address the problem of the insidious discrimination in the accredited investor definition, either the term “spouse” will need to be removed, or a constructive definition arrived at.

I’m not sure which solution is better.

I am sure, however, that there will be broad consensus in the angel investing community that the sexual orientation discrimination in the SEC rule is repugnant.

To learn more about this issue, go to http:\\startupequality.com.