Category: Compliance Bricks and Mortar

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

Enforcement Actions Against Advisors Nearly Doubled: NASAA by Melanie Waddell in AdvisorOne

Enforcement actions taken against investment advisory firms by state securities regulators nearly doubled to 399 in 2011—accounting for 15% of all enforcement actions handled by state securities regulators, according to the North American Securities Administrators Association’s (NASAA) annual enforcement report.

The Flaws of Whistleblower Hotlines and Rewards by Matt Kelly in Compliance Week

So the real headache of the SEC’s whistleblower program isn’t that it will threaten “your industry” and put you out of a job; it’s that SEC whistleblower rewards threaten your focus and distract you from doing your job as you think best. Compliance officers have plenty of risks and misconduct to manage already, and the SEC’s whistleblower program pours accelerant onto that already flammable situation. I recall one compliance executive at a real estate firm who received a complaint about possible misconduct in China. “Within 36 hours, I was on the ground in Beijing and stayed there for a week,” that person told me. “It was a wild goose chase, as far as we could tell. Nothing there.”

The Mummy and Using Challenges to Improve Compliance Cultures by Tom Fox

So the compliance angle here? It’s the difference between two companies in their responses to compliance challenges. Exhibit A is Goldman Sachs and their continuing PR nightmare named Greg Smith. Smith exploded onto the ethics scene with his very public resignation from Goldman Sachs and Op-Ed piece in the New York Times (NYT) in March. The NYT piece castigated Goldman Sachs both internally for their drive towards the all mighty dollar (horror) and their external relationships with their clients, for basically the same reason (horror, horror). This week Smith has made the rounds of several shows including a prominent feature on 60 Minutes to plug his recently released book entitled, “Why I Left Goldman Sachs.”

The SEC’s New Focus on Performance Reporting: What Private Fund Managers Need to Know

During this complimentary webcast, hosts Justin Guthrie and Coley McKinstry will give an industry update, discuss specific case studies where ACA has recently assisted private fund managers, and how managers can reduce their risk when presenting performance.

• Industry Update:

o Presence Examinations
o Investor Led Transparency Push
o Implications of SEC Aberrational Performance Inquiry
o Form PF Performance Reporting Requirements
o Implications of SEC Registration

• Case Studies on Performance Reporting:

o Recordkeeping Requirements
o Hypothetical Track-records
o Investor vs. Fund Level Performance
o Side Pockets
o Model vs. Actual Fees
o Private Equity and Real Estate Considerations
• Overview of a Performance Audit

After their presentation, Justin and Coley will take questions and comments from attendees. To register, click here.

The Long Road Back: Business Roundtable and the Future of SEC Rulemaking by Jill E. Fisch, Institute for Law and Economics, University of Pennsylvania Law School

The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. The DC Circuit’s 2011 Business Roundtable decision is one of the most serious, particularly in light of the heavy rulemaking obligations imposed on the SEC by Dodd-Frank and the JOBS Act. The effectiveness of the SEC in future rulemaking and the ability of its rules to survive legal challenge are currently under scrutiny.

This article critically evaluates the Business Roundtable decision in the context of the applicable statutory and structural constraints on SEC rulemaking. Toward that end, the essay questions the extent to which deficiencies in the SEC’s rulemaking process can accurately be ascribed to inadequate economic analysis, arguing instead that existing constraints impede the SEC’s formulation of regulatory policy, and that this failure was at the heart of Rule 14a-11.

Bad rules make bad law, and Rule 14a-11 was a bad rule. This essay argues that the flaws in SEC rule-making are quite different, however, than those identified by the DC Circuit. Moreover, in the case of Rule 14a-11, Congress played a critical role by explicitly authorizing the SEC to adopt a proxy access rule. By substituting its own policy judgment for that of Congress, the DC Circuit threatens not just the ability of administrative agencies to formulate regulatory policy, but the ability of Congress to direct agency policymaking.

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

Frankenstein, Lance Armstrong and FCPA/Bribery Act Compliance by Tom Fox

So how does Frankenstein relate to compliance and ethics? Exhibit A for today is my fellow Texan Lance Armstrong. Yesterday, in the FCPA Blog I wrote about Armstrong and ethical values in the context of engaging in conduct which is so unethical, that you would be embarrassed to tell your children about it. Today I want to focus on some other aspects of Armstrong. Should he be analogized to Dr. Frankenstein, the Monster, or perhaps both?

Schapiro SEC Reign Nears End With Rescue Mission Not Done by Joshua Gallu and Robert Schmidt in Bloomberg

It’s not surprising that Schapiro’s frustrations boiled over that August evening. She has told friends that the late nights and almost constant policy battles have left her exhausted and eager to depart after the November election. Admirers and critics agree Schapiro rescued the agency from the threat of extinction when she was appointed by President Barack Obama four years ago. Still, she hasn’t fulfilled her mission — to overcome the SEC’s image as a failed watchdog by punishing those who steered the financial system toward disaster and by proving regulators can head off future breakdowns.

SEC Examinations of Investment Advisers – Highlights of IAA 2012 Boston Compliance Workshop in Compliance Avenue

At an Investment Adviser Association (IAA) 2012 Compliance Workshop in Boston yesterday, IAA legal staff, law firm attorneys and Securities Exchange Commission (SEC) staff, including a regional representative from the SEC’s Office of Compliance Inspections and Examinations, discussed current developments in SEC exams, including current inspection priorities and issues for advisers to consider. As noted by each speaker from the SEC, their statements are their own views and not necessarily those of the SEC.

This post provides highlights of the discussions about 2012 SEC examinations, the new SEC “presence” examinations for newly-registered investment advisers and the anticipated focus of SEC investment adviser examinations in 2013.

Caution Advised for Newly Registered Advisers a client alert from Pepper Hamilton LLP

In addition, the SEC examination staff has indicated that meeting with the firm’s “leadership” during an examination is likely to be of special importance. The SEC examination staff views effective risk governance as including the following three essential lines of defense, which are in turn supported by senior management and the board of directors or the principal owners of the firm:

(1) The business is the first line of defense responsible for taking, managing and supervising risk effectively and in accordance with laws, regulations and the risk appetite set by the board and senior management of the whole organization.

(2) Key support functions, such as compliance and ethics or risk management, are the second line of defense. They need to have adequate resources, independence, standing and authority to implement effective programs and objectively monitor and escalate risk issues.

(3) Internal audit is the third line of defense and is responsible for providing independent verification and assurance that controls are in place and operating effectively.

FDIC Insurance End May Spark Money-Market Turbulence, Pimco Says by Liz Capo McCormick in Bloomberg

A potential flood of cash into the U.S. money markets if unlimited Federal Deposit Insurance Corp. coverage is allowed to lapse in December is creating investor concern and may lower short-term interest rates, according Pacific Investment Management Co. An emergency 2008 government provision providing unlimited insurance on certain bank accounts during the U.S. financial crisis to help prevent sudden withdrawals will expire at the end of the year unless Congress extends it. There is about $1.4 trillion sitting in banks’ non-interest-bearing transactions accounts holding more than $250,000, the previous insurance ceiling, which would become uninsured in January if Congress doesn’t act, FDIC data show.

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

Mass. Securities Chief Urges SEC to Establish Accredited Investor Methods under JOBS Act Reg. D Measure in Jim Hamilton’s World of Securities Regulations

In a letter to the SEC, the Massachusetts Securities Commissioner and Secretary of the Commonwealth William Galvin said that in the proposed regulations implementing the JOBS Act elimination on the ban on general solicitation under Regulation D the Commission has failed to meet its obligations under Section 201 of the JOBS Act to establish methods for issuers to use to verify that investors are accredited. In his view, this failure will put the interests of retail investors and savers at risk in unprecedented ways. This failure will also place unnecessary burdens on issuers, who could benefit from the Commission’s guidance on this important obligation. Also, the SEC’s failure to adopt meaningful requirements for the Rule 506( c) exemption will impede state and federal enforcement in virtually all cases involving unregistered offerings.

Private Equity Firms’ Use of Management Fee Waivers in Compliance Avenue

Potential Federal Tax Ramifications of Converting Management Fee to Carried Interest. The management fee is generally paid quarterly and treated as ordinary income for tax purposes, while “carried interest” generally qualifies for long-term capital gain treatment. Because ordinary income is taxed at a maximum federal rate of 35% currently, whereas capital gain is currently taxed at 15%, one tax benefit resulting from the “conversion” of management fee to carried interest is a significant reduction in the firm’s tax bill.

SEC Charges Goldman Sachs, Former Banker With ‘Pay-to-Play’ Violations by Bruce Carton in Compliance Week

The SEC announced today that it has filed a “pay-to-play” case against Goldman, Sachs & Co. and one of its former investment bankers. The SEC alleges that Goldman and Neil M.M. Morrison, a former vice president in the firm’s Boston office, made undisclosed campaign contributions to then-Massachusetts state treasurer Timothy P. Cahill while he was a candidate for governor.

Massachusetts seeks to deny registration to adviser by Dan Jamieson in Investment News

Massachusetts has filed a complaint against a midsize adviser for allegedly misstating assets under management.

When CCR applied for Massachusetts registration in June, the state began a “detailed review” of its prior regulatory filings with the Securities and Exchange Commission, Massachusetts regulators said in a complaint released Tuesday.

State examiners found “an illogical and inconsistent pattern in reporting assets under management,” the state said in a release.

For several years, CCR showed assets under management of “precisely $25 million” despite changes in the number of clients, said Brian McNiff , a spokesman for the Massachusetts Securities Division.

SEC Charges Investment Bank Analyst with Illegally Tipping College Friend About Nonpublic Merger Deals

The SEC alleges that Jauyo “Jason” Lee, who worked in the San Francisco office of Leerink Swann LLC, gleaned sensitive nonpublic information about the deals from unsuspecting co-workers involved with those clients and by reviewing various internal documents about the transactions, which involved medical device companies. Lee tipped his longtime college friend Victor Chen of Sunnyvale, Calif., with the confidential information, and Chen traded heavily on the basis of the nonpublic details that Lee had a duty to protect. Chen made more than $600,000 in illicit profits, which was a 237 percent return on his initial investment. Bank records reveal a pattern of large cash withdrawals by Lee followed by large cash deposits by Chen, who then used the money for the insider trading.

The National Labor Relations Board Sheds Useful Light on Key Social Media Policy Provisions by Philip L. Gordon in Littler’s Workplace Privacy Counsel blog

Between summer 2011 and spring 2012, the National Labor Relations Board’s (NLRB) Acting General Counsel drew substantial attention in his direction by publishing three lengthy Advice Memos, which expressed his views on the application of the National Labor Relations Act (NLRA) to social media policy provisions and employers’ discipline based on employees’ personal social media content. These memoranda, however, revealed only the litigation positions that the NLRB’s cadre of enforcement attorneys would take in this new and evolving area of the law. The views expressed in the memos did not, and do not, bind the Board. Last week, however, the Board issued an opinion, which, albeit not analyzing the employer’s social media policy per se, revealed the Board’s thinking on several employment policies commonly found in employers’ social media policies. Costco Wholesale Corporation, 358 N.L.R.B. No. 106 (Sept. 7, 2012).

Angel Capital Association weighs in on SEC proposed rule on general solicitation and accredited investor verification by William Carleton

The most controversial aspect of the SEC’s proposal has been its lack of any definitive safe harbor by which an issuer can be certain it has satisfied the amorphous “reasonable steps” standard of proposed Rule 506(c).

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

The FCPA Compliance Strategic Plan – Some Lessons for the Astros by Tom Fox

I pondered over Stephen’s thought on the subject of a strategic plan recently when I heard the Houston Astros General Manager say that he was not sure what plan he has to make the Astros a winning if not relevant, team again. Basically he said it was a 1, 3 or 5 year plan, or perhaps something else, he just wasn’t sure. With those words of encouragement in mind it would appear that the Astros plan is the following: (1) Year One: Lose to a new set of teams as the Astros will move from the National League to the America League; (2) Year 3: Continue to lose; (3) Year 5: Be all you can be. How is that for a strategic plan?

Compliance and the Legal Department: A Counterpoint in 3 Geeks and a Law Blog by Susan Hackett

My point is that many law departments choose to in-source compliance rather than out-source it. In-house counsel are hired and paid to intimately learn and live with the client in order to help “keep the milk in the glass”; outside lawyers are often retained to help clean up what’s spilt. If you only see spilt milk, you don’t know much milk is kept in the glass, or how many glasses there are that never tipped over at all. When Toby suggests that GCs would be better served if they were asking for more money for compliance-related activities and that they don’t because they are risk averse, I’d respond quite simply that Toby may not be aware of the extreme focus and resource corporate clients do expend on compliance. What they spend on compliance is spent on in-house staff, and not usually spent on firms or e-discovery vendors. E-discovery systems are not preventive legal systems – they’re remedial, except for the small benefit that some regulate what can be posted or stored (it doesn’t stop the inappropriate activity behind the document or email).

The Key to Compliance: The Trenches by Michael Volkov in Corruption, Crime & Compliance

Ask anyone in the FCPA paparazzi and they will tell you exactly what you need to do to make sure you have an effective anti-corruption compliance program. There are as many answers as there are compliance professionals.

I can assure you that every compliance professional has forgotten the missing link – not Curly Q Link, but the essential aspect of every compliance program. The crux of it all – the raison de’ tere — all boils down to this – think of the interactions which occur between your company and foreign government officials, and try and calculate or imagine in your mind every one of those interactions. Each of them presents opportunities for improper payments, a motive and an opportunity to engage in bribery. The incentive is there, and your job is to stop it – you cannot police every interaction, every meeting, every dinner, and every opportunity for improper behavior.

Money Market Fund Reforms Hit Roadblock by Joe Mont in Compliance Week‘s The Filing Cabinet

Overruled by three of her commissioners, Securities and Exchange Commission Chair Mary Schapiro has been rebuffed in her two-and-half-year effort to reform money market funds.

In a statement issued at 9:20 p.m. on Wednesday night, Schapiro made public that the majority had squashed proposals she has championed to impose structural reforms on the $2.4 trillion domestic marketplace (only Commissioner Elisse Walter broke rank to offer support). These efforts, she said, were needed to “reduce the susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.”A pending vote on the matter has been cancelled.

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

Anti-Money Laundering For the Non-Banking Entity by Tom Fox

While many companies which operate under anti-bribery laws such as the UK Bribery Act or anti-corruption laws such as the US Foreign Corrupt Practices Act (FCPA), have compliance programs in place to review business relationships, I have found that one of the areas which most non-banking companies do not sufficiently focus on is anti-money laundering (AML).

Fracking, conflicts of interest and adverse inferences by Jeff Kaplan in the Conflicts of Interest Blog

Take the example of “fracking,” an area of considerable complexity, and my own attempts – as a citizen who wants to be reasonably informed – to understand it.   Initially, I was skeptical about the wisdom of the fracking but the more I read the more it seemed, on balance, like a good idea (assuming strong environmental safety measures are put in place and that the embrace of fracking does not diminish the development and deployment of renewable energy sources).

Cheating in Online Courses by Dan Areily

A recent article in The Chronicle of Higher Education suggests that students cheat more in online than in face-to-face classes. The article tells the story of Bob Smith (not his real name, obviously) who was a student in an online science course.  Bob logged in once a week for half an hour in order to take a quiz. He didn’t read a word of his textbook, didn’t participate in discussions, and still got an A. Bob pulled this off, he explained, with the help of a collaborative cheating effort. Interestingly, Bob is enrolled at a public university in the U.S., and claims to work diligently in all his other (classroom) courses. He doesn’t cheat in those courses, he explains, but with a busy work and school schedule, the easy A is too tempting to pass up.

When A Business Relationship Goes Bad by Kathleen Edmond in Best Buy Ethics

Companies like Best Buy often talk about key vendor relationships and business affiliations. The reality is, of course, that companies don’t have relationships – people do. Business relationships generally come down to a person at Company A working with a counterpart at Company B to achieve some set of shared goals. In order for that relationship to be healthy and profitable for both parties, there must always be an atmosphere of trust, mutual respect and independence.

 For this reason, Best Buy maintains a strict Gifts, Business Courtesies and Vendor Relationships policy that is designed to protect Best Buy and vendor alike from the sort of temptations that can arise when relationships go bad. The vast majority of the time these relationships are healthy, respectful and profitable for both parties. Every now and then, however, bad judgment leads someone to cross the line and abuse a relationship for personal gain.

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

Four Signs Your Awesome Investment May Actually Be A Ponzi Scheme by Theo Francis in NPR’s Planet Money

[I]t turns out that the Ponzi industry is much broader and deeper than even the biggest blowups suggest. That’s one lesson of a slim new book, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims, from Boston University Law Professor Tamar Frankel.

Should dentists and lawyers be rotated, like auditors? by Jeff Kaplan in the Conflict of Interest Blog

As a general matter, the professional relationships that expert service providers (e.g., doctors, lawyers, accountants) have with those they serve carry the potential for conflicts of interest, at least, where the provider’s advice can impact how she is paid. Of course, we rely on providers’ professional standards of conduct to mitigate those conflicts. Beyond this, we tend to think that having a good personal relationship with an expert provider will serve as a useful “inner control,” and steel the provider against the potential for COIs inherent in the very economic nature of the relationship.

Too bad that it apparently doesn’t work.

When Your Investment Target Has Drug Cartel Ties by Nick Elliott in WSJ.com’s Private Equity Beat

The firm had done some due diligence and found the businessman had a strong record going back eight years. Springer’s firm formed the same impression, but Springer said he was suspicious that there was no information before that time, so he asked the firm for more time to dig deeper.

Knight Capital Says Trading Glitch Cost It $440 Million by Nathaniel Popper in NYTimes.com’s DealBook

$10 million a minute.

That’s about how much the trading problem that set off turmoil on the stock market on Wednesday morning is already costing the trading firm. The Knight Capital Group announced on Thursday that it lost $440 million when it sold all the stocks it accidentally bought Wednesday morning because a computer glitch. The losses are threatening the stability of the firm….

Loss Swamps Trading Firm in the Wall Street Journal

Knight officials blamed software installed earlier this week for causing the brokerage firm to enter millions of faulty trades in less than an hour on Wednesday morning. The orders roiled trading in almost 150 stocks and left Knight holding losing positions in many shares at the end of Wednesday’s trading session.

Knight Capital trading debacle shows Wall Street frailties by Andrew Tangel and Jim Puzzanghera in the Los Angeles Times

The high-speed trading arms race being waged on Wall Street has finally claimed its first major casualty.

Knight Capital Group, a brokerage that handles nearly 11% of all stock trading in U.S. companies, is in danger of collapsing after a software glitch triggered millions of unintended orders. The New Jersey firm lost $440 million in less than an hour — nearly four times the company’s profit last year.

These are some recent compliance-related stories that caught my eye.

How To Define Your Terms In 300 Pages by Theo Francis in NPR’s Planet Money

In Tuesday’s show, economist Luigi Zingales warned that massive, overly complicated laws and regulations go a long way toward undermining public trust in the government. They leave only lobbyists and lawyers reading the rules, in the pursuit of loopholes.

By coincidence, on Tuesday a key federal financial regulator said it had approved a collection of definitions and conditions for regulating a big chunk of the derivatives market.

It was several hundred pages long.

Lying Liars Who Believe Those Lies by Dan Ariely

What do Williams Gehris, America’s most decorated war hero, and Walter Williams, the last Civil War veteran to pass away, have in common? Both were frauds. They spun tales of military heroism, duped the public, and then – whoops – someone discovered that they hadn’t actually achieved the purported feats.

The chilling effect of accredited investor verification by William Carleton

Here’s the problem with opposing heightened verification altogether: the JOBS Act clearly contemplates that issuers must do something more to ensure that all the investors in a deal are accredited, when the deal has been broadcast publicly. So the SEC is going to have to reflect this legislative imperative in its rules. I’ve accepted that reality, and put all my eggs in the basket of hoping that it will remain possible to conduct Rule 506 offerings as before – without general solicitation and without advertising.

5 Business Ethics Must-Reads by Chris MacDonald

1. Adam Smith The Wealth of Nations
2. Edward Freeman Stakeholder Capitalism
3. Joseph Heath Business Ethics Without Stakeholders
4. John Boatright What’s Wrong—and What’s Right—with Stakeholder Management
5. Joseph Heath Business Ethics and Moral Motivation

Why Should the Boss Listen to You: Compliance Professional as Trusted Advisor by Tom Fox