New Mexico Regulates the Use of Placement Agents

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New Mexico, like New York and California is regulating the use of placement agents. The state has adopted the New York Model and banned any future investments with money managers who employ third-party placement agents. They have also instituted enhanced disclosure requirements.

The New Mexico State Investment Council policy will preclude any investments being made with money managers who use outside placement agents to market their fund. This is a complete ban of third-party marketers. Money managers who use internal marketing teams will have to disclose details of their relationships. Fees paid to attorneys, consultants, brokers, administrators and others related to investments will also require disclosure under the new rules.

The policy was enacted at the end of May, 2009. (I just realized that I forgot to write a post about it.)

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Insider Trading Enforcement

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Either the Securities and Exchange Commission has stepped up its enforcement of insider trading or it’s doing a better job of publicizing its enforcement.

Earlier this week, the SEC announced its case against Raj Rajaratnam and his New York-based hedge fund advisory firm Galleon Management LP.

On September 23, they charged Reza Saleh with insider trading in connection with Dell’s tender offer for Perot Systems. These charges were filed just two days after the date of the merger.

Last month, the SEC brought charges against Melissa Mahler for insider trading activity that happened in 2004. Ms. Mahler made the stupid mistake of lying to the feds about whether she had purchased the shares. That turns the insider trading case from a civil case to a criminal case. It’s also easier to prove, since all the feds can pull up the brokerage statement showing that she had purchased the shares.

There is also the SEC’s insider trading case against Mark Cuban. Even though the initial charges were thrown out in district court, they are appealing that decision to the Fifth Circuit Court of Appeals.

According to reports there are 10 More Insider Trading Arrests Coming Against Securities Professionals.

Perhaps the SEC is finding insider trading cases to be some easy wins? After being raked over the coals, maybe they see insider trading enforcement as an area that can get them some good publicity?

As we heard on The Wire: “We want dope on the table for the six o’clock news.

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Privacy on Both Sides of the Atlantic

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Here is the United States we are mostly talking about financial information and medical information when it comes to privacy and  data security. The state data privacy laws focus on social security numbers and financial account information. HIPPA created a federal regulatory regime for medical information.

Europe has been focused less on financial information and much more on personal information when it comes to data security. The EU regulators are much more protective of the information about where you live, your race and your religion.

I thought this quote summed up the different approaches quite nicely:

Europe: You don’t understand privacy until they come for your neighbor in the middle of the night.

That came from Kim Howard the Editor of ACC Docket through a Twitter update. Memories of the Holocaust still drive regulations in the EU.

Compliance and Solitaire

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Compare playing solitaire on your computer against using a deck of cards to play solitaire. The computer won’t let you cheat. You can’t put the card on a stack if it doesn’t belong on that stack. The rules are embedded in game’s software.

Ultimately, that should be one of the goals for compliance. You want the business rules to be embedded in the software applications that run your business processes.

Of course, for many things that is really hard to do. The rules of solitaire are simple. The rules for compliance are often not. (Maybe that means you need to simplify some of your rules.)

Richard Susskind, author of The End of Lawyers?: Rethinking the Nature of Legal Services, uses this concept in explaining the future evolution of legal services. I found it equally useful when thinking about embedding compliance into business processes.

What do you think?

One in Two U.K. Companies Block Social Networking Web Sites

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Fulbright & Jaworski, the international law firm, just published their 6th Annual Litigation Trends Survey Report. It is an independent survey of senior corporate counsel from a wide range of industry sectors.

About half of the respondents (52% of U.K. and 46% of U.S.) claim to block employees from accessing social networking Web sites. Two in five of all corporates (42%) block the most popular personal social networking sites (such as Facebook, MySpace and Bebo) and 30% block business-related networking sites (LinkedIn and Plaxo). The YouTube web site is also blocked by more than a third of companies (37%).

Only 1/3 of the companies reported that they have no restrictions on access. Technology companies are the least likely to block social networking sites, with 56% of all tech companies saying they have no restrictions on such sites.

I found it interesting that 18% of U.K. companies have been asked to produce electronic information from such web sites as part of an electronic discovery request in legal proceedings.

Melanie Ryan, a Fulbright partner, commented, “For some businesses, networking sites can provide an efficient platform for keeping up-to-date with the latest developments and maintaining a profile in their industry. For those businesses that block access, such benefits are outweighed by the possible legal risks, including the inadvertent disclosure of confidential or proprietary information and the resulting claims or fines imposed by their regulators – not to mention, the security threat to their IT systems.”

But do they have a policy in place to let employees know what they should not be doing on these sites? Or are employees just doing those bad things at home or on their iPhone?

Blocking is not an effective policy.

fullbright-findings

California Regulates Use of Placement Agents

California

California has followed the lead of New York and started regulating the use of placement agents. California’s law requires placement agents to disclose contributions and gifts made to state and local pension and retirement board members, as well as information about the placement agent’s compensation, the services provided, and any lobbying or regulatory registrations.

The California law is based on disclosure. It does not ban the use of placement agents like New York and as proposed by the SEC

The new California law (Assembly Bill No. 1584) went  into effect on October 11, 2009 when Schwarzenegger signed the bill into law. The law establishes a disclosure-based regime that requires:

  • Potential placement agents, prior to acting to solicit a potential state or local public pension or retirement system investment, must disclose campaign contributions and gifts to public pension board members during the prior 24 months.
  • Placement agents must disclose any subsequent gifts and campaign contributions to pension or retirement board members for as long as they are being paid to solicit investments.
  • Each state and local public pension system must develop and implement policies requiring disclosure of payments to placement agents by external asset managers by June 30, 2010. The new disclosures must include, at a minimum, the following information:
    • the existence of the relationship;
    • a résumé for each officer, partner or principal of the placement agent;
    • a description of compensation paid to the placement agent;
    • a description of services to be performed by the placement agent;
    • a statement of whether the placement agent, or its affiliates, is registered with the SEC, the Financial Industry Regulatory Authority  or other regulatory body; and
    • a statement of whether the placement agent, or its affiliates, is registered as a lobbyist with any state or the federal government.
  • A state or local public pension or retirement system may not enter into an agreement with any asset manager that does not agree in writing to comply with any such policy.
  • Any placement agent or external manager that violates any such policy is barred from soliciting new investments from that state or local retirement system for five years from the time of the violation.

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Web 2.0, Knowledge Management and Professional Development

Mark Frydenberg

Mark Frydenberg is teaching a new, experimental class at Bentley University’s: CS 299 – Web 2.0: Technology, Strategy, Community. I am the experiment today, telling my story to his students.

The focus of my presentation will be how I learned about Web 2.0, started using it as a knowledge management tool and how I now use Web 2.0 for my professional development.

If you want to listen and watch, there will be a Ustream video. It should be on Checkmark’s Ustream at 11:20.

We will be watching the Twitter hashtag #cs299. Send any questions you want me to ask a roomful of college students learning about Web 2.0 by using CS299 in a Twitter post. Class starts at 11:20.

I gave them this reading list to give them some background on the topics I intend to cover. You can also see what the students have been doing by checking out their Class Blog and Discussions.

Below is the slidedeck I put together for the class:

The slides are mostly visual so you may find it more useful to see my notes that go along with each slide. The slides with the notes are available at JD Supra: Web 2.0, Knowledge Management and Professional Development.

Defining An Accredited Investor

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One of the key rules for private investment funds is that their investors generally need to be “accredited investors.” This is the gateway to an exemption from the registration requirement under the federal securities laws.

The exemption is generally targeted so that experienced investors with significant financial resources and their own advisers are in less need of the Securities and Exchange Commission’s regulatory protection. In theory, they can protect themselves better than the SEC could protect them.

Who qualifies as an accredited investor? The answer is spelled out in Rule 501 of Regulation D:

  • Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity;
  • Any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act;
  • Any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act;
  • Any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958;
  • Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000;
  • Any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors
  • Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940
  • Any charitable organization, corporation, or partnership with assets exceeding $5 million (not formed for the specific purpose of acquiring the securities offered);
  • Any director, executive officer, or general partner of the company selling the securities;
  • Any natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  • Any natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;
  • Any trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes
  • Any entity in which all of the equity owners are accredited investors.

In addition to the definition of accredited investor, you also need to understand how accredited investor status relates to the common exemptions from the registration requirements of the federal securities law.

Rule 504 permits allows a business to sell up to $1 million in securities during a 12 month period to an unlimited number of non-accredited investors. Additionally, Rule 504 does not require the issuer to provide any specific disclosure to the investors, regardless of whether they are accredited.

Rule 505 allows a business to sell up to $5 million in securities during a 12 month period to an unlimited number of accredited investors, and up to 35 non-accredited investors. The disclosure requirements when selling to non-accredited investors are significantly more difficult to meet and are very similar to the disclosures required in a public offering.

Rule 506 allows a business to raise an unlimited amount of capital via the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors. In addition to the disclosure requirements for Rule 505, any non-accredited investors must also meet a “sophistication” standard, either themselves or through a qualified  representative. The status of an investor as “sophisticated” is a high standard. Investors who are merely knowledgeable about the particular industry are not necessarily sophisticated. They must have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment.

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Canada’s Foreign Corrupt Practices Act

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In the United States, the Foreign Corrupt Practices Act has received significant attention due to some recent high-profile prosecutions. Just to the North, there is the Canadian equivalent to the FCPA: the Corruption of Foreign Public Officials Act. It has not yet been a significant concern for most businesses that fall within its jurisdiction.

But that is likely to change.

The CFPOA was passed in 1999,  in ratification of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

3.(1) Every person commits an offence who, in order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official.

(a) as consideration for an act or omission by the official in connection with the performance of the official’s duties or functions; or

(b) to induce the official to use his or her position to influence any acts or decisions of the foreign state or public international organization for which the official performs duties or functions.

Canada has jurisdiction over the bribery of foreign public officials when the offense is committed in whole or in part in its territory. To be subject to the jurisdiction of Canadian courts, a significant portion of the activities constituting the offense must take place in Canada.

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