Compliance Bits and Pieces – July 2

Early this week, some people expected fireworks to come from the Free Enterprise v. PCAOB decision. Instead, we got cheap package of sparklers. Fun for a few minutes, but unlikely to leave much of a lasting impression.  Here are some interesting compliance-related stories from the past week.

SEC Statement on Supreme Court’s Decision in FEF v. PCAOB

I am pleased that the Court has determined that the Board’s operations may continue and the Sarbanes-Oxley Act, with the Board’s tenure restrictions excised, remains fully in effect. The PCAOB is a cornerstone of the Sarbanes-Oxley Act and serves a critical role in promoting investor protection and audit quality,” said SEC Chairman Mary L. Schapiro. “We look forward to continuing to work with the Board in connection with its mission to oversee auditors in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports.”

The PCAOB Anti-climax by Professor Bainbridge

The real problem here is the Supreme Court’s decades long acquiescence in the creation of a fourth branch of government comprised of independent agencies over which the President has power of removal only for cause. It is not so much the double level of tenure protection that offends the President’s constitutional prerogatives, as the existence of any level of protection.

The New Sheriffs in Town by Halah Touryalai in RegisteredRep.com

There will be plenty at stake when the 4,000 firms currently registered with the SEC are transferred to state regulators. Between 2008 and 2009 the number of firms with $100 million assets or more dropped. Meanwhile, the number of firms with $25 to $100 million in assets increased by 15 percent. Firms in that range make up 38 percent of all SEC registered investment advisors — larger than any other asset range.

Enforcement Report for Q2 ’10 in the FCPA Blog

The first quarter of 2010 was the busiest ever for FCPA-related enforcement. This past quarter was one of the quietest for new enforcement actions, with just one from the DOJ and three from the SEC.

Image is sparkle3 by placid casual

Cheap Sunglasses and Compliance

Can cheap sunglasses affect your ethical behavior?

An important part of a compliance program is monitoring and improving the ethical behavior of your workforce. I’m always intrigued by ethics experiments.

Francesca Gino of Chapel Hill, Michael Norton of Harvard Business School, and Dan Ariely of Duke tested the effect of wearing knock-off designer sunglasses. They wanted to see if knowing you were wearing knock-offs would affect your behavior.

It did. Those subjects told they were wearing knock-off designer sunglasses cheated more than those who were not told.

The scientists asked two groups of young women to wear sunglasses taken from a box labeled either “authentic” or “counterfeit.” (All the eyewear was authentic.) Then the researchers put the participants in situations in which it was both easy and tempting to cheat.

People still cheat when its easy and tempting. Of those in the “authentic” group, 30% inflated their scores. But in the “counterfeit” group 71% inflated their scores.

They ran a bunch of other tests using the same theory that knowingly wearing knock-off designer sunglasses leads to degraded ethical behavior. It seems to have a very significant impact.

A lesson for compliance professionals: Don’t use knock-off goods in your program.

Dan Ariely talks about the findings in this video:

Sources:

Image of Knockoff Shades is by sparktography.

Should Private Funds Have more than $10 Billion?

The current draft of the Dodd-Frank Wall Street Reform and Consumer Protection Act has a surprise in it for big hedge funds. By “surprise” I mean tax.

Title XVI: Financial Crisis Special Assessment has a $19 billion fee ready to be assessed against financial companies institutions with more than $50 billion in assets and hedge funds with more than $10 billion under management. This $19 billion in “fees” is being assessed to support the new government initiatives in the financial reform legislation.

Section 1601(f)(2) leaves up to the new Financial Stability Oversight Council to define a hedge fund (in consultation with the SEC). The amount owed by any particular hedge fund manager will depend on a matrix of contributing factors. Section Section 1601(g) lays out thirteen factors the Council will need to take into account.

Before you start handing money back to limited partners to get under the $10 billion threshold you may want to wait for the legislative process to continue. Senator Brown of Massachusetts is opposed to new taxes and is threatening to withhold his vote. (I didn’t vote for him.) With the death of Senator Byrd, the Democrats need to pull in more Republican votes to get the financial reform bill passed in the Senate.

Update: The Boston Globe is reporting that the $19 billion tax has been removed from the bill: Brown’s Threat Gets Bank Tax Removed.

Sources:

Image of Money series 2 is by Mokra

GRC Professional Survey

The folks at the Open Compliance & Ethics Group have been developing a professional education and certification program for governance, risk management and compliance professionals. Basically, it’s a program that helps to build on existing credentials and “round out” an executive’s skills so that they are more effective at integrating all of these processes (e.g., internal auditors learn basic legal and investigation skills; lawyers learn basic auditing skills; everyone learns leadership skills).

To ensure that the education and certification models are valid, they conducted a series of job analyses with experts and member organizations over the past 5 years. As a final step, they broadened this study to include their entire membership and even those outside of their membership.

Please help them by participating in a confidential survey. The survey takes 15 to 45 minutes to complete. (It took me 45.) Anyone who completes the survey by Friday, July 2nd will receive $200 credit toward the education and certification program when it is complete.


http://surveys.oceg.org/s3/grc-job-analysis

Please take a few moments to participate.

Final Text of the Private Fund Investment Advisers Registration Act of 2010

There is a lot happening in the Dodd-Frank Wall Street Reform and Consumer Protection Act. (Yes, that appears to be the agreed upon name of the financial reform bill.)

I’m most interested in its Title IV: Private Fund Investment Advisers Registration Act of 2010(.pdf).

The act will remove the current exemption from SEC registration for “small” investment advisers. If you have more than $30 million under management and fewer than 15 clients, you were exempt from registration with SEC under section 203(b)(3).

If the bill is enacted, that exemption will be removed and private fund managers will have to register. If the manager has more than $150 million under management they will register with SEC.

The final text of the Private Fund Investment Advisers Registration Act of 2010has been released.

The Senate-House Conference Committee has released all 2319 pages of the the final text of its conference report: Dodd-Frank Conference Report. I’ll get to the rest of it at some point.

As of this morning, it sounds like the bill is still short of the votes necessary to get it passed in the Senate. One of my Senators, Scott Brown, is unhappy with the new tax imposed by the too-big-to-fail regime. He would be vote 41 and could prevent a filibuster from stopping the bill from a final vote in the Senate.

Sources:

  • Conference Report on Private Fund Investment Advisers Registration Act of 2010.
  • Dodd-Frank Wall Street Reform and Consumer Protection Act conference report and votes from the House Financial Services Committee

Updated pdf file with text of the Private Fund Investment Advisers Registration Act of 2010

Compliance Bits and Pieces for June 25

Here are some recent stories that I found interesting:
Officially our best-ever cease and desist from ThinkGeek

But what makes this cease and desist so very, very special is that it’s for a fake product we launched for April Fool’s day.

No Fund for States to Oversee Advisers? by Mark J. Astarita, Esq. on SECLaw.com

If the legislation that is currently moving through Congress passes, state regulators will take responsibility for the oversight of all investment advisers who manage less than $100 million dollars, a change from the current benchmark of $30 million dollars. While the state regulators have been pushing hard to increase their power through this piece of legislation, there is one small problem – they don’t have the funds to regulate all of these additional advisers.

Why You Should Care About Derivatives Reform by Matt Kelly in Compliance Week‘s The Big Picture

Like most human beings, I somewhat wish derivatives had never been invented—not because they aren’t useful (they are), but because discussion of how to regulate the derivatives trade makes my head hurt. I’m sure I am not alone on this. Nevertheless, how derivatives are created, traded, and disclosed to the public is indeed an important discussion to have.

Blogging for Law Firms by Jordan Furlong in the Law Firm Web Strategy blog

I still think that the benefits of blogging tend to accrue to the blogging lawyer more than to the firm where he or she works, and that a lawyer’s voice and personality are the key elements of a truly successful blog. But I’m no longer prepared to say that a law firm can’t use blogs as effective marketing and communication tools. My opinion has evolved because both blogs and the profession have evolved since then too.

Damn.

Compliance and Humor

At the Compliance Week 2010 Conference I was surprised to discover that the improv comedy group, Second City, had dived into the world of compliance and ethics awareness. They debuted three of their awareness videos during the conference keynotes. They are now available on their Real Biz Shorts website:

The big question is whether humor is appropriate for ethics and compliance?

Second City has a response in their FAQ:

“Well we believe that this programming is too important to be delivered in a way that doesn’t connect with employees. And humor is a great tool to address tough subjects and break the ice, allowing people to dialogue about the issues they face. In the comedy business there is a saying, “things are only funny when they’re true.” Humor for humor’s sake doesn’t work in ethics and compliance, but humor as a way to get to truth is invaluable.”

Tom Yorton, the CEO of Second City Communications, stated four things that comedy pros can teach compliance professionals in an article in the May issue of Compliance Week: Winning Your Audience.

  • Humor Gets to the Truth
  • Dialogues Beat Monologues
  • Foster Open Communication
  • Say It, and Say It Again

Check out the videos if you’re feeling down at your compliance job and need a chuckle. If this sounds interesting, they also offer a free demo with four other high-quality videos.

Now if I could just be funnier…..

Getting Cleaned by Oil Spill Stock Scams

I doubt you have missed the news about the oil spill mess in the Gulf of Mexico. The scammers have clearly noticed and sense an opportunity to make a quick buck.

Some companies may issue press releases, or send unsolicited faxes or spam emails that might include:

  • Claims to have products or technologies that are effective in remediating oil spills or restoring the eco-system
  • Mention of contracts or expected contracts with BP, formerly British Petroleum, that will aid the cleanup effort
  • Claims that the company is providing technical assistance or expertise to BP or to U.S. government agencies such as the Coast Guard or the Environmental Protection Agency

One of the first identified scam enforcement actions, the SEC suspended the trading in ACT Clean Technologies.

The Commission temporarily suspended trading in the securities of ACT because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things: (1) British Petroleum’s purported expression of interest in using a so-called oil fluidizer technology purportedly licensed to ACT’s wholly-owned subsidiary, American Petroleum Solutions, Inc., for use in cleanup operations in the Gulf of Mexico, and its purported request that field tests be conducted on the oil fluidizer technology; and (2) the purported results of field tests finding that the oil fluidizers are effective for use in clean up efforts in the Gulf of Mexico.

Many of these “investment opportunities” are classic pump-and-dump schemes. Early investors pay people to generate publicity  intended to increase demand for company stock and drive up the stock price. They use spam emails, investor bulletin boards, blogs, Twitter and any of the myriad of social networking platforms. When prices rise, the insiders or third party scammers sell their shares and let the price drop.

Other stocks involved are MOP Environmental Solutions and Green Bridge Industries.

Complaints can be filed on FINRA’s website or on the SEC’s website. You can also call the National Center for Disaster Fraud’s special oil-spill hotline if you suspect an oil spill scam: 1-866-720-5721.

The Financial Times is reporting that the assets of BP executives are being used instead of the typical dead banker emails from Nigeria.

I am the private solicitor for Mr Tony Hayward, the esteemed Chairman and Chief executive of British Petroleum. My client has various personal and family related holdings of BP stock and options. Due to his faithful long standing service to BP the total value of his holdings amounts to in excess of 100m pounds sterling. Mr Heywood is a British citizen but it has been my sorrowful duty to advise him that his personal and family wealth is at great risk of being wrongfully confiscated by US authorities acting extra-territorially under special powers authorised by the US government and with the secret consent of a supine UK political and legal establishment.

Sources:

Side-by-Side Comparison Chart of Financial Reform Bills

The Wall Street Reform and Consumer Protection Act of 2009, passed by the House on December 11, 2009 is over 1300 pages long. The Restoring American Financial Stability Act of 2010, passed by the Senate on May 20, 2010, is over 1600 pages long.

You have lots of reading to figure out the differences between the two bills.

Davis Polk put together a great side-by-side chart that compares key issues in the Senate and House Bills. At a 160 pages, the chart provides a much more detailed analysis than any other I have seen published.