Now It’s the Law

President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act at the Ronald Reagan Building today. The clock starts ticking on the compliance and rule-making deadlines.

“The fact is, the financial industry is central to our nation’s ability to grow, prosper, compete, and innovate. There are a lot of banks that understand and fulfill this vital role, and a lot of bankers who want to do right by their customers. Well, this reform will help foster innovation, not hamper it. It is designed to make sure that everyone follows the same set of rules, so that firms compete on price and quality, not tricks and traps. It demands accountability and responsibility from everyone. It provides certainty to everybody from bankers to farmers to business owners. And unless your business model depends on cutting corners or bilking your customers, you have nothing to fear from this reform.” – excerpt from the president’s speech

The President was joined on the stage by two non-politicians:

Andrew Giordano is a retired Vietnam veteran from Locust Point, Maryland who the President met last year when he participated in a roundtable to discuss the outdated rules regulating the financial sector. Mr. Giordano was saddled with hundreds of dollars in overdraft fees on his veteran’s account because his bank had automatically enrolled him in “overdraft” protection that he never asked for. The new Consumer Protection Bureau will enforce new rules on overdraft programs to make sure that consumers like Mr. Giordano get a real choice and are not unknowingly charged unnecessary fees.

Robin Fox is a 7th grade science teacher from Rome, Georgia who sent an letter to the President in early August because her credit card company retroactively increased the rate on her existing credit card balance from 10.90% to 17.90%, even though she paid her account on time. The increase has been a burden on her family at an already difficult time, after her husband’s landscaping business dried up due to the financial crisis. The new Consumer Protection Bureau will enforce the Credit CARD Act of 2009, which bans arbitrary rate hikes on existing balances and other unfair practices by credit card companies.

The politicians on the stage:

  • Vice President Biden
  • Secretary Timothy Geithner
  • Chairman Chris Dodd, D-CT
  • Chairman Barney Frank, D-MA
  • Speaker Nancy Pelosi, D-CA
  • Senator Harry Reid, D-NV
  • Senator Blanche Lincoln, D-AR
  • Representative Collin Peterson, D-MN
  • Representative Steny Hoyer, D-MD
  • Representative Paul Kanjorski, D-PA
  • Representative Maxine Waters, D-CA
  • Representative Mel Watt, D-NC
  • Representative Luis Gutierrez, D-IL
  • Representative Gregory Meeks, D-NY
  • Representative Dennis Moore, D-KS
  • Senator Tim Johnson, D-SD
  • Senator Jack Reed, D-RI

I assume everyone got pens.

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UK Bribery Act Delayed

When I saw there was a press release from the UK’s Ministry of Justice, I was expecting an announcement of what it meant for a commercial organization to have “adequate procedures” to prevent bribery. That being the only affirmative defense under the Bribery Bill.

It turns out that implementation of the Bribery Act will be delayed until April 2011. They will start the regulatory process for guidance on procedures which commercial organizations can put in place to prevent bribery. That guidance is scheduled to be released in early 2011 in time for organizations to ramp up for the compliance deadline.

I view the UK Bribery Act as being more strict than the Foreign Corrupt Practices Act since it has no exclusion for “facilitation payments” and is not limited to government officials. The US DOJ and SEC have stepped up their enforcement of the FCPA which makes it a big concern for any company with international operations. We have yet to see how the UK government will enforce its Bribery Act.

In light of the delay, Transparency International is planning to publish its own guidance to “allow companies to get a ‘head start’ in tightening up their anti-corruption procedures.”

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Do Prosecutions Stop Insider Trading?

We generally assume that the prosecution of crime acts as a deterrence to others who may think about committing the crime. One of the key factors in fraud is opportunity. If the wrongdoer thinks they can not get away with the violation, they are less likely to commit the violation.

At least that is the theory. Social scientists have been looking at this strategy for a long time, with sometimes mixed results. My guess is that the deterrent effect will vary from crime to crime and deterrence strategy to deterrence strategy.

What about insider trading?

The UK’s Financial Services Authority has published a metric on insider trading. They look at the level of abnormal pre-announcement price movements (APPMs) in the share price of a company.

“The level of APPMs for the takeover data set has remained stable over the past few years including for 2009. The level of APPMs for the FTSE 350 data set remained at a low level in 2009.”

The data does not show any improvements. The data set is on the small side so it is hard to judge significance. The FSA program is also new. The program begin during a period of great turmoil in the financial markets.

On the other hand, the FSA’s new enforcement activity of criminal prosecutions and large fines did not affect the amount of abnormal pre-announcement price movements. If this robust enforcement activity is supposed to have a deterrent effect, it does not obviously appear in the data.

Perhaps robust enforcement activity catches more bad guys but does not reduce the bad activity.

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It Does Not Take Much to Get You Into FCPA Trouble

The recent FCPA enforcement actions brought against Veraz Networks, Inc. shows that it does not take huge piles of money to get in trouble. Veraz admitted to making improper payments of only $40,000.

Not that $40,000 is an insignificant amount. It just pales in comparison to the huge dollars we have seen on other FCPA enforcement actions.

That $40,000 in improper payments led to a $300,000 fine and $3,000,000 of investigation expenses.

Back in 2008 Veraz was involved in an SEC investigation that resulted in the company not being able to timely file its 10Q for March 31, 2008. The FCPA violation was uncovered by the company during this investigation. It’s not clear what the original SEC investigation was focused on, but I would guess it was not FCPA violations. They were merely a byproduct of another investigation.

What lessons can we learn from the Veraz?

It does not take a lot of zeros to have an FCPA violation. It’s clear from the statute that even a nominal amount can be a violation.

FCPA violations are on the SEC’s checklist when they start poking around. The SEC is getting easy wins from the FCPA.

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Goldman Settles; Fabulous Fab is Left on His Own

Goldman Sachs settled with the Securities and Exchange Commission. That’s not a surprise. Goldman did not want to litigate this action. It wanted it to go away.

As a shareholder in Goldman, I wanted it to go away. It seems others did also. GS stock price opened at $138.50 on Thursday morning. It opened at $151.47 this morning. That’s a 10% increase based on the settlement. The stock has been down 21% since the SEC filed its complaint.

Goldman is going pay $550 million, with $250 million going to investors and $300 million going to the SEC. The dollar amount is not a surprise. I assumed the top dollar amount was the $1 billion lost by investors. I think the time it took between the filing of the action and the settlement was largely focused on how much Goldman was going to pay to make this ugly incident go away.

That is a big dollar amount. As SEC enforcement director Robert Khuzami points out, it’s the biggest SEC fine against a Wall Street firm. There have been bigger fines in other industries.

According to Footnoted, Goldman has $27 billion is cash and short term securities. It’s big dollar number, but Goldman can find that much the cash by looking under the cushions on its couch.

Unfortunately for Goldman VP Fabrice Tourre, he is not included in the settlement. The SEC is continuing its litigation against him. Fabulous Fab has a Monday deadline to respond to the SEC complaint. Fab still works at Goldman but is on paid leave.

He is trying to clear his name. Goldman just paid to get theirs back.

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Compliance Bits & Pieces for July 16

Here are some recent stories that I found interesting:

Canada and the Corruption of Foreign Officials Act by Tom Fox

The CFPOA was passed in back in 1999. However, up until this year, there was only one enforcement action under the legislation involving a Canadian company and no prior enforcement actions against individuals. The Canadian government, as a signatory to the OECD Treaty Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, felt an obligation to actively enforce its foreign anti-corruption and anti-bribery statute. This led to the funding for and creation of two RCMP units dedicated to enforcing the act, in 2008.

Defendant Used Blackberry PIN Messages to Avoid Feds by Ryan J. Reilly in Main Justice

According to the DOJ, Farkas and his co-conspirators made efforts to disguise their alleged fraud by communicating using a feature on their Blackberry phones that allowed them to send so-called “PIN messages,” which are similar to text messages but not routed through or saved on a computer server.

What One Mizzou Grad Learned in Law School by Kashmir Hill in Above the Law

I’m studying for the bar right now, and to be honest, little of this sounds like what I learned in law school. So I said to myself, if I didn’t pick up these 20-odd topics, what did I learn? He came up with a list of the 17 things he learned in law school.

Site offers Better Access to Federal Rulemaking in Robert Ambrogi’s LawSites

But Regulations.gov is difficult to use for experts and average citizens alike, say the founders of a new site, OpenRegs.com. They have created this site “to make the proposed and final regulations published in the Federal Register easy to find and discuss, so that citizens can become better informed and more involved.”

How Embarrassing… Westlaw Reference Attorneys Are Blogging… And You’re Not?? by Greg Lambert in 3 Geeks and a Law Blog

Westlaw’s Reference Attorneys have set up their own blog where they focus on the needs of Summer Associates and produce blog posts that point out some of the needs expressed by Summer Associates and relay that to others. The bloggers share information that comes in from Summer Associate calls in order to identify trends (such as issues on the gulf oil spill), and get someone to blog about how they’ve handled the issues so that others can benefit from the experience.

Revisiting Toyota, Ethics and Compliance

Toyota Logo

After many people slapped Toyota with the unethical label over its unintended acceleration problem, it appears that Toyota may be vindicated.

The Wall Street Journal is reporting some early results form the U.S. Department of Transportation’s analysis of data recorders. They found that throttles were wide open and brakes not engaged on Toyotas involved in accidents blamed on sudden acceleration.

Back in March, I pointed out that we saw the same situation with Audi back in the late 1980s. People claimed that the car suddenly accelerated when they applied the brakes. It turns out they were stepping on the gas pedal, not the brake pedal.

It’s hard to pin blame on your customers for failing to use the product correctly. Audi was never able to deal with the same issue. Steve Jobs failed to find much support in telling people they are holding the new iPhone 4 incorrectly.

Toyota has experienced quality issues since they began their quest to become the biggest car company, instead of staying with being the best car company. By looking at the sticky accelerators and stuck floor mats Toyota was cognizant that their cars had flaws. Those flaws seem to have distracted them from realizing that the fault may not have been not their own.

I continue to think that the Toyota saga is one of a failure of crisis management, and not one of ethics or compliance.  Toyota has also benefited from BP’s bigger crisis. BP’s failure seems to be one both of quality, ethics, compliance, ineffectual leadership, and crisis management.

I’m also still troubled by the conflict of interest the US government has with Toyota.  General Motors is one of Toyota’s  biggest competitors. The US government own almost 61% of General Motors after having invested about $50 billion to keep the company alive. It would be good for General Motors if Toyota was found at fault and lost market share as a result. Therefore, it would be good for the US government for Toyota to be found at fault.

I don’t mean to imply that the Department of Transportation is being biased in its investigation. There is just an inherent conflict in the marketplace when the government starts owning private enterprises.

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Power Corrupts – So Does Powerlessness

Rosabeth Moss Kanter points out another reason that the “tone at the top” is only one factor for corporate compliance in Powerlessness Corrupts.

“Power corrupts, as Lord Acton famously said, but so does powerlessness. Though powerlessness might not result in the egregious violations associated with arrogant officials who feel they are above the law, it is corrosive.”

  • Managers spread powerlessness by limiting information.
  • They compound the insult by sneaking unpopular decisions through when they think no one’s looking.
  • Powerlessness burgeons in blame cultures.
  • The powerless retaliate through subtle sabotage. They slow things down by failing to take action
  • Negativity and low aspirations show up in behaviors psychologists call defensive pessimism, learned helplessness, and passive aggression.

Those are a lot of points for targeting the tone at the middle and the tone at the bottom.

Dilbert, being the epitome of powerlessness, captures some of this in today’s strip.
Dilbert.com

Trust and Compliance

Yesterday’s Carnival of Trust post got me thinking about the relationship of compliance and trust.

“Compliance lays out policies and checks to make sure you are complying with those policies. Trust, but verify, and mostly verify.”

I equate trust more with the ethics side of business: Doing what you should (or should not) do, based on principle. Compliance is focused more on things you can’t (or have to) do. Compliance is mandatory.

Trust is focused on personal interactions. Compliance is focused on corporate interactions. Ultimately, a company is made up of a network of personal interactions.  You can’t mandate trust. You can’t require trust. You have to earn trust.

Being trustworthy means more than merely complying with the rules. Rules generally set some minimum standard of conduct. Breaking the rules – being non-compliant – will usually label you as being un-trustworthy. On the other-hand, there are enough bad rules and overly strict corporate policies that sometimes being non-compliant with your internal rules will make you more trustworthy externally.

In the end, the goal of compliance and the goal of trust-building should be the same: better personal and corporate behavior. They just get there by traveling different roads.

The American business culture is increasingly moving to a rules-based regulatory environment. Hence, the growth of compliance. Is that a good thing or a bad thing?

It’s good if it will stop bad behavior. Of course, it’s always hard to figure out if you’re stopping bad behavior. If you are catching more bad actors it could be because you are getting better at identifying the bad behavior. or it could be because there is more bad behavior. If there is a decrease in catching bad actors, maybe you are just doing a worse job of catching the bad actors and not stopping the bad behavior.

It’s bad if compliance is acting as a substitute for trust-worthy, or ethical, behavior. It’s hard to envision the vast majority of rules as being anything more than minimum standards of behavior.

As a compliance professional, I need to make to sure that I focus on how compliance can promote the business goals and promote trustworthiness within the organization. Compliance professionals need to work towards making themselves trustworthy individuals.


If you can find it, that is. by Jessica Hagy in Indexed, used by permission

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Twenty Dollar Image is from Wikimedia Commons. Enlargement of the 20-dollar bill. Enlargements conform with American copyright law if they show only small parts of the bill.

Carnival of Trust

The Carnival of Trust is the brainchild of Charles Green of Trust Matters. It’s intended to highlight the best posts about trust in the business and professional workspace over the previous month. He apparently ran out of worthy people to host his carnival and, in what must have been a moment of weakness, asked me to host the Carnival of Trust for July.

Compliance and trust are an odd fit. After all, compliance can be seen as the opposite of trust. Compliance lays out policies and checks to make sure you are complying with those policies. Trust, but verify, and mostly verify.

I love carnivals. So before Mr. Green could change his mind I agreed to host the carnival. Still unsure about how compliance and trust worked together, I’m even more unsure how carnivals and trust go together. So I decided I would write about some of my favorite things at a carnival:

The Happy Clown

Clowns are a highlight of the carnival, with their faces painted in a bright red smile. The classic clown uses “clown white” to cover his entire face, hiding his underlying features. Then the clown adds a perpetual grin. Is there a problem with having a perpetual grin?

Steven DeMaio writes When Being Positive Is Positively Meaningless. Being super-positive can create so much “white noise that when clear, authentic positive feedback is given, it gets muted and loses its punch.” Being positive all the time can lower trust.

The Sad Clown

On the other side of the midway is the sad clown. Everyone can’t be happy all the time. As the character clown, the sad clown is likely the one who will end up getting a pie thrown at his face.

Scott Greenfield of Simple Justice takes on the Happysphere? You can’t get there from here. If you’re going to write a blog or expect to hear the truth from your peers, you need to expect to get some pie thrown in your face. Scott is happy to throw a pie at those sad clowns who cross the line in the legal blogosphere.

(Expecting a pie myself, I’m sure Charlie is starting wonder why he let me host this.)

The Clown Car

It seems that all of our financial institutions piled into a clown car and engaged in the same foolish activities with home mortgages. It’s fun to see clowns pile out of the impossibly small car. It’s less fun when you realize it’s taxpayer money helping the clown banks get out of their predicament.

Peter Birks writes about Trust and Naivety when it comes to looking at the health of our financial institutions. He writes about how Europe has decided to follow the U.S. lead in running financial institutions through stress tests. Running the tests was fairly successful in the U.S. for improving the public’s confidence in the banks. Birks points out why it’s not as successful in Europe. Different societies have different levels of trust in their government and their institutions.

Ball Toss

It’s pretty easy to throw a ball. It should be easy to win at the ball toss. The game’s barker has little to judge. If the ball goes in, you win. Baseball umpires have a harder job.

Charles Green talks about Baseball, Billy Budd and Business, using the blown call by baseball umpire Jim Joyce as the backdrop for his article. He presents three lessons to be learned:

Lesson 1. From umpire Joyce: face facts. Deal with reality. And the minute you see the facts are against you, call it. Call it on yourself. Take full responsibility.

Lesson 2. From pitcher Galarraga: accept life gracefully. Do all that you can; when you win, be gracious; and when you lose, that’s when you really demonstrate class.

Lesson 3: From Commissioner Selig. Celebrate the humanity of sports, business, life. The humanity of the sport really does transcend winning and losing.

Lion Tamer

The lure of the lion tamer is man against beast; realizing that you are not at the top of the food chain. The hungry lions are looking to eat the lion tamer when he steps into their cage. Health care costs are threatening to devour the American economy. Congress stepped into this cage of hungry lions when it passed the huge new health care law this spring.

Gregory Warner brings us an interesting story on Marketplace about a link between the way private oncologists get paid and how much chemotherapy they prescribe. No surprise. Doctors, like the rest of us, are influenced by how they get paid.

Fortune Teller

What awaits us after we leave the carnival’s midway? The lure of fortune tellers is the hope that their mystical powers will help us see the future and better deal with it.

One of a leader’s job skills is planning for the future and leading their people to best deal with it. Mike Myatt points out the importance of truth & leadership. “Telling the truth is not always easy, and may subject you to substantial opposition and controversy over the short run, but it will do nothing but help build your reputation, success and sustainability over the long haul.”

Elephant Ride

Elephants impress us with their massive size. Mr. Bailey’s biggest triumph as a circus entrepreneur was gaining possession of the first baby elephant born in captivity. This allowed his circus to compete with Barnum’s traveling circus.

Outside the carnival people are often unwilling to talk about the elephant in the room. If you want to be successful, you need to address the obvious problems. Jan Schultink shares a great insight (and image) in VC Pitch: Talk about the elephant in the room.

Demolition Derby

One of the loudest parts of the carnival is the demolition derby. I love seeing old cars smash into each other again and again until there is one fiercely-damaged car left still moving in the arena.

Tom Cox points out that Nice Teams Finish Last. Being nice will lead to workarounds and uncrossed bridges. On the other hand, you don’t want to be fierce, where you attack preemptively and build walls. He proposes a middle path where you are bold. That may not lead to victory in the demolition derby, but it may be a better way to lead a team.

Bumper Cars

The bumper cars offer people of all driving skills the ability to rampage through a pack of cars, with the inevitable collisions resulting in nothing more than a sudden jolt.

Over at Trust is Everything, Karen Mishra shares some trust lessons she learned as part of her teenage daughter getting ready to drive in Drivers’ Ed: A Whole New Meaning of Trust. I hope her daughter’s learning process is more like the bumper cars than the demolition derby.

Bearded Lady

Carnivals are full of odd people. For most carnivals, that includes the attendees, not just the sideshow performers. The bearded lady has been a staple of the side show for over a century. Although there were many famous bearded ladies, there were also many fakes.

When do Exaggerations and Misstatements Cross the Line? asks Knowledge@Wharton. “Embellishment is part of human nature, experts say, and almost everyone is guilty of it at one time or another. Left unchecked, however, exaggerations that seemed innocuous at first could result in serious, potentially career-ending consequences.”

Big Prizes

The lure of many games at the carnival is that big prize hanging on the wall behind the barker. Everyone wants the big prize. You’re bound to feel some envy when you see a winner carrying that huge stuffed animal around the midway. That envy may drive you to play again, hoping for a shot at the prize.

Jon Ingham looks at the problem of Promotion (and salary envy) in Social Advantage. The workplace is a social environment and workers will “behave dysfunctionally if they believe they’ve been treated unfairly in just a relatively minor way.”

Cotter Pins

Pay close attention to the cotter pins. Carnival rides fold down into truck-sized boxes for transportation to the next venue. Those cotter pins keep the ride re-assembled and keep you from flying off  into the crowd. A cotter pin is the glue that keeps the ride together.

Jack Vinson points to a story with the theory that trust is the glue that holds people together. “Trust is the most important currency in business. By opening up to what is true and creating a vision for the highest good, leaders can build a culture of trust and enhance the bottom line.”

Ring Toss

The ring toss game at the carnival is notoriously difficult. Failure is the usual result. If it were easy, they wouldn’t be giving prizes for winning.

John Scalzi in Whatever discusses the failure mode of clever. He points out that to be really clever you need to know when not to be clever. Before you write that clever bit, realize that the perception of the recipient will affect it. “Just because you intended to be clever doesn’t mean you will be perceived as clever.”

(I should have read that advice before I put this post together.)

You can read more about the Carnival of Trust and find links to past Carnivals of Trust at Charles H. Green’s Trust Matters. You can also use that site to submit an article for consideration in the next carnival.
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