Month: March 2010

World’s Most Ethical Companies 2010 Edition

2010 World’s Most Ethical Companies

Ethisphere Institute just announced its list of the World’s Most Ethical Companies for 2010.

Of the 100 companies on their list, 26 are new to the list. The sole winner for the real estate industry is Jones Lang LaSalle. For the financial services industry there were three companies: American Express, The Hartford and The Principal Financial Group.

A tidbit that caught my eye was the comparative performance of the companies. Ethisphere claims that the “2010 World’s Most Ethical Companies have outperformed the S&P 500 by delivering a 53 percent return to shareholders since 2005—compared to the S&P’s four percent shareholder loss over the same period.”

It’s interesting to see that these companies consistently outperformed the broader in good times and bad. I’m tempted to go back through all of the past winners to see how it would have worked out by investing in these companies over the years. (If I could just find the time to do so.)

Ethisphere’s looks at 7 categories under their “Ethics Quotient”:

  1. Corporate citizenship and responsibility (20%)
  2. Corporate governance (10%)
  3. Innovation that contributes to public well being (15%)
  4. Industry leadership (5%)
  5. Executive leadership and tone from the top (15%)
  6. Integrity track record and reputation (20%)
  7. Internal systems and ethics/compliance program (15%)

SEC Warns Firms on Muni Pay-to-Play Rules

While sources are wallowing in the exposure of a political figure in a “pay to play” scandal, I thought there might be some lessons for other investment managers as states and perhaps the SEC roll out limitations on political contributions.

The original story seemed mildly interesting.  The SEC warned firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm’s employees. The story caught my eye because MSRB Rule G-37 was identified as a model for the SEC’s proposal on pay to play.

The SEC wanted to make it clear that an “executive who supervises the activities of a broker, dealer, or municipal securities dealer is not exempt from the MSRB’s pay-to-play rule just because he or she may be outside the firm’s corporate governance structure.”

The SEC report identified JP Morgan and the Treasurer of the State of California, but did not name names. It did not take much research to find out that Phil Angelides was treasurer at the time of the incident. The Wall Street Journal identified the JP Morgan executive as David Coulter who was the vice chairman who oversaw the bank’s investment-banking business.

“On September 10, 2002, the Vice Chairman forwarded an invitation for the California Treasurer’s New York fundraising event to JP Morgan Chase’s executive committee and to its Vice President for Government Relations with a handwritten note stating that the California Treasurer is an important client and soliciting their help in raising $10,000 for the event.”

That is exactly the sort of behavior that the SEC wants to prohibit with MSRB Rule G-37 and its proposed pay to play rule.

A key takeaway from the report is that the SEC will look “to the activities, not merely the title, of an associated person in determining whether the person is” subject to the pay to play restrictions.

The story gets juicy because Mr. Angelides is currently the Chairman of the Financial Crisis Inquiry Commission. The Financial Crisis Inquiry Commission was established under the Fraud Enforcement and Recovery Act of 2009 to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Perhaps his own situation will be an example in the FCIC’s report due on December 15.

Sources:

Compliance Bits and Pieces for March 19

Here are some compliance related stories from the past week:

Securities Docket Radio: Available Free on iTunes

Securities Docket Radio is now available as a free download on iTunes! To listen to or download the debut program featuring Bruce Carton’s interview with Sanjay Wadhwa, Deputy Chief of the SEC’s new Market Abuse Unit, please click on the iTunes link below.

Schapiro Details How The SEC Would Spend 2011 Budget by Melissa Klein Aguilar in Compliance Week’s The Filing Cabinet

SEC Chairman Mary Schapiro took to the Hill this week to provide lawmakers with details on how the agency would use the President’s budget request of $1.258 billion for fiscal 2011. If enacted, the 12 percent increase over the agency’s FY 2010 funding level would allow the SEC to hire an additional 374 professionals, bringing its total staff to just over 4,200.

Dear Moody’s Corp: Type this fast 3 times by Dominic Jones in IR Web Report

Moody’s Corporation (NYSE:MCO) is one company that is in the process of sending such a notice to its registered shareholders … Now remember that people are getting this on paper and they have to manually key in that long URL –http://www.amstock.com/ProxyServices/ViewMaterial.asp?CoNumber=26180

Compliance Book of the Month: Money for Nothing by Matt Kelly in Compliance Week

The book Money for Nothing can be summed up in one sentence: The boards running corporations in America today are ineffective. But while that sentence may be accurate, it is not news to corporate compliance and governance officers, so those of you looking for a more substantive analysis or solutions to the governance problems you face might want to read elsewhere.

No, We Don’t Need to Suspend the FCPA In Haiti or Any Other Country! by the FCPA Professor

A topic in the blogosphere this week has been whether the FCPA needs to be suspended so that more U.S. companies will invest in Haiti. The spark igniting this discussion was an opinion piece on Monday by Wall Street Journal editorial board member Mary Anastasia O’Grady titled “Democrats and Haiti Telecom” (see here).

Turning Down The Information Firehose–ABA Article in Law Practice by David Hobbie in Caselines

Much of my work focuses on how attorneys can do a better job handling information….Research for the article was itself an interesting experiment in personal knowledge management. The most valuable resources were probably KM Lawyer Mary Abraham’s post “Managing the Firehose“, “PKM Professional” Harold Jarche’s posts on Sense-Making with Personal Knowledge Management, Patty Anklam on PKM as the “Third KM,” and the collection of resources compiled by a number of people on delicious at http://delicious.com/popular/pkm.

Did you “Make” an Untrue Statement under 10b-5?

The First Circuit threw out the SEC’s 10b-5(b) claim in SEC v. Tambone. This time it was the entire court after an earlier decision of a three judge panel reached the opposite decision.

The SEC alleged that James Tambone and Robert Hussey engaged in fraud in connection with the sale of mutual fund shares tied to market timing claims. The two were senior executives of a registered broker dealer, Columbia Funds Distributor, Inc. The prospectuses for the funds told investors that market timing was not permitted. Unfortunately, Tambone and Hussey permitted a number of customers to engage in market timing transactions. The SEC took the position that Tambone and Hussey were responsible for the false statements in the prospectuses since they commented on the market timing passages prior to their inclusion in the documents.

This case presents the two-part question of whether a securities professional can be said to “make” a statement, such that liability under Rule 10b-5(b) may attach, either by (i) using statements to sell securities, regardless of whether those statements were crafted entirely by others, or (ii) directing the offering and sale of securities on behalf of an underwriter, thus making an implied statement that he has a reasonable basis to believe that the key representations in the relevant prospectus are truthful and complete. The answer to each part of this two-part question is “no.”

Rule 10b-5(b), promulgated by the Securities and Exchange Commission under of section 10(b) of the Securities Exchange Act of 1934, renders it unlawful “[t]o make any untrue statement of a material fact . . . in connection with the purchase or sale of any security.” 17 C.F.R. § 240.10b-5(b).

The Tambone case turns on the meaning of the word “make” as used in Rule 10b-5(b). The SEC advocated “an expansive definition, contending that one may “make” a statement within the purview of the rule by merely using or disseminating a statement without regard to the authorship of that statement or, in the alternative, that securities professionals who direct the offering and sale of shares on behalf of an underwriter impliedly “make” a statement, covered by the rule, to the effect that the disclosures in a prospectus are truthful and complete.”

The court rejected the SEC’s position.

In 1994 the US Supreme Court held that private civil liability does not an aiding and abetting suit under Rule 10b-5 in the case of Central Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164. So private parties can only bring a suit against primary violators of Rule 10b-5. As a result of that decision, Congress amended the Exchange Act to make it clear that the SEC can bring a suit againstanyone who provides substantial assistance to a primary violator of securities laws. That is, the SEC can impose secondary liability.

The First Circuit decided that the SEC was trying to impose primary liability on Tambone and Hussey for conduct that would be a secondary violation (at most). The Court acknowledged that there is a split in the courts over the right test, but held that the facts of this case would fail both tests.

“If Central Bank is to have any real meaning, a defendant must actually make a false or misleading statement in order to be held liable [as a primary violator] under section 10(b). Anything short of such conduct is merely aiding and abetting.” Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1997).

The next step is up to the SEC. They need to decide if they will appeal to the Supreme Court and use this case to try to reconcile the law in this area.

Sources:

Bentley CS 299

I spent some time this afternoon with Mark Frydenberg‘s class at Bentley University: CS 299 Web 2.0 – Technology, Strategy, and Community.

I talked about my perspective on Web 2.0, trying to show how 2.0 tools can be used to help you organize the information you need to do your job better and develop yourself professionally. My take on web 2.0 tools is that they are great for personal knowledge management.

Web 2.0 has some obvious uses for marketing. But that’s like saying you watch television for the ads.

My slide deck is embedded below.

I used Google Docs to create the presentation. It falls far short of PowerPoint for the way I create my presentations. On the positive side, I could access the slide deck from any computer and make an edit when I had an idea.

Updates:

Implementing Compliance Practices for Social Media

I was in the audience for FINRA’s latest educational Program: Implementing Compliance Practices for Social Media.

This program addressed implementation of new guidance that FINRA recently issued in , concerning social media.

Introduction

Tom Pappas

FINRA does not endorse any particular practice and each firm will have to do things differently. The views in this webinar will not provide a safe harbor.

Summary of FINRA Regulatory Notice 10-06, Guidance on Blogs and Social Networking Web Sites

Joseph Savage

addresses five different areas:

Recording-Keeping. You need to keep copies of the information you publish, regardless of the form. FINRA is aware that it’s not easy to capture this information when using third-party sites like Facebook. (Tough. Deal with it). You can file screenshots with FINRA.

Suitability responsibilities (Notice to Members 01-23). You are better off not recommending any specific investments.

Types of interactive electronic forums. Generally, postings will be considered advertisement, but interactive postings are a public appearance (so you do not need principal approval). They felt that Twitter posts and Facebook updates would be interactive electronic forums.

Supervision of social media sites (Regulatory Notice 07-59). This should be a risk-based review.

Third-party posts (“Adoption” and “Entanglement”). Generally, third party content is out of your control. But if you arrange for third party content or endorses it, then you may be deemed to have adopted that content and treat it as if you adopted it directly.

The notice is just guidance, not a rule. FINRA is looking at a new rule. See Regulatory Notice 09-55.

Firms’ Perspectives: Is Social Media Right for Your Firm?

Doug Preston & Joanne Rodgers

Doug pointed out the tremendous growth of social media. Regardless of the form and how it works, you need to use the sites in compliance with rules. (The rules are not going to adapt to social media.)

Joanne is doing a pilot with a vendor to help with compliance. They had lots of requests from recruiting and sales to use the tools.

If you use a social media site for personal purposes, can you still list that you work for the financial services company? You can have a “business card rule.” Just post the information on your business card, with no call to action or specific information.

Is this a growth area or just customer pressure? They have no data. Sales really want to use the tools to generate business. They view it more as a lead generation instead of a sales tool. Recruiting is an avid user of social media sites, especially LinkedIn.

Nobody has much data on the cost/benefit of using social media sites.

Firms’ Perspectives: Developing Social Media Pilot Programs

Doug Preston & Joanne Rodgers

Joanne has just finished a pilot for 25 agents and 25 recruiters. She saw that most of the agents participated in Facebook, more personal than business. The recruiters mostly used LinkedIn. (She did not want to disclose the vendor she used.)

Doug has not opened up the broker side to social media. The bank side does use it. They using some of that learning to build a system for the broker side.

One issue is the level of activity and the additional resources needed to review activity. The tools may be free, but they require people resources and time.

The key is the ability to obtain and retrieve the records and to move the records into your email surveillance program. It’s also important to be able to shut off some of the functionality on social media sites.

Firms’ Perspectives: Compliance Practices Concerning Social Media

Doug Preston & Joanne Rodgers

There are lots of risks. You need to draw a line between sites you control and those run by third parties. You can stuff on a blog you host that you can’t do on a third party blog platform.

You will need new processes and policies. You will need lots of training.

FINRA is ahead of the curve compared to some other regulators in the financial services industry. Insurance regulators have not addressed the use of social media.

One of the big risks is brand/reputation risk. Each of the registered representatives becomes a brand ambassador. If they say some thing bad or embarrassing it affects the company as well as themselves.

What is FINRA looking for? If you are using social media, they will want to see: written procedures, actual supervision, records and procedures.

They did not like LinkedIn recommendations. Registered representatives should not accept the recommendations.

The static versus interactive categories is the toughest one to deal with.

Third-Party Postings

Joseph Savage, Doug Preston, Joanne Rodgers, & Joseph Savage

Questions 8, 9 & 10 in address the issue of third party posts. You probably should put in a disclaimer if you let third party posts on your site. You should monitor them to make sure there is no inappropriate material (porn, copyright). You also need to monitor complaints.

A reg. rep. “favoriting” something or “liking” something could be considered adopting that third party statement.

Program Summary

The session should be available online in a few weeks.

FACULTY

Tom Pappas (Moderator) is Vice President and Director of FINRA’s Advertising Regulation Department. The department regulates the advertisements, sales literature and correspondence used by FINRA firms. His responsibilities include rule development, management of the filing and surveillance programs and related enforcement activities. He served in the same role at NASD before its 2007 consolidation with NYSE Member Regulation, which resulted in the formation of FINRA. He joined NASD in 1984 and was previously with Davenport & Company LLC. He received a bachelor’s degree from The University of Richmond and an M.B.A. from Virginia Commonwealth University.

Douglas Preston is a Senior Vice President and Compliance Executive at Bank of America Merrill Lynch (BAML), as well as Chief Compliance Officer for Merrill Lynch Professional Clearing Corporation, the firm’s prime brokerage arm. He is also responsible for a number of other compliance areas at the firm, including serving as the Chairman of the firm’s Enterprise Electronic Communications & Media Governance Committee, and leading BAML’s Global Banking & Markets Electronic Communications & Media Compliance team, among other responsibilities. Prior to BAML, Mr. Preston was Senior Special Counsel at NYSE Regulation. In his role at the NYSER, Mr. Preston helped develop and interpret various NYSE rules. He has worked on several major regulatory initiatives, including Regulation SHO, gifts and entertainment and electronic communications (NYSE 07-59), among others. Before joining NYSE, Mr. Preston was the General Counsel and Chief Compliance Officer (CCO) for Santander Investment, SA’s New York investment bank. He was also the CCO of the investment banking arm of the Bank of Nova Scotia, and Associate General Counsel for the Securities Industry Association (now SIFMA). Prior to SIFMA, he worked in private practice, representing financial services entities. Mr. Preston received his J.D. from Fordham University School of Law. He is a member of the Bar of New York, New Jersey, Washington, DC and the U.S. Supreme Court.

Joanne Rodgers is a Vice President of Compliance at New York Life Insurance Company (NYL).  She is responsible for managing the sales material review unit, field review unit and market surveillance. Ms. Rodgers has worked at NYL in various roles of compliance for the past 15 years. Prior to joining NYL, she worked as an examiner at NASD. She is a graduate of Franklin & Marshall College with a B.A. in Business Administration.

Joseph P. Savage is a Vice President in FINRA’s Investment Companies Regulation Department. Mr. Savage specializes in a broad range of securities regulatory matters, including investment management, investment company, advertising and broker-dealer issues, and regularly appears at conferences regarding these issues. Prior to joining FINRA, he was an Associate Counsel with the Investment Company Institute and an attorney with the law firms of Morrison & Foerster LLP and Hunton & Williams. Mr. Savage also served as a judicial law clerk for United States District Judge John P. Vukasin of the Northern District of California. Mr. Savage holds a bachelor’s degree from the University of Virginia, a master’s degree from the University of California, Berkeley, and a J.D. from the University of California, Hastings College of the Law, where he served as Note Editor of the Hastings Law Journal.

Happy Evacuation Day!

March 17th may mean Saint Patrick’s Day to most of you. Here in Boston it’s Evacuation Day.

The holiday commemorates the evacuation of British forces from the city of Boston following the Siege of Boston, early in the American Revolutionary War. (It’s just a coincidence that it coincides with Saint Patrick’s Day.)

George Washington fortified Dorchester Heights in early March 1776 with cannons. Major General Henry Knox had captured the cannons from Fort Ticonderoga. The garrison and navy under the command of British General William Howe were threatened by these cannon positions. Howe had to decide between attack and retreat. Howe chose to retreat and withdrew from Boston and sailed off to Nova Scotia on March 17.

George Washington had his first victory of the Revolutionary war.

Dodd’s Solo View on Private Investment Funds

Senator Dodd

Senator Dodd did not forget about private investment funds. Tucked into page 366 of his 1366 page Restoring American Financial Stability Act of 2010 is the Private Fund Investment Advisers Registration Act.

This is largely the same language in the Private Fund Investment Advisers Registration Act of 2009 contained in Dodd’s draft Restoring American Financial Stability Act of 2009. He circulated that draft back in November to start negotiations with Republicans.

Venture Capital Fund Advisers

There is an exemption from registration for the “provision of investment advice relating to a venture capital fund.” The bill gives the SEC the responsibility for defining a “venture capital fund.”

Private Equity Fund Advisers

Unlike the bill passed by the House, Dodd proposes an exemption from registration or reporting requirements with respect to advice given to private equity funds. The SEC is tasked with defining the term “private equity fund.”  Unlike venture capital funds, private equity funds will be subject to SEC record-keeping requirements to the extent the SEC determines it is “necessary and appropriate in the public interest and for the protection of investors.”

State versus Federal Registration of Investment Advisers

Section 410 of the bill raises the federal registration level to $100 million from $25 million. So investment advisers and funds of less than $100 million will be subject to state regulators instead of federal regulators. David Tittsworth, executive director of the Investment Adviser Association, said the change would shift about 4,200 of the 11,000 money managers now registered at the SEC to state regulation.

Accredited Investors

The Dodd bill would change the threshold for “accredited investor.” Currently, the threshold is $200,000 income for a natural person (or $300,000 for a couple) or $1,000,000 in assets. The SEC would have the power to increase those levels  as “appropriate and in the public interest, in light of price inflation since those figures were determined.”

The Comptroller General is also directed to study the financial thresholds for investor eligibility in private funds.

Regulation D Offerings

Separately in the bill, Senator Dodd is proposing to tinker with exemption from registration under Rule 506. Section 926 of his bill, gives the SEC the power to designate certain Rule 506 offerings to not be “covered securities.”  That would get the states more involved in the review and regulation of private offerings, including private fund offerings.

Now What?

This bill still has a long way to go in the Senate. Most reports indicate that private funds are not one of the hotly contested issues in the bill. Assuming the Senate passes the bill, they will need to negotiate the differences between the House and Senate. Assuming it passes, it looks like a big chunk of work would be dropped onto the SEC to define the fund types.

Sources:

Dodd Goes Solo

Senator Dodd

After months of negotiation, Senator Dodd gave up on his negotiations with Republicans and decided to introduce a financial industry reform bill all by himself.

To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Now what?

Well, there’s a lot of reading. The Restoring American Financial Stability Act of 2010 is a whopping 1,336 pages. That’s a hundred or so pages longer the House’s Wall Street Reform and Consumer Protection Act passed in December.

Apparently none of the 10 Republicans on the Senate Banking Committee endorse Dodd’s Restoring American Financial Stability Act of 2010. I assume he can muster the Democrats on the committee to pass the bill. Then he has to get the votes lined up in the full Senate. That will likely mean having to make some changes to the bill. Assuming he can gather that many votes, then they need to negotiate a compromise law with the House so that the bill is in a final form that both legislative bodies will approve (or vote down).

I wouldn’t get too attached to anything in the Restoring American Financial Stability Act of 2010. One thing that’s certain: the bill will look different.

How will it be different? I’m not even going to guess.

Sources: