Compliance Bits and Pieces for February 19

Here are some interesting compliance related stories from the past two weeks. (I reserved last week for my blogoversary.)

Details Emerge on SEC Office of Market Intelligence by Bruce Carton in Compliance Week

One of the first tools that the Securities Exchange Commission launched after it ushered itself into the Internet era in the mid-1990s was the “Enforcement Complaint Center,” a fancy name for an e-mail box at the SEC where the public could send tips. The Enforcement Complaint Center initially received only about 20 complaints per day, but that number snowballed through the years. Today it’s not uncommon for the ECC to receive up to 1,000 e-mail tips per day.

Morningstar acquires footnoted!

For the past 6 1/2 years, we’ve written frequently about various mergers and acquisitions. Today, we have some M&A news of our own: Morningstar (MORN) has acquired footnoted.org. You can download the official press release here, but I wanted to personally share with you why I’m so excited about this deal and why I think Morningstar, which is already well known for its independent research, is the perfect partner to help me continue growing footnoted.

Blizzard Ethics and Parking Space Etiquette by Jack Marshall of Ethics Alarms

The Great Blizzard of 2010 inspired The Washington Post to publish a piece about snow ethics, focusing especially on this touchy question: Is it ethical to park in a space shoveled out by someone else? The problem with the article is that it doesn’t ask the ethically crucial second question: Is it ethical for someone to hold one of the rare cleared parking spaces on the street open, when other motorists desperately need a place to park?

Corporate Backlash to Social Media by Gil Yehuda

A recent post titled “Company Forces Employee to Delete LinkedIn Profile” reminded me of the reality of the corporate mindset.  The post describes the reaction to the news that employees in this one firm can no longer have a private LinkedIn profile as a result of how the company interpreted the FINRA guidelines.

Financially Justifying Ethics: A Faustian Bargain? by Charles Green in Trusted Matters

Many readers are familiar with Goethe’s Faust in which the protagonist sells his soul to the devil in return for having his way here on earth. Those who are not familiar with it will find the same theme echoed in Robert Johnson’s Crossroads song, in which the singer sells his soul to the devil in return for fame as a bluesman. . . . But never mind. What I want to talk about is the justification of ethical corporate behavior by referring to its profitability. It is, I suggest, a slippery slope.

Calpers names firms not responding on placement agents in The Washington Post

Calpers, the biggest U.S. public pension fund, released late on Wednesday a list of 11 firms with which it has invested that did not reply to its request for information on their use of placement agents, who are at the center of a probe of New York’s pension fund.

New York City Enacts New Rules for Its Pension Fund Investments

New York City Comptroller John C. Liu announced sweeping changes in the way New York City pension funds make investment decisions. Following the lead of New York state and several other states, New York City is changing how it deals with gifts, campaign contributions and placement agents.

Ban on Campaign Contributions

  • Comptroller Liu declines any campaign contributions from investment managers and their agents doing business with, or seeking to do business with, the New York City pension systems.

Requirements for Fund Managers

  • Zero-tolerance gift prohibition – fund managers must certify that they have not given any gifts to any employees of the Comptroller’s Office, nor to any employees or trustees of the New York City pension systems;
  • Minimizing contact – fund managers must disclose all contact with employees of the Comptroller’s Office regarding new investments as well as all contact with pension trustees and other individuals involved in the investment decision-making process;
  • Disclosure of placement agents – fund managers must disclose all fees and terms relating to any firm retained to provide marketing or placement services, and that any such fees are fully paid by the fund manager;
  • Agreement for recourse – fund managers must agree that the pension system(s) may terminate or rescind a contract or commitment for investment and recoup all management and performance fees for violation of these requirements.

Restrictions on Placement Agents

  • Expand current ban on private equity placement agents to include placement agents and third-party marketers for all types of funds, where such agents and marketers are exclusively providing “finder” or introduction services;
  • Ease current ban on private equity placement agents to allow use of placement agents who provide legitimate value-added services such as due diligence and similar professional services on behalf of prospective investors;
  • Require such agents and marketers to demonstrate the ability to raise capital outside NYC by establishing that they raised $500 million in at least two of the past three years from entities other than the NYC pension systems;
  • Require full description of value-added services provided as well as resumes of key professionals and employees who contact individuals involved in decision-making process regarding a proposed investment;
  • Require registration with either the Securities and Exchange Commission or the Financial Industry Regulatory Authority.

New York City is separating itself from New York State by not completely banning the use of placement agents. Unfortunately, the Comptroller has not publish a copy of these new rules on his website.

Disclosure: My company has historically used placement agents as part of its fundraising.

Sources:

Image is by Julius Schorzman under Creative Commons in Wikimedia: Boroughs Labels New York City Map.

Securities Class Actions in Canada

With the winter Olympics going full swing in Canada, I thought I would look to how that country is dealing with securities class actions. NERA Economic Consulting just released their 2009 Update on Trends in Canadian Securities Class Actions.

Some tidbits:

  • Eight securities class actions were filed in 2009, compared with the 10 filings in 2008.
  • There are now more than $14.7 billion in outstanding plaintiffs’ claims in Canadian securities class actions.
  • In 2009, six cases settled for total payments of approximately $51 million

These are not big numbers compared to the securities class action activity in the United States. (Which is a good thing from the corporate perspective.) But this is still a new area for Canadian law.

Sources:

Media Leak is not Protected as a SOX Whistleblower

Leaking information to the media about bad financial controls is not protected by SOX whistleblower retaliation clause.

Nicholas P. Tides and Matthew C. Neumann were working as “Audit IT SOX auditors” at The Boeing Company. They made several complaints about auditing deficiencies to their supervisors. They claimed “that Boeing’s auditing culture was unethical and that the work environment was hostile to those who sought change.”

So they took their story to Andrea James, a reporter from the Seattle Post-Intelligencer, providing her with information and documents.

Boeing ended up firing Tides and Neumann. They sued claiming they were wrongly fired as whistleblowers and were protected under Section 806 of Sarbanes-Oxley.

The court pointed out that 18 USC § 1514A(a)(1) states that the protection exists when

the information or assistance is provided to or the investigation is conducted by—

(A) a Federal regulatory or law enforcement agency;

(B) any Member of Congress or any committee of Congress; or

(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct)

None of these three cover a reporter or media outlet, so no protection to the whistleblower.

Sources:

Disclosure: I own some Boeing stock.

The Economist: Special Report on Financial Risk

This week’s The Economist has an excellent special report: The Gods Strike Back.

The title comes from Peter Bernstein’s Against the Gods:

“The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature.”

The report contains these stories:

For me, when looking for blame, I tend to focus on the rating agencies. As the report points out, the raters were paid by the the issuers not the purchasers of the securities. That results in a misalignment of interests. Of course, they may have just gotten wrong.

Looking at the chart below you have to be impressed by how spectacularly wrong they were:

Hopefully, we will learn some lessons from the financial crisis. We should have learned by now that the next crisis will be caused by something different so we need to be able to recognize and deal with the unexpected.

President’s Day

Washington’s Birthday, the federal holiday was originally implemented by the United States Congress in 1880 for government offices in the District of Columbia (20 Stat. 277) and expanded in 1885 to include all federal offices (23 Stat. 516). As the first federal holiday to honor an American citizen, the holiday was celebrated on Washington’s actual birthday, February 22. On January 1, 1971 the federal holiday was shifted to the third Monday in February by the Uniform Monday Holiday Act. A draft of the Uniform Holidays Bill of 1968 would have renamed the holiday to Presidents’ Day to honor the birthdays of both Washington and Lincoln, but this proposal failed in committee and the bill as voted on and signed into law on June 28, 1968 kept the name Washington’s Birthday.

In Massachusetts, while the state officially celebrates “Washington’s Birthday,” state law also prescribes that the governor issue an annual Presidents Day proclamation honoring the presidents that have come from Massachusetts: John Adams, John Quincy Adams, Calvin Coolidge, and John F. Kennedy. MGL Chapter 6: Section 15VV (Coolidge, the only one born outside of Massachusetts, spent his entire political career before the vice presidency there. George H. W. Bush, on the other hand, was born in Massachusetts, but has spent most of his life elsewhere.)

— From Wikipedia

Weekend Book Review: In Fed We Trust

It is only fitting that I am writing this book review on a Sunday. In Fed We Trust: Ben Bernanke’s War on the Great Panic starts off by telling about the importance of a few Sundays in 2008. In March, there was the Sunday when the Federal Reserve announced an unprecedented action to lend $30 billion to JPMorgan Chase to buy Bear Stearns. There was the Sunday in August when the Federal Reserve and the Treasury Department decided to seize Fannie Mae and Freddie Mac. Of course, there was the Sunday in September when they allowed Lehman Brothers to fail. There was the Sunday when Bank of America agreed to take over Merrill Lynch.

David Wessel tells a story about Ben Bernanke’s rule of the Federal Reserve deciding to do “whatever it takes” to protect the U.S. economy from the incredible economic threat of those Sundays. The story takes us through what it missed, what it did, what it didn’t do, what it got right and what it got wrong during the “Great Panic.”

During Alan Greenspan’s term as chairman of the Federal Reserve we mostly watched as he and the Board decided whether to raise interest rates or not. Most of the country thought that was the extent of what the Federal Reserve did. During Bernanke’s term we saw the incredible power of the Federal Reserve to create vast sums of money out of thin air.

One of the key takeaways from the book is that is very difficult “to get the politics, the policy and market reaction all right at the any one point in time.” That was a quote from former Secretary of the Treasury Henry Paulson shortly after leaving office.

The book is sometimes short on its depiction of events. The one that stuck out the most was the short description of the Merrill Lynch discussion by Bank of America’s Ken Lewis and Joe Price. The New York Attorney General tells a more interesting tale in his indictment of the Bank of America executives.

But of the book provides terrific insight into the events of the Great Panic. (That’s the term the Wessel uses.) During the full-court press of forcing the largest banks to take TARP money, it’s Merrill Lunch’s Thain that asks how taking the TARP money would affect government controls on executive compensation. As we later find out, Thain became one of the poster boys for the banks’ failures with executive compensation.

In the end, as we all know, mistakes were made. The Federal Reserve did not always get the politics, policy and market reaction right.

But what if Bernanke had not been a student of the Great Depression? What if he had not taken bold steps? I think the economy and the country would be much worse off.

Blogoversary!

anniversary present

Instead of substantive information, today’s post focuses on me and this website.

Compliance Building went public on February 12, 2009.  Since then, it looks like I have managed to get out a blog post every business day.  Sometimes, more than one.

Thanks for reading. If you haven’t done so already, you can subscribe and have my posts sent to you. It’s free, except on the Kindle. (I can’t convince Amazon to change the price.)

I started my first blog, KM Space, on this day in 2007. I set up Real Estate Space a few months later. Now I’m moving into my fourth year blogging.

Here are some statistics from the past three years:

Posts
Compliance Building 873
KM Space 614
Real Estate Space 144
Total: 1631

I hope at least some of those posts were useful to you, whether you are a subscriber or one of the other 90,000 or so visitors to Compliance Building.

Why do I do this? I publish because the information is useful to me, but I’m happy to have you along for the ride. (I put down my thoughts in more detail in the Why I Blog page.) This blog is a personal knowledge management tool.

For those of you who know me from KM Space, I will continue to publish a subset of my posts to the KMspace feed. No need to say goodbye. Unless I’m boring you.

Image is from Petr Kratochvil at publicdomainpictures.net.

California Proposes Having Placement Agents Register

Placement agents would have to register as lobbyists under legislation proposed by Assemblyman Ed Hernandez (D-West Covina). The legislation would define placement agents as lobbyists in accordance with the state’s Political Reform Act. Placement agents would have to register as lobbyists before pitching investment ideas to public pension plans in California.

It seems like the big California pension funds want access for pitches from small investment firms without their own marketing staff. So they are not following the lead of New York with its outright ban on placement agents.

The bill is sponsored by State Controller John Chiang, the California Public Employees’ Retirement System (CalPERS), and Treasurer Bill Lockyer.

The bill is straightforward, defining a placement agent as:

“any person or entity hired, engaged, or retained by, or acting on behalf of, an external manager, or on behalf of another placement agent, as a finder, solicitor, marketer, consultant, broker, or other intermediary to raise money or investment from, or to obtain access to, a public retirement system in California, directly or indirectly, including, without limitation, through an investment vehicle.”

There is an exemption for employees of external managers who spends at least one-third of their time managing the assets of their employer.

As a “placement agent” you are required to report quarterly on fees, compensation and gifts under the Political Reform Act (Government Code §81000-81016).

Sources:

Another Reason to Secure Your Wireless Network

Linksys WRT54GL

If you care about network security, you are probably well aware of the Massachusetts Data Privacy Law and its requirement to secure wireless networks.

But password-protecting a wireless router also has constitutional significance.

A child pornography suspect had no constitutionally protected privacy right in the files found on his personal computer, accessible by a neighbor who was piggybacking on his unsecured wireless network.

A neighbor stumbled across the shared files and alerted the local sheriff. After coming by to see the files, the sheriff ran license plates on cars on the street and found one nearby that was registered to a convicted sex offender. The sheriff then obtained warrants to determine the subscribers IP address and eventually to seize the computers.

Even though the defendant confessed on the spot, his lawyer tried to get all of the evidence thrown out claiming the sheriff violated the defendant’s reasonable expectation of privacy. The government disagreed and said the “defendant’s conduct in operating his home computer eliminated his right to privacy.”

The case ended up with Judge King in the Oregon’s United States District Court in the case of U.S. v. Ahrndt.

The case even quotes one of my favorite columns: The Ethicist by Randy Cohen in The New York Times: Wi-Fi Fairness Feb 8, 2004. Cohen came to the conclusion that “you may use but not overuse Wi-Fi hot spots you encounter.”

The judge steps over the issue of whether it is legal or not to access an open wi-fi hotspot, but is happy to point out that the accidental unauthorized use of other people’s wireless networks is a fairly common occurrence in densely populated urban environments.

“As a result of the ease and frequency with which people use others’ wireless networks, I conclude that society recognizes a lower expectation ofprivacy in information broadcast via an unsecured wireless network router than in information transmitted through a hardwired network or password-protected network.”

The judge also found “when a person shares files on iTunes over an unsecured wireless network, it is like leaving one’s documents in a box marked ‘take a look’ at the end of a cul-de-sac.” In the end, the defendant’s conduct in operating his software and maintaining his router diminished his reasonable expectation of privacy.

So not only, will improperly maintaining your wireless network open you to data loss and liability under privacy laws, but you diminish your constitutional protections.

Sources: