One Heart Boston: All proceeds beyond the direct material costs, postage and applicable taxes from the sale of One Heart Boston merchandise will benefit The One Fund Boston, created to raise money to help those families most affected by the tragic events that unfolded during this year’s Boston Marathon.

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

Rep. Waters Introduces Investment Adviser Examination Improvement Act

Representative Maxine Waters (D-Cal.), along with Representative John Delaney (D-MD), again introduced legislation that would allow the SEC to charge user fees to fund examinations of investment advisers, the Investment Adviser Examination Improvement Act of 2013.  …  The proposed legislation also has the backing of a number of organizations including NASAA, which issued a supporting statement.  Nevertheless, the likelihood of action in the foreseeable future is remote.

House Panel Examines SEC Failure to Meet JOBS Act Rulemaking Deadline, Comm. Walter Says Accredited Investor Definition Is Outdated in Jim Hamilton’s World of Securities Regulation

At a hearing of the Subcommittee on Oversight and Investigations of the House Financial Services Committee examining the failure of the SEC to meet the statutorily imposed deadline for implementing Title II of the Jumpstart Our Business Startups Act (JOBS) Act, SEC Commissioner Elisse Walter testified that the Commission will move ahead to adopt final regulations implementing Title II as expeditiously as possible. This is a top priority for the SEC, she emphasized. During the hearing, Commissioner Walter said that she favors a revision to the definition of accredited investor to focus more on the amount of money a person already has invested.

Scott London Subverted Sarbanes-Oxley: Big Four Mock Audit Partner Rotation in re: The Auditors

The rest of the column goes on to explain that London seems to have subverted the intent of Sarbanes-Oxley Section 203 that requires lead engagement partner rotation off engagements to promote objectivity, independence and professional skepticism. But he’s not alone. The more I looked into this the more I realized it’s probably pretty common in the firms. After ten plus years of Sarbanes-Oxley, we’ve probably got quite a few of these roll off, roll back on partners out there. An early draft of a paper by four academics, including former PCAOB academic fellow Brian Daughtery, says almost everyone does it.

Financial Analyst Survey: “Chinese Wall? Reg FD? Never Heard of Them…” in The Corporate Counsel .net

Meanwhile, in this survey of hedge fund professionals – commissioned by Labaton Sucharow, HedgeWorld and the Hedge Fund Association – 46% said they believe that their competitors engage in illegal activity, 35% have personally felt pressure to break the rules, and 30% have witnessed misconduct in the workplace. When asked if they would blow the whistle or report the misconduct, 87% of respondents said they would report wrongdoing given the protections and incentives such as those offered by the SEC Whistleblower Program.

Last week was a difficult week to be away from Boston on vacation. My family is usually out on Patriot’s Day Monday watching the Boston Marathon. We wander down our street and mingle with the other spectators, friends, and neighbors on Commonwealth Avenue at the start of the Newton hills.

Instead we spent the week in Charleston and Washington hearing about the events through the news, Facebook and Twitter. Some it was informative, and some was misinformed.

On sunny post-vacation Monday morning, everything feels the same in a city that felt such tragedy a week ago. That’s good.

I’m sure there are compliance angles about the story. You have to wonder what made the brothers go bad. You have to be concerned about investigation process. You have to be concerned about the abrogation of rights.

But today is really about getting back to normal.

I’m watching the horror while on vacation instead of my office in Boston.

My heart goes out to all of the spectators and families who were affected by the blast. Patriot’s Day in Boston is usually a great day, starting with the Revolutionary War reenactments in the morning, a Red Sox home game, and the endurance of the marathon.

I’m also heartbroken by the runners who put in months of training, but were stopped short of the finish line. That finish line is a demarcation of salvation after making it the 26.2 miles from Hopkinton and up Heartbreak Hill. It should never be a crime scene.

What better way to ensure compliance than to have an eye watching you while you work? What better eye than the ultimate evil eye of Sauron?

It’s a product of the day at ThinkGeek. But since the day is April 1, it’s not real. (At least not yet.) Your workers can breathe a sigh of relief.

Yet another heavy snowfall in Greater Boston. I spent my time this morning shoveling, instead of writing a new blog post.

At first I thought Transportation Security Administration had gone completely insane. The blue shirts are now going to allow knives on planes as long as the blade is shorter than six centimeters and narrower than 1/2 inch. After looking closer I just think they merely incompetent.

Up front I should mention that I have never thought that post 9/11 airport security made me feel any safer flying. And if you balance the costs and aggravation to travelers against the small reduction in possible in-flight incidents, the TSA is completely out of control.

From a compliance perspective, the changes in the banned list make my head hurt.

Water, gels, and liquids in a container of more than 3 ounces are still dangerous. But actual knives are not.

Looking closer at the rules, the permitted knives are a very small subset of knives. The blades can’t be fixed or locked. That limits it to novelty knives. (I lost one of those to LaGuardia’s TSA line a few years ago with an old client’s logo on it.) The news releases and media report have largely failed to emphasize the continuing prohibition of locking blades. They should look closer at the image above.

I scratch my head over the use of centimeters for length and inches for width on limiting novelty knives. I guess the TSA wanted to use both sides of the ruler. Someday, the United States will join the rest of the world and embrace the metric system.

I suspect that TSA officials are big hockey fans because hockey sticks are now allowed on board. However, baseball bats are still banned, unless they are novelty size. You can also bring gold clubs, ski poles and lacrosse sticks on board. Clearly,  TSA officials are not baseball fans.

But that bottle of water is still more of a threat on board than a hockey stick.

Raise your hand if you think any of these rule changes are going to (1) make you feel safer flying, or (2) will result in less confusion in the long airport TSA lines? ……. No. I didn’t think so. That sounds like a policy failure, with the changes in policy failing to meet either of its main goals.

Sources:

• Statement on Changes to the Prohibited Items List by the TSA
• TSA Knives infographic (.pdf)
• Sporting Equipment Permitted in Carry-on Luggage
• TSA Will Permit Knives, Golf Clubs on U.S. Planes by Jeff Plungis in Bloomberg

While the New York Fed is increasingly tasked with regulating financial institutions, its bread and butter is economic analysis. A recent report debunks the theory that the stimulus spending lowered unemployment.

James Orr, vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, and John Sporn, a senior analyst in the Federal Reserve Bank of New York’s Markets Group, analyzed $860 billion (6 percent of GDP) stimulus contained in the 2009 American Recovery and Reinvestment Act, adopted in the context of rising unemployment rates.

Their analysis of the distribution of ARRA funds across states shows that the expanded assistance to unemployed workers was highly correlated with state unemployment rates. However, most other state allocations had little association—positive or negative—with state unemployment rates. You can see that reflected in the chart above.

In this battle of Keynes vs. Hayek, it looks like Hayek won.

Sources:

• State Unemployment and the Allocation of Federal Stimulus Spending
  James Orr and John Sporn in the New York Federal Reserve Bank’s Liberty Street Economics
• The American Recovery and Reinvestment Act of 2009: A Review of Stimulus Spending in New York and New Jersey (.pdf) by James Orr and John Sporn
• Hayek vs. Keynes Rap Anthem “Fear the Boom and Bust”

March comes in like a lion and out like a lamb. The same may be true of the SEC when it comes to the 2008 financial crisis and the SEC. This week’s  Supreme Court decision in Gabelli v. SEC,  means that the SEC has only 5 years after the date of the fraud to bring an enforcement action.

The 2008 financial crisis began in March 2008, when the Federal Reserve announced an unprecedented action to lend $30 billion to JPMorgan Chase to buy Bear Stearns. All the fraud that lead up to the collapse of Bear Stearns will be outside of the enforcement of the SEC in a few days.

The SEC is going to be left with post-collapse valuation failures as firms failed to write down their assets or fraudulently told their investors that everything was going to be okay, when the walls were collapsing around them.

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

People Need to Stop Selling Earnings Info to Undercover FBI Agents
by Bruce Carton in Compliance Week

Unfortunately, the saying “those who don’t know history are destined to repeat it” has once again turned out to be quite accurate. Prosecutors alleged this week that in June 2011, several months after Sebbag was sentenced, a Long Island financial advisor named Damian Perna embarked on a similar scheme in which he obtained draft earnings reports for several public companies through a contact at an investor relations firm. Bloomberg reports that “after getting an advance copy of one earnings report, Perna sold it for $7,000 to a Federal Bureau of Investigation agent working under cover, prosecutors said.”

Yunnan official’s airport tantrum goes viralBy Benjamin Kessler in the FCPA Blog

Best Practices for Internal Investigation Interviews by Michael Volkov in the Corruption, Crime, & Compliance Blog

An internal investigation is only as good as the information elicited during interviews. I do not mean to belittle the importance of collecting and reviewing documents. But documents provide the framework, the context and the outline of a series of events – the investigation story. Also, documents are invaluable tools for investigators when conducting interviews. They constrain the witness’ ability to fabricate or mislead. In many cases, they provide the boundaries for truth.

FTC Releases Top 10 Complaint Categories for 2012

“Identity theft is once more the top complaint received by the Federal Trade Commission, which has released its 2012 annual report of complaints. 2012 marks the first year in which the FTC received more than 2 million complaints overall, and 369,132, or 18 percent, were related to identity theft. Of those, more than 43 percent related to tax- or wage-related fraud. The report gives national data, as well as a state-by-state accounting of top complaint categories and a listing of the metropolitan areas that generated the most complaints. This includes the top 50 metropolitan areas for both fraud complaints and identity theft complaints.”

Just tooting my own horn today. I finally fulfilled the requirement to become an Investment Adviser Certified Compliance Professional®.

With the SEC’s registration requirement for private fund managers, I took a closer look at what the SEC requires for compliance professionals.  Rule 206(4)-7 imposes no particular requirements on a chief compliance officer.  The SEC release for the rule provides a bit a more context on the professional background requirements:

“An adviser’s chief compliance officer should be competent and knowledgeable regarding the Advisers Act…”

I  looked at several compliance programs but decided the Investment Adviser Certified Compliance Professional Program co-sponsored by the Investment Adviser Association and National Regulatory Services would be the best choice.

I assume this certification and designation would give me the right to say I am “competent and knowledgeable regarding the Advisers Act.”

The program is  a lot of work: 20 courses and a test. The test was hard. I did not feel confident that I had passing marks when I handed it in. But apparently I did.

This was my lineup of courses, all of which were well run:

• Introduction to the Advisers Act
• Books and Records Requirements for Investment Advisers
• Insider Trading, Contracts and Form ADV Deilvery Req.
• Understanding Fiduciary Duties, Sweep of Anti-Fraud Prov
• Custody, Pay to Play, Solicitors and Proxy Voting Anti-Fraud Rules
• Compliance Programs Rules
• IA Codes of Ethics
• Prof. Ethics: Ethical Decision-Making for Compliance
• Form ADV Part 1- Annual Updating Amendment and More
• Form ADV Part 2: Identifying and Disclosing Conflicts-
• Critical Skills for High Performance Compliance Profes
• Investment Adviser Performance and Advertising
• Investment Adviser Regulatory Update
• Anti-Money Laundering Risk Management and Monitoring
• Safely Embracing the Power of Social Media
• Defensible Due Diligence for Investment Advisers and Hedge Funds
• A Tailored Compliance Testing Program for IAs
• SEC Examinations for Investment Advisers
• Trading Practices, Portfolio Compliance and Related Enforcement Cases
• RIA Year-End Compliance Check-Up

More on the Investment Adviser Certified Compliance Professional Program.

Does your compliance program sometime feel like this gate? A tool working alone is not necessarily effective. It may be a great tool, but still not be effective.

If it’s easy to get around then it’s not effective. Do you even know if people are going around? Is it even possible to know if they are going around?

Sometimes you have a great tool, but the tool does not work for your organization.

Image from There I Fixed It.