Month: February 2010

Training a Diverse Workforce: Best Practices

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Having a code of ethics is not enough to ensure compliance. Training is the vital step that brings these standards to life—effective training helps ensure that key tenets are retained and applied. While organizations need to take every measure to ensure that employees take training principles and apply them to everyday situations, this oftentimes is easier said than done. What are the best practices in workforce training employed by leading organizations and their training providers? What are they training on, who’s being trained, and how is this training being delivered, communicated and tracked?

Panel:

  • Erica Salmon Byrne, Assistant General Counsel & Managing Director, Compliance Advisory Services, Corpedia
  • Stella Raymaker, Director, Ethics & Equal Employment Opportunity Compliance, Waste Management
  • Loren Becher, Manager, Compliance Training and Communications, American Express
  • Howard Sklar, Anti-Corruption Counsel, Hewlett-Packard

Stella pointed out that a large percentage of her workforce is not connected tot he company through electronic messages. There is a difference in how you need to communicate with blue collar and white collar workers. Diversity is not just ethnicity and gender. Twitter is not going to reach everybody in your company.

Loren has a diversity with job functions at American Express. They had an enormous job just cataloging all of the compliance programs throughout her organization. They created a toolkit of materials for managers to use. They wanted to make it easier for managers to send the right message.

Howard has taken a risk-based approach to training and compliance at Hewlett-Packard. There is a conflict between centralized training and distributed training. They allow district managers to assign training to employees. There is still a set of required training based on job function. Formal training is just one aspect of compliance training. It’s all of the other messages sent to employees.

The panelists emphasized the need to have  face for your compliance program. It’s important to get local champions. You don’t need them to be compliance experts. You need them to be able to spot the issue and be willing to ask the question to the expert, compliance person or legal counsel.

Howard pointed out the need to avoid “compliance training.” You need to have compliance built into business operation training. Training merely to “check the box” will not be effective.

It’s important to remember that not doing something also sends a message. If people do something wrong and do not suffer consequences that sends a message.

A practice note from the panel was to send out messages about the importance of training before the training session. Send out messages about recent failures of anti-money laundering in the news to people before they attend their anti-money laundering training. Training is expensive so you need to maximize the value to the company and the participants. Let them know the importance. Give them tools to help them better understand the issues in the context of your business.

One interesting challenge with training the board of directors is that for board members who sit on multiple boards they get training fatigue.

Doing More with Less: Compliance During Tough Economic Times

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Let’s face it: compliance is usually seen as a cost center. While there’s been some good and interesting research about the positive impact on the business of a good ethical culture and brand, that message has not permeated everywhere. So in tough economic times, those responsible for their company’s compliance programs are forced to do more with less. How do you work with a smaller budget without sacrificing the quality or effectiveness of your efforts? And what are the best companies doing to demonstrate the value of and return on their own efforts?

Speakers:

  • Ronnie Kann, Managing Director, CELC, Corporate Executive Board
  • Alexandra Wrage, President, Trace International
  • Keith Abrams, Vice President & Associate General Counsel, Bayer NA
  • Dean Krehmeyer, Executive Director, Business Roundtable Institute for Corporate Ethics
  • Jeremy Wilson, Senior Manager, Ethics Office, Cisco Systems

Resource Allocation

Jeremy looked to collaboration to help maximize resources. Start by figuring out resources you have internally to limit external expenditures. Cisco has lots internal technology resources. Take advantage of your technology resources. They leverage internal social media tools to help communicate with employees and managers. Since they own WebEx they do lots of videoconferencing.

Dean is seeing the compliance and ethics trying to push activities upward to get boards and C-level executives more involved in their programs. There is an emphasis on making the business case.

Keith pointed out that there as much interest throughout organizations to do the right thing. The board is sometimes behind.

Alexandra pointed out that in a time of decreasing budgets, legal and compliance should not have a disproportionate cut. Working with shoddy partners and illegal conduct has real business costs.You need to make compliance business-relevant.

Enhancing the Program

Look to your peers and competitors to show what others are doing. Complying with regulations are important but meeting the level of your industry is even more important when the practice exceeds regulatory standards.

Storytelling is important. Stories are one of the best ways to demonstrate corporate culture.

Risk Management

The 2008 financial crisis had a much bigger financial loss than the Enron era wave of corporate governance changes. The outrage is bigger also. But we are not seeing as many perp-walks and prosecutions. The crisis may have been more about failures of risk management than a failure of corporate governance. You still need ethics and compliance to be a fundamental part of corporate operations.

We need to make it clear that bribery is not a victimless crime. It sometimes seems that it does not have the headline issues of environmental violations. Hopefully, the SEC and DOJ prosecutions will cause companies to focus on the dangers of bribery. The result is not just fines, but people are going to jail for bribery.

Broken Trust

How can your company help restore the public trust in it? It’s a business issue. You should have your ethics and compliance program show the lead in restoring that broken trust. Show your internal employees how you are restoring trust so it will be apparent externally. Empower your employees so they know the answers.

Strategic Implications

It’s hard to tap into the business processes. Compliance is usually outside the flow of business processes. Don’t talk “at” people. You need to engage them and have a dialogue. If the issues were easy, they wouldn’t be issues.

Alexandra points out that compliance has an important role when entering new markets. There are natural allies in the markets to help deter bribery. Bribery is theft and increases the costs to consumers. She has case studies and reports that shows that you can succeed by not paying bribes. You have to go with a strong message at the beginning. After the first time you pay a bribe, the government officials will line up with their hands out.

There are lots of stakeholders who were damaged by the current corporate ethics wave. More than the Enron-era corporate ethics wave. Companies need to find the balance between innovation and compliance. You don’t want to be a barrier to new business (as long as it is ethical and compliant.)

Global Insights into the Anti-Corruption Landscape

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Dow Jones Risk & Compliance presents the results of a recent survey of current anti-corruption regulation, emerging trends and the impact on corporations around the world.The speaker was Rupert de Ruig, Managing Director, Risk and Compliance, Dow Jones & Company.

He started by looking back at 2009. He labeled the “year of the individual.” People were increasing being prosecuted and going to jail for compliance failures. There was an extension of control person to impose liability for supervisors/directors who were directly involved in the bad actions.

The United Kingdom is implementing a bribery bill. It’s expected to become law in 2010. The purpose is to make it more clear what is a bribe to make it easier to prosecute. It goes beyond the FCPA because it also covers bribes to private companies, not just public officials. It’s applicable if you have operations in the UK.

As corruption continues is some jurisdictions, companies are not entering the markets in those countries. Since the reach of the FCPA is extra-territorial, you need to be careful where you operate.

Equatorial Guinea Case Study

Rupert used this country as a case study. He pointed out the enormous wealth due to its oil reserves. That wealth has not made its way to the larger community. There is an oligarchy of officials that retain most of the wealth, largely through corruption. There is a need to better keep corrupt money out of the United States.

Bringing Corrupt Officials to Justice

652 senior government officials were arrested in 2009 for corruption, with 17 from North America, 138 from Africa, and 167 from Europe (including Eastern Europe and Russia).

Dow Jones State of Anti-Corruption

Dow Jones recently published their 2009 State of Anti-Corruption.

They found 30% of the survey takers said their company did not have an anti-corruption program.

They found that business expansion has been limited by the FCPA. They are concerned that the cost of bribery in some countries is too great. (I would guess that it is both the direct dollar cost and the cost of potential prosecution.)

A third of companies felt they lost business to a competitor who paid a bribe.

Tone at the Top: The Board’s Role

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

Understanding and supporting a prudent ethical and compliant tone throughout an organization is a core responsibility of the board of directors. Board actions are more transparent than ever to employees, investors, regulators, media and the general public. This session will discuss the challenges and keys to success for today’s boards. What are the responsibilities and associated liabilities of the Board for a company’s compliance? How can a board become actively involved in assuring employees, stakeholders and regulators that their organization is being proactive about ethics and compliance?

Speakers:

  • Thomas O’Neil, Advisor, WellCare Health Plans
  • C. Turney Stevens, Dean, College of Business, Lipscomb University
  • TK Kerstetter, President & CEO, Corporate Board Member

Turney started off by a need to focus on the tone throughout the organization. It is great to have the board of directors focused on integrity and ethics. But it is useless if that message does not reach down throughout the organization.

Thomas pointed out the need to view and get involved in company operations. They should not limit their involvement to meeting in the boardroom.

Watershed Events

The test of company’s culture is during a crisis. TK used the example of Wal-Mart, when the vice-chairman was found to be abusing gift cards. They had to set the culture and discipline that person (terminate?).

Overload

It can be overwhelming for a board to oversee all of the operations. They need to have faith in the organization. Directors need to get comfortable that the company is doing the right thing. Turney mentioned the work of Ben Heineman and his book  High Performance with High Integrity. It is important to create some metrics to measure the process and the compliance program. Heineman came out of GE and its culture of measurement.

Cutting Corners

With the pressure of hitting budgets and performance goals, how do you temper this with the need to operate with integrity. The board needs to show that the employee was a rogue and that the company had the culture, operations and monitoring in place that would normally prevent the rogue employee from succeeding. You need to show that you were a reasonably prudent director. (Of course the standard for being a reasonably prudent director is a continually increasing standard.)

You need to temper “missing the numbers” and the need for integrity. How to reconcile these competing forces? It’s tough.

Going Public

Private equity firms need to do a better job on compliance, ethics and the “tone at the top” when preparing their portfolio companies to go public. There are the regulatory issues of course. But there is an increased pressure to make the numbers in the public markets.

Working Toward a Healthier Organization: Pfizer’s Compliance Program

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from the session:

Picture of Douglas Lankler

There are a number of challenges associated with maintaining integrity as a top priority in a highly competitive global business. But sometimes, despite company’s most earnest efforts to effectively implement compliance metrics and an ethical culture, things can go wrong and subject a company to governmental scrutiny and penalties. Join us as Pfizer’s ehief compliance officer Douglas Lankler candidly discusses this reality and how corporate leaders handle the challenge of compliance in a global setting—and how to effectively address and rebound from cases on noncompliance.  Douglas M. Lankler, Senior Vice President & Chief Compliance Officer, Pfizer was interviewed by Timothy P. Erblich, Executive Vice President, Ethisphere Institute, Ethisphere.

Lankler started with Pfizer in 1999 at the start of the compliance program at Pfizer (and at the start of the compliance field). He told some of the background on the Pfizer investigation on Bextra. (see: Pfizer and Compliance.) It was a very difficult outcome for the company. It had a tremendous impact internally. Everyone talks about it and everyone wants to make sure it does not happen again.

The result was a very rapid evolution of the compliance program. As a big company, they already had a robust program. This made it better. When you have 100,000 employees and 99.99% of them are doing the right thing, that still leaves some bad employees.

Pfizer is very acquisitive so it is key to integrate the acquired companies into the Pfizer culture. Systems can keep an eye on employees. But culture helps them to make sure they make the right decision when no one is looking. They have taken the extra-ordinary measure having employees wear integrity pins. (Lankler had one on his lapel.)

The audit committee and the entire board of Pfizer are very focused on compliance issues. Of course there are more than financial issues for compliance failure at a healthcare/pharma company. Compliance failures can kill people.

For Pfizer the key is monitoring at a very granular level. The compliance program needs to dive deep into the transactions, sales levels and questions from customers. An increase is sales is great, but can also be a red flag for something bad happening.

Part of the problem with changing standards and regulations will be used to look back at prior actions. Something you did in 2004 will be evaluated with a 2010 perspective. (This is one of the reasons to stay ahead of the regulatory landscape.)

In dealing with a government investigation, it is very important to put yourself in the shoes of the prosecutor. When listening to the strategy of your outside counsel you need to listen to it from the prosecutor’s perspective. The prosecutor found a problem. You need to help them understand the company operations. They see the problem (and the jury will see the problem) in isolation. You need to show them that the company is as upset about the problem as the prosecutor.

As part of their settlement with the government, Pfizer’s CCO reports directly to the CEO. Previously Lankler reported to the general counsel. This was a big change for Pfizer. The company is highly regulated so there is a tight connection between the legal division and the compliance division. Outside of the legal division, he does not have the legal spending power of the legal department behind him. (He was No.2 in legal.) There was tension between the importance of compliance having a seat at the head table and the importance of support from the legal group.

Compliance 2010 – What’s Next?

I am attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere. Here are my notes, live from this session:

“New challenges abound amid advancing best practices, not to mention the continually escalating rate of enforcement both by U.S. regulators and overseas officials. What’s on the horizon for compliance? This roundtable discussion comprised of leading ethics and compliance officers will share their insight into what’s next, how to be prepared, and their own seasoned advice on how corporate executives can keep their organizations from making headlines for compliance or ethics transgressions.”

  • David G. Barry, Managing Editor, Financial Information Services, Dow Jones & Company
  • Grace Renbarger, Chief Ethics and Compliance Officer, Dell Computer
  • Haydee Olinger, Corporate Vice President & Global Compliance Officer, McDonald’s
  • Peter Jaffe, Chief Ethics and Compliance Officer, AES
  • Genie Gavenchak, Senior Vice President, Chief Compliance and Ethics Officer & Deputy General Counsel, News Corporation

Peter lead off. He is looking ahead for continuous improvement. They have an existing program that they think is solid. They have good relationships internally and wants to have even better relationships. They are also looking to better adapt to local cultures.

Grace pointed out that they were dealing with the economic downturn in 2009 by focusing closer in internal fraud issues. With a potential recovery in 2010, they are looking for better global compliance with a flat budget. Dell as a company is looking to put integrity and ethics at the forefront of its business.

McDonald’s is looking to stay ahead of the trends and regulations. Social media, privacy and HR issues will be important in 2010. They leverage their outside law firms to help with training. In foreign markets they own more restaurants, as opposed to franchise, so they want to set the tone for future franchisees.

News Corp. is looking at how to best operate in difficult foreign markets. They want the message that they will not play the old game. But at the same time they need to operate in those countries. (Disclosure: News Corp is one of the largest tenants of my company.)

Federal Sentencing Guidelines

The next question was the proposed amendments by the US Sentencing Commission. [Prior post: Proposed Amendments to Sentencing Guidelines] One panelist raised whether the effect of the amendments would be to make the general counsel the CCO. This would seem to be step back since many companies have been separating the GC and CCO functions. Most of the panelists report to the general counsel, but have lots of contact with their boards and CEOs.  One panelist really disliked the incorporation of document retention issues into compliance and ethics practices.  The panel also pointed out that the are just minimum standards.

Foreign Corrupt Practices Act

Each of the panelists have increased their focus on FCPA issues.  Each mentioned that they were trying to standardize their practices across the world. Each has a closer focus on countries with higher levels of corruption. (Nobody was willing to point fingers at any particular country as being the most problematic.)  They have made their foreign operations and foreign partners aware that the FCPA applies to them, even though they are not in the US.

One panelist mentioned that they are moving from lawyer based training to internal programs with greater focus on internal practices, not the law. One key is how to do all of this awareness and training in a cost effective way. In-person training is the most effective, but also the most expensive. One of the keys is leverage. Focus on training the trainers and the tone from the top. The top is not just the CEO, but the head of local operations and middle management.

Social Networking Sites

The panel started with a statistic that 25% of companies have fired someone for what they did on a social media site. News Corp. has taken this head on, but also has the problem that they own MySpace and are a media company. The key is to set boundaries to prevent damage to the company and to clarify ownership of content. McDonald’s has over a million employees and at the same time trying to use social media proactively. A big focus is on trademark and intellectual property issues.

Compliance in Mergers and Acquisitions

The key is to be part of the acquisition diligence process to vet any issues ahead of time. Integration is a bigger issue. You need to unify the codes and investigation processes so they are standard across the organization. One issue is that smaller companies tend to have many of the compliance and ethics process in one person and one process. A bigger company has it broken out into separate components.

Citizens United, Corporate Campaigning and Pay to Play

Panelists said that they already have political donations and lobbying policies in place. There is more of a focus on pay-to-play. When interacting with the government as a contractor you need to be focused on the issue.

Top Issues for 2010

  • Overall government regulation.
  • No idea. There were so many curveballs in 2009 and there will likely be more in 2010.
  • Communication and education.
  • Organizational scorecard for compliance and ethics

Global Ethics Summit 2010

Today I will be in New York attending the Global Ethics Summit 2010, hosted by Dow Jones and Ethisphere.

Assuming I can get an internet connection and power, I will be live-blogging from the summit. If not live, I will try to get my notes published later tonight on the train ride home.

Here is the agenda:

Compliance 2010 – What’s Next?

  • David G. Barry, Managing Editor, Financial Information Services, Dow Jones & Company
  • Genie Gavenchak, Senior Vice President, Chief Compliance and Ethics Officer & Deputy General Coun, News Corporation
  • Peter Jaffe, Chief Ethics and Compliance Officer, AES
  • Haydee Olinger, Corporate Vice President & Global Compliance Officer, McDonald’s
  • Grace Renbarger, Chief Ethics and Compliance Officer, Dell Computer

Working Toward a Healthier Organization: Pfizer’s Compliance Program

  • Douglas M. Lankler, Senior Vice President & Chief Compliance Officer, Pfizer
  • Timothy P. Erblich, Executive Vice President, Ethisphere Institute, Ethisphere

Tone at the Top: The Board’s Role

  • Thomas O’Neil, Advisor, WellCare Health Plans
  • C. Turney Stevens, Dean, College of Business, Lipscomb University
  • TK Kerstetter, President & CEO, Corporate Board Member

Doing More with Less: Compliance During Tough Economic Times

  • Ronnie Kann, Managing Director, CELC, Corporate Executive Board
  • Keith Abrams, Vice President & Associate General Counsel, Bayer NA
  • Dean Krehmeyer, Executive Director, Business Roundtable Institute for Corporate Ethics
  • Jeremy Wilson, Senior Manager, Ethics Office, Cisco Systems
  • Alexandra Wrage, President, Trace International

Global Insights into the Anti-Corruption Landscape

  • Rupert de Ruig, Managing Director, Risk and Compliance, Dow Jones & Company

Training a Diverse Workforce: Best Practices

  • Erica Salmon Byrne, Assistant General Counsel & Managing Director, Compliance Advisory Services, Corpedia
  • Loren Becher, Manager, Compliance Training and Communications, American Express
  • Stella Raymaker, Director, Ethics & Equal Employment Opportunity Compliance, Waste Management
  • Howard Sklar, Anti-Corruption Counsel, Hewlett-Packard
  • Nan Stout, VP, Business Ethics, Staples

Don’t Be Evil: Imagination at Work with Google and GE’s Compliance Programs

  • Brackett Denniston, Senior Vice President & General Counsel, General Electric
  • Andy Hinton, Chief Compliance Officer & Associate General Counsel, Google
  • Stephen Martin, General Counsel & Chief Compliance Officer, Corpedia

Transparency –What, How Much and When?

  • Alex Brigham, Executive Director, Ethisphere Institute, Ethisphere
  • David Andrews, Board Member, Union Bank of California
  • Nancy Zucker Boswell, President & CEO, Transparency International USA
  • Wendy Hallgren, VP, Corporate Compliance, Fluor
  • David Howard, Partner, Dechert

When the Government Comes Knocking: Trends and Tips for Dealing with Regulators and Enforcement Officials

  • Ty Cobb, Partner, Hogan & Hartson
  • Paul S. Atkins, Co-founder & Managing Director, Patomak Partners
  • Eric Feldman, Senior Advisor to the Director for Procurement Integrity, National Reconnaissance Office
  • Brian Martin, Senior Vice President & General Counsel, KLA-Tencor
  • Hank Bond Walther, Assistant Chief, U.S. Department of Justice

Does Compliance Matter?

  • Joan Meyer, Partner, Baker & McKenzie LLP
  • Jeffrey Benjamin, Vice President & General Counsel, Novartis
  • Charles Elson, Director, HealthSouth
  • Patricia Nazemetz, Chief Ethics Officer, Xerox
  • Gregory S. Nixon, Senior Vice President, General Counsel, Corporate Secretary & Chief Compliance O, DynCorp International

Hiring Lawyers for Employees Under Investigation

Your company comes under investigation and specific employees are implicated. What is the right way to get lawyers for those employees? Assuming the company is picking up the cost of the lawyers, the company usually wants to have some input on the selection.

A recent New Jersey case highlighted some of the issues involved for the company and the lawyers involved. In the Matter of the State Grand Jury Investigation (A-80-08) highlighted the ethical issues.

The court laid  it out simply that the Rules of Professional Conduct forbid a lawyer from accepting compensation for representing a client from one other than the client unless six conditions are satisfied:

  1. The client gives informed consent.
  2. There is no interference with the lawyer’s independence of professional judgment or with the lawyer-client relationship.
  3. There is no current attorney-client relationship between the lawyer and the third-party payer.
  4. Information relating to the representation of the client is protected.
  5. The third-party payer must pay the invoices in its regular course of business.
  6. Once the third-party payer commits to pay, they need to get court approval to stop.

In this case Laidlaw International, Inc. was under investigation, with a focus on three employees.  The company hired four lawyers, one for each named employee involved and a fourth for all non-target current and former employees. The retainer agreements provided that the company would be responsible for the lawyer fees, but the lawyers’ professional obligation was to the individual employees only. The lawyers were not required to make disclosures to the company, and payment of the legal fees was not conditioned on the lawyers’ cooperation with the company.

That arrangement is fairly standard. But the state attorney objected and want to disqualify the company-paid lawyers for the employees. “The attorney maintains a sense of loyalty to the party paying him,” said Deputy Attorney General Frank Muroski told the Court at oral arguments. “The lawyer must suspect that the fee payer expects to have its interests protected.”

The court denied that there is an per se conflict. But there should be safeguards in place as outlined in the six conditions.

One key practice tip for the lawyers is that there must be a careful and conscientious redaction of all detail from any billings submitted to the third-party payer.

Sources:

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.