Month: February 2009

Email Compliance 201

liveofficeLiveOffice presented a webinar on records management issues related to electronic correspondence and archiving. (I missed the Email Compliance 101 session.)

First up was  Christina Rovira, Legal Compliance Advisor at CoreCompliance & Legal Services, Inc. She pointed out that SEC and FINRA require investment advisers and broker-dealers to supervise the business activities of their representatives. There is a fiduciary duty to act in the best interest of the client.

FINRA Rule 3010 requires written supervisory procedures including an annual internal audit. This audit includes a review of correspondence (that means email too). Securities Exchange Act of 1934 Section 17a3 & 17a-4 sets standards for retention. FINRA Rule 07-59 (.pdf) addresses the supervision of electronic communications. Investment Advisers are covered under Rule 204-2 with a laundry list of requirements.

The rules are largely risk-based. So you need to focus on new hires and others under closer supervision. In reviewing the communications you want to develop a search lexicon to try to identify issues in the electronic communication. You also want to make sure you exclude privileged attorney-client documents/correspondence. It may be better to store those is a separate repository. They also emphasized that you need to search the text of the attachments as well as the email itself. Attachments generally have more problems.

What to look for?:

  • discussions of performance without disclosure
  • inclusion of testimonials
  • predictions and projections
  • references to past specific recommendations
  • unbalance discussions of risk/reward
  • disclosure of confidential client information
  • breaches of privacy policy

Archiving functionality is key. You need to be sure that you cannot modify or delete email in the archive.

Privacy is hot button right now. Regulation S-P promulgated under section 504 of the Gramm-Leach-Bliley Act implements notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about consumers. State laws are going further. There is California’s SB1 Financial Information Privacy Act and the Massachusetts has 201 CMR 17.00. That means you need to look for social security numbers, drivers’ license numbers, new account forms and client specific information.

They turned to conflicts of interest and insider trading issues. For example, you should focus on communications between the research desks and trader desks.

The panel also pointed out that you need to look as the communication tools to see whether you can capture the communication. If you can’t capture it, then they cannot use. You must affirmatively prohibit the use of the tool. For example, some social networking sites are a problem. A Blackberry is okay as long as you route it through the company’s email and capture the email in the archive.

R. Anthony Seyboth moved on to give the sales pitch for LiveOffice.

Roundtable Discusses Supply Chain Risks

compliance_week_logo

On Jan. 27, 2009, Compliance Week and Integrity Interactive presented an editorial roundtable focusing on supply chain and vendor management risks. They were kind enough to invite me to participate. There is an article about the roundtable in the next issue of Compliance Week and a copy is available on line: Roundtable Discusses Supply Chain Risks. (subscription required)

One theme from the discussion was a desire for an industry or third party standard for compliance. We all thought it would be great if some industry association or auditing firm could review vendors and give the reliable ones a seal of approval.

Dave Curan, the Chief Executive Officer of Integrity Interactive, recommended that all companies have a separate code of conduct that applies to their suppliers. Many in the audience pointed out that vendors often have there own code of conduct which precipitates a “battle of the codes.”

Is Investor Protection the Top Priority of SEC Enforcement?

Stavros Gadinis a Post-Graduate Fellow at Harvard Law School has published a paper: Is Investor Protection the Top Priority of Sec Enforcement? Evidence from Actions Against Broker.

Abstract:
Recent financial collapses have focused policymakers’ attention on the financial industry. To date, empirical studies have concentrated on corporate issuer activity, such as securities offerings and class actions. This paper makes a first step in studying SEC enforcement against investment banks and brokerage houses. This study suggests that the SEC favors defendants associated with big (listed) firms compared to defendants associated with smaller firms through two channels. First, the SEC is more likely to choose administrative rather than court proceedings for big-firm defendants, controlling for types of violation and levels of harm to investors. Second, within administrative proceedings, big-firm employees are likely to receive lower sanctions, notably temporary or permanent bars from the industry. To explain this gap, the paper first investigates whether big-firm violations are qualitatively different from small firms’ violations, but finds no support for this. This paper instead finds tentative support for the hypothesis that SEC officials favor prospective employers, as big firms headquartered in desirable locations receive lower sanctions.

Unfortunately, he does find a correlation.

“The analysis shows that, for the same violation and comparable levels of harm to investors, a big-firm defendant is on average 75% less likely than a small-firm defendant to end up in court rather than in an administrative proceeding, facing a higher likelihood of being banned from the industry as a result. More importantly, among cases that the SEC assigns to administrative proceedings, big-firm defendants are 60% more likely than small-firm defendants to receive no industry ban, controlling for violation type and harm to investors. The gap between big and small firms persists when limiting the analysis to the individual employees of such firms, who should not be shielded by public policy considerations potentially prevalent when the SEC considers enforcement against a large broker-dealer firm.”

Stavros offers the “revolving door” theory as a tentative explanation for the difference. Although, he has no basis for offering this explanation.

There could be many reasons for the difference in treatment. Larger firms could be better represented, with their legal team steering them towards a better result.

I have not gotten deep in the data to see if there are weaknesses in the way he categorized harms and treatment. I encouraged you to take a look at the study and let me know what your thoughts are.

Thanks to David Zaring for pointing out this paper in The Conglomerate.

The Stanford Fraud

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Yesterday, the SEC filed a complaint against R. Allen Stanford and three of his companies: Antiguan-based Stanford International Bank, Houston-based broker-dealer and investment adviser Stanford Group Company, and investment adviser Stanford Capital Management.

Tuesday morning, the Wall Street Journal reported on Stanford Depositors head to Antigua or Redemptions. Word had gotten out that the authorities were investigating the Stanford International Bank and depositors were nervous.

They should have been nervous when they first made the investments. According to item 31 in the SEC complaint, SIB was offering very high rates of return on CDs. On November 28, 2008 SIB was offering a 5.375% rate on a 3 year CD, while other US banks were offering rates under 3.2%. At the same time, SIB was saying the investments were safe and invested in very liquid assets. [Investing 101. The greater the risk the greater the rate of return you should expect.]

Unfortunately it looks like the problem has been in place for years. According to the SEC complaint [item 4] , SIB had identical returns in 1995 and 1996.

Bruce Carton points out that one of Stanford’s own lawyers has emerged as a key figure in the matter: Attorney for Stanford’s “Disaffirmation” of Prior Statements Was Red Flag for SEC. Bruce cites a Bloomberg report that Thomas Sjoblom, a partner at law firm Proskauer Rose doing work for Stanford’s company’s Antigua affiliate, told authorities that he “disaffirmed” everything he had told them to date.

Felix Salmon, of Portfolio.com, first pointed the problems with Stanford International Bank on February 10: What’s Going On at Stanford International Bank? Felix noted that Stanford had very consistent returns that seemed to not be impacted by any of the gyrations of the market over the last few years. Feliz also dug up a report by Alex Dalmady that highlighted the problems.

I see many similarities to the Madoff scheme. The principal was well respected. (Antigua even bestowed knighthood on him.) Investors were promised safety. Investors were shown reasonable, consistent returns. The investment technique was obscure.

Unlike Mr. Madoff, it looks like Mr. Stanford took off in one of his private jets and authorities are still looking for him.

See also:

Five Things Every Legal Practice Should Know About 2.0

At the recent LegalTech conference, Lee Bryant and May Abraham presented on Web 2.0 tool inside law firms (a/k/a Enterprise 2.0).

Lee shares his thoughts on his Headshift blog:  Five Things Every Legal Practice Should Know About 2.0:

In the session, we tried to get across just how easy it is to find meaningful use cases for the use of social tools inside a law firm, and the great potential for cost and time savings they present. We touched on a few Headshift cases studies including Allen and Overy, who have been using social tools for informal knowledge sharing successfully for over three years, and Freshfields Bruckhaus Deringer, whose wiki spaces have replaced an old intranet with increasing levels of traffic and participation. But we also looked at a classic DIY ‘mashup’ approach within the Australian firm Mallesons, who have built some fantastic applications using combinations of open source and other tools.

Mary shares her thoughts on her Above and Beyond KM blog: Tales From LegalTech: Five Things Every Legal Practice Should Know About Web 2.0:

One of the reasons I agreed to participate in this session was that I’ve begun to experience the benefits of social media in my knowledge management work and could see the great potential for its use more generally in a legal practice.  There are so many things lawyers do that require the participation of others — planning and organizing throughout a matter’s life cycle, discussions with clients and other lawyers, negotiations with counter-parties, drafting legal documents, closings, post-closing compliance and clean-up, etc.   What would happen if we could use Web 2.0 tools to shift these activities out of the current paradigm of  expensive face-to-face meetings,  ineffective conference calls held while all participants are multitasking, and asynchronous e-mail exchanges?  What would change?

There are many great uses for blogs, wikis and other 2.0 tools inside the firewall of your organization (even if it is not a law firm). These 2.0 tools are very useful from a compliance perspective.

They can be useful in drafting policies. A working group can use the wiki to collaborate in creating the initial draft of a policy. You can publish a draft policy in  a blog post and let the broader audience use the blog comment feature to provide input about the policy.

These 2.0 tools generally have great search features. They should make it easier for the people in your organization to find the relevant policy. Since you can embed links in the policies, you can link to other relevant policies. It also will enable a hub and spoke approach to policies, allowing you to cross-reference policies instead of repeating similar items in multiple policies.

Most of the concerns about web 2.0 (anonymity, nasty comments, etc.) go away when the audience is your coworkers. They are also easier to deploy and easier to use that traditional technology tools.

Mary is long-time friend from my days in knowledge management. I met Lee at the 2008 Enterprise 2. o Conference. (You can see my live blogging of Enterprise 2.0 on my old KM Space blog.) Both Mary and Lee have great insights about how these tools can help your organization.

Today’s “Web 2.0″ Webcast Materials

If you plan on joining us for today’s webcast, I wanted to make some more information available.

Twitter:

twitter_logoWe will  be monitoring Twitter before, during and after the webcast for questions and comments using the #SecuritiesD hashtag.

Slides:

Web 2.0 – Leveraging New Media to Maximize Your Securities & Compliance Practice

View more presentations from Doug Cornelius. (tags: web 2.0)

You can also download the slides at:

Instructional Videos from CommonCraft:

Sites shown on the slides:

To attend this webcast scheduled for February 17, at 2 pm Eastern, please sign up on the Securities Docket website.

Re-Post – Web 2.0: Leveraging New Media to Maximize Your Securities & Compliance Practice

On February 17, 2009, Securities Docket is sponsoring a webcast that will look at the numerous ways that securities and compliance counsel and professionals can now use web 2.0 to promote, market, and network themselves, their practices and their firms as never before.

Please join Bruce Carton, Editor of Securities Docket, and me for a webcast that will discuss the best new tools and strategies available to securities and compliance counsel and professionals.

twitter_logoWe will also be monitoring Twitter before, during and after the webcast for questions and comments using the #SecuritiesD hashtag.

To attend this webcast scheduled for February 17, at 2 pm Eastern, please sign up on the Securities Docket website.

Federal Law to Protect Attorney Client Privilege

Senator Arlen Specter of Pennsylvania introduced Senate Bill 445: A bill to provide appropriate protection to attorney-client privileged communications and attorney work product. The bill:

“Prohibits federal prosecutors and investigators across the executive branch from requesting or conditioning charging decisions on an organization’s reasonable assertion of attorney-client privilege or decision to pay of attorneys fees for an employee. This bill emphasizes that the right to counsel is chilled unless the confidential communications between attorneys and their clients are protected by from compelled disclosure. The Department of Justice has changed its rules three times in the past few years, and attorneys and clients need clarity and an unchanging rule.”

The bill would reverse the Thompson Memo and the McNulty Memo which pressured companies to waive attorney-client privilege and disclose the results of internal investigations as part of federal prosecutions for wrong-doing.

The bill was just introduced so I have no idea whether it will be passed or whether it will change during the legislative process.

Thanks to Ellen S. Podgor of the White Collar Crime Professor Blog for pointing out the proposed legislation.

Amendment to Mass. Data Privacy Law

goodwinprocter_logoGoodwin Procter has published a client alert describing the amendments to the Massachusetts Data Privacy Law (my posts on this topic).

They detail three changes.  First is pushing bck the complaince deadline to January 1, 2010. Second, theyhave lifted some of the contract amendments and certifications from vendors. Third, they clarified the  wireless encryption requirement.

The text of the amended regulations (.pdf).