Updated FTC Guidelines Affect Testimonial Advertisements, Bloggers, Celebrity Endorsements

On October 5, the FTC released their updated guidelines to advertisers on how to keep their endorsement and testimonial ads in line with the Federal Trade Commission Act.

The guidelines were last updated in 1980. Clearly technology and publishing has changed significantly in the past 30 years.

The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. These examples address what constitutes an endorsement when the message is conveyed by bloggers or other “word-of-mouth” marketers. The revised Guides specify that while decisions will be reached on a case-by-case basis, the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. Thus, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service. Likewise, if a company refers in an advertisement to the findings of a research organization that conducted research sponsored by the company, the advertisement must disclose the connection between the advertiser and the research organization. And a paid endorsement – like any other advertisement – is deceptive if it makes false or misleading claims.

By the way, I don’t receive any income, advertising dollars or free product in connection with ComplianceBuilding.com. If do, I’ll let you know when I write about it. (Feel free to send that new BMW for me to review.)

The other interesting aspect of the Guidelines is how they treat celebrity endorsers. The revised Guidelines make it clear that celebrities must disclose their relationships with advertisers when making endorsements outside the context of traditional ads, such as on talk shows or in social media. I am waiting to hear the first disclaimer on Regis and Kelly.

Text of the Federal Register Noticepdf-2

National Breast Cancer Awareness Month

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October is National Breast Cancer Awareness Month. Compliance Building, like many others, has gone pink to promote and support the world’s fight against breast cancer.

After watching the NFL players sporting pink accents on Sunday, I figured I could do the same thing. So I updated the website and changed many of the colors to pink.

Since the National Breast Cancer Awareness Month began in 1985, mammography rates have more than doubled for women age 50 and older and breast cancer deaths have declined. As a result, breast cancer deaths are on the decline. Encourage the women in your life to get mammograms on a regular basis.

You can also offer financial support. I encourage you to donate to the Susan G. Komen for the Cure.

Breast cancer is the most common cancer in women in the United States, aside from skin cancer. According to the American Cancer Society, an estimated 192,370 new cases of invasive breast cancer are expected to be diagnosed among women in the United States this year. An estimated 40,170 women are expected to die from the disease in 2009 alone. Today, there are about 2.5 million breast cancer survivors living in the United States.

Thanks to the folks at Corporate Compliance Insights for giving me the idea: CCI “Goes Pink” To Support Breast Cancer Awareness Month.

More on the Private Fund Investment Advisers Registration Act of 2009

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There are three and half bills in Congress for regulating private investment funds. The Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009 are all sitting in committee. The half is the proposal from the Obama administration: Private Fund Investment Advisers Registration Act of 2009. The Obama bill has not yet been submitted.

The National Venture Capital Association has been lobbying hard (or at least effectively) to get some changes in the bill before it is submitted. There is now new language in the bill that reads:

(l) EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.—The Commission shall identify and define the term ‘venture capital fund’ and shall provide an adviser to such a fund an exemption from the registration requirements under this section. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.

Of course that still defers the very difficult task of defining a “venture capital fund” from the various types of private investment funds.

In a statement from Mark G. Heesen, president of the National Venture Capital Association:

“This proposal recognizes that venture capital firms do not pose systemic financial risk and that requiring them to register under the Advisers Act would place an undue burden on the venture industry and the entrepreneurial community. The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk.”

References:

Bits and Pieces on Compliance

Here are a few stories and items that caught my eye recently, but I have not had time to build-out to a full post:

Role of Federal Sentencing Guidelines in FCPA Cases from the WrageBlog

Given the tremendous fines imposed upon Siemens AG and Kellogg Brown & Root LLC (“KBR”) in the past 10 months, many have asked how the DOJ calculates criminal fines in FCPA cases and how statutory penalties and the United States Sentencing Guidelines (“U.S.S.G.”) interact in that calculation.

Behind the Numbers: The Anatomy of a Ponzi Scheme from The Fraud Guy

Many articles have been out in the press since Ponzi schemes have begun unraveling over the course of the last year which either describe Ponzi schemes inaccurately or really don’t help the public understand how the schemes actually work and what happens with the money.  This article (publication pending), “The Anatomy of a Ponzi Scheme” may help people understand how Ponzi schemes and their orchestrators work.

Complying With Mass. Data Security Regs Proves Costly from Melissa Klein Aguilar for Compliance Week

For those organizations already tackling the task of complying with a new Massachusetts data security regulations that are currently slated to take effect March 1, compliance is proving costly, a recent survey shows. . .  A joint survey of more than 200 members of the International Association of Privacy Professionals conducted by the IAPP and the law firm Goodwin Procter found that 33 percent of the organizations polled have already spent more than $50,000 on complying with the rules.

Massachusetts Holds Public Hearing on Information Security Regulations — Regulators Contemplating Additional Revisions in Final Rulemaking from Security, Privacy and The Law

The Massachusetts Office of Consumer Affairs and Business Regulations (OCABR) held a public hearing in connection with its promulgation of revisions to the Commonwealth’s information privacy regulations, 201 CMR 17.00. The standing-room-only crowd endured a modest, unventilated conference room in the Transportation Building to make comments on the stringent regulations. OCABR Undersecretary Barbara Anthony led the meeting with OCABR Deputy General Counsel Jason Egan and Assistant Attorney General Diane Lawton. The principal author of the original regulations, OCABR General Counsel David A. Murray, could also be seen in the audience.

Due Diligence Failure Leads to SEC Enforcement Action? from Mark J. Astarita of SECLaw.com

The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

Lehman Bankruptcy Court Declares “Bankruptcy Default” Under Swap Agreement To Be Unenforceable from Goodwin Procter

On September 17, in one such closely watched matter, U.S. Bankruptcy Judge James Peck ordered Metavante Corporation (“Metavante”), a counterparty to Lehman Brothers Special Financing (“LBSF”) in an interest rate swap transaction in which Lehman Brothers Holdings, Inc. (“LBHI”) is the credit support provider, to perform its obligations to pay quarterly fixed amounts owing under the transaction, notwithstanding the bankruptcies of LBSF and its parent. Judge Peck concluded that Metavante could not rely solely on the filing of the Lehman bankruptcy cases to refuse to make payment to Lehman while also not terminating the agreement.

Some of these have been in my personal Twitter feed (@dougcornelius) or my Posterous (Compliance Building’s Posterous).

Ruehle Decision on Internal Investigations Overturned

The Ninth Circuit stepped into a conflict between former Broadcom CFO William Ruehle and lawyers at Irell & Manella. The disagreement concerned a type of misunderstanding on whether lawyers during an internal company probe are representing a singular executive or the company itself.

At issue was whether Irell clearly explained to Ruehle that it was representing the company and anything he told them could be shared with third parties. They ended up realeing information to the government. Irell lawyers maintained they told Ruehle. Ruehle said he couldn’t remember receiving such notice.

The lower court said the law firm breached its duty of loyalty to Ruehle by revealing his statements to the government and banned the government from using those statements in its trial.

Most famously, the judge also referred the lawyers to the California state bar for disciplinary action. [See my previous post: Attorney-Client Privilege and Internal Investigations]

In this opinion penned by Judge Richard C. Tallman, the court rejected Carney’s analysis and ruled that the “overwhelming evidence” shows that Ruehle’s statements to the Irell lawyers were not made in confidence. Ruehle should have understood that lawyers investigating the stock-option issue would likely share any information he provided with the company’s auditors.

Again, its important realize that once you start including non-lawyers in your communication, you have likely waived the attorney client privilege. The Ninth Circuit focused on the point that Ruehle knew his comments were to be shared with the accountants. You can’t have an expectation that information shared with accountants will have the protection of attorney-client privilege.

if you are a corporate officer subject to an investigation, you need to be aware that statements made during an internal investigation may end up in the government’s file. You can’t always count on the attorney client privilege to protect these statements.

References:

National Cyber Security Awareness Month

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October is National Cyber Security Awareness Month.

Check out the top tips to keep you safe online:

Fair Value Accounting: What Lawyers Need to Know

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Bruce Carton of Securities Docket put together a great panel of securities and accounting experts to discuss the evolution of fair value accounting regulations and the impact of the guidelines in accounting and legal contexts.

Presenters

These are my notes from the webcast.

Fair value accounting records the estimated market value of many assets and liabilities on balance sheets. Although sometimes called “mark-to-market” but that is a misnomer. You need to estimate the value if there is no market for the asset. Fair value estimation methods were standardized by SFAS 157 (ASC Topic 820 –Fair Value Measurements and Disclosures) issued by FASB in 2007.

The standard came out just in time for the financial meltdown.

There are three types of measurement:

Level 1: Based on quoted prices in active markets for identical instruments.

  • Listed stocks, actively traded bonds.

Level 2: Based on observable (auditable) inputs used to estimate an exit value.

  • Two similarly situated buildings in a downtown real estate market.
  • OTC interest-rate swap, fair valued based on observable data such as the contract terms and the current LIBOR forward rate curve.
  • Contracts with option-like features, fair valued based on contract terms, observed volatility, interest rates.

Level 3: Based only on unobservable inputs and assumptions used by the company to estimate an exit value (i.e., where markets don’t exist or are illiquid).

  • CDOs, many financial derivatives, stock in unlisted companies.
  • Level 3 fair value estimates usually employ the company’s own models, notably variants of Discounted Cash Flow (Present Value) models.

Huge losses reported by financial firms on subprime assets led to a debate over the implementation of SFAS 157 when markets become illiquid and price inputs aren’t readily available. During the crisis, banks and investment banks were required to reduce the book value of mortgage-backed securities to reflect their current prices.Those prices declined severely with the collapse of credit markets as mortgage defaults escalated. Banks were forced to raise capital and quickly jettison some of thee securities to raise capital, further providing downward pressure on the values. So, banks and politicians have blamed fair value accounting for contributing to the crisis.

On the other side, fair value accounting gave a more realistic view of the financial health of an institution. One of the factors in the financial crisis was that parties did not trust the credit-worthiness of their counterparties. Fair value provides important information about the values of financial assets and liabilities, as compared to their historical costs (original price). There should be greater transparency allowed for better informed decisions. It also limits the ability to manipulate earnings by timing the sale of assets.

But there are downsides to fair value accounting. When markets are illiquid, fair value is a hypothetical transaction price that cannot be measured reliably. When fair values are provided by sources other than liquid markets, they are unverifiable and allow firms to engage in discretionary income management. By recognizing unrealized gains and losses, fair value accounting creates volatility in a company’s equity. This is particularly important for financial institutions because it affects their regulatory capital.

There is also the quirk of the fair value accounting for one’s own liabilities. Some banks reported gains because of a decline in quality of their debt. They recorded an income gain because they were more likely to default on their debt.

One of the issues in the financial crisis is that mortgage-back securities moved from Level 1 valuations to Level 3 valuations very quickly. Models were not established for valuations of these assets when they went toxic and cash flows dried up.

References:

Opportunities Exist to Improve DOD’s Oversight of Contractor Ethics Programs

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The Government Accounting Office released a report on the compliance and ethics programs of 57 government contractors each with yearly contracts over $500 million: Defense Contracting Integrity: Opportunities Exist to Improve DOD’s Oversight of Contractor Ethics Programspdf-icon

The report’s survey was conducted in September 2008, before the new Federal Acquisition Regulations were put in place to require compliance and ethics programs. As of December 2008, the government contractors are required to have a code of business ethics and conduct, an internal control system, and to disclose to the Government certain violations of criminal law, violations of the civil False Claims Act, or significant overpayments. In fiscal year 2008 alone, DOD’s hotline received nearly 14,000 contacts resulting in 2,000 cases referred for investigation.

The Report found two key areas where additional opportunities exist to improve DOD’s oversight. The first is in the area of verifying the existence of contractor ethics programs after contract award as part of contracting officers’ contract administration responsibility. Additional oversight of contractor ethics programs during contract administration could help ensure that contractor ethics programs are in place as intended. The second is in the area of DOD’s hotline program. The new FAR contractor ethics rules have the potential to make the DOD’s hotline program less effective by ultimately reducing contractor exposure to DOD hotline posters and diminishing the means by which fraud is reported under the protection of federal whistleblower laws. Nearly all of the major contractors surveyed in the report had in-house ethics and compliance programs that exempt them from displaying the DOD posters.

The GAO report ended with four recommendations to improve oversight of defense contractors’ ethics programs:

  1. Determine if other guidance is needed to clarify responsibility during contract administration responsibility for verifying the implementation of contractor ethics programs.
  2. Determine the need for displaying the DOD fraud hotline posters.
  3. Determine whether the hotline poster should inform contractor employees of their federal whistleblower protections.
  4. If there is a need for the DOD’s hotline posters, amend DFARS to require display posters regardless of whether contractor has its own posters.

References:

SEC’s Office of Compliance Inspections and Examinations Gets a Review

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The SEC’s Division of Enforcement was not alone in getting a report from the SEC’s Inspector General: Improvements Needed Within the SEC’s Division of Enforcement. The Office of Compliance Inspections and Examinations also got a review from the Inspector General: Review and Analysis of OCIE Examinations of Bernard L. Madoff Investment Securities, LLC. pdf-icon

For this report, the Office of the Inspector General hired FTI Consulting, Inc. to help with the review. Not to be outdone by the report on the Division of Enforcement, FTI came up with 37 recommendations, topping the other report’s 21 recommendations.

So far that’s a total of three reports and 58 recommendations from the SEC’s Inspector General as a result of the Madoff incident.

References: