Month: June 2012

Professional Certifications for Compliance

Do you need a certification to be compliance professional?

“Need” is not the right answer. Compliance is still a diverse and complex field, where the needs can differ remarkably from firm to firm.

I’m a bit skeptical that a generic certificate program is likely to help me much with my job or professional development. Whatever benefit comes from the program needs to balance the cost of the program and the time spent at the program’s courses (and away from the actual job).

I was contemplating the Society of Corporate Compliance and Ethics programs. They offer a Certified Compliance and Ethics Professional certification. You can combine a multi-day academy offering to meet the classroom requirements and take a test the next day.

With the SEC’s registration requirement for private fund managers, I took a closer look at what the SEC requires for compliance professionals.  Rule 206(4)-7 imposes no particular requirements on a chief compliance officer.  The SEC release for the rule provides a bit a more context on the professional background requirements:

“An adviser’s chief compliance officer should be competent and knowledgeable regarding the Advisers Act…”

So it’s not a lot of context. But you need to show that you understand the Advisers Act.

I switched gears from the CCEP and took a look at the Investment Adviser Certified Compliance Professional co-sponsored by the Investment Adviser Association and National Regulatory Services. I assume this certification and designation would give me the right to say I am “competent and knowledgeable regarding the Advisers Act.” It will even give me a certification that says so.

But it’s a lot of work: 20 courses and a test.

I’m taking care of six of those course over the next two days.

Boston IA Compliance Symposium 2012

Northeastern University Batterymarch Conference Center
Second Floor of the Hilton Boston Financial District

DAY 1 – Tuesday, June 12, 2012

8:30 AM–10:30 AM (ET)

A New Look at the Advisers Act: Registration, Exclusions and Exemptions; Mid-Sized Advisers and Exempt Reporting Advisers; Private Fund Advisers and More

10:45 AM–12:45 PM (ET)

Books and Records Requirements for Investment Advisers

2:00 PM–4:00 PM (ET)

Insider Trading, Contracts and New ADV Delivery Requirements

Day 2 – Wednesday, June 13, 2012

8:30 AM–10:30 AM (ET)

Understanding Fiduciary Duties and the Sweep of the Anti-Fraud Provisions of the Advisers Act

10:45 AM–12:45 PM (ET)

Custody and Pay-to-Play Rules Plus Solicitors and Proxy Voting Requirements for Investment Advisers

2:00 PM–4:00 PM (ET)

Compliance Programs Rules and Strategies for Managing Your Annual Review

 

Compliance Bits and Pieces for June 8

These are some compliance-related stories that recently caught my attention:

Focus of SRO Hearing Shifts to Regulatory ‘Fatigue,’ SRO Burden for Small Advisors in fi360 blog

At the end of the day, both sides could claim points scored, although it was probably a Pyrrhic victory for SRO opponents. The die is cast for a favorable committee vote sometime this summer. The bill will eventually move to the Senate before gridlock sets in. In the coming weeks, H.R. 4624 will likely be tweaked in the House committee markup, such as adding restraints on costs for small advisers and possibly imposing a cost-benefits analysis on SRO rules. However, the SRO itself will remain intact and faithful to the FINRA governance model. You will not see Ketchum say he can’t live with some amendments. FINRA has plenty of room in the bill for minor concessions. What FINRA can’t afford to lose is market share.

Nasdaq Sets Aside $40 Million to Settle Facebook Claims By MICHAEL J. DE LA MERCED and NATHANIEL POPPER in NYTimes.com’s DealBook

The stock market operator said on Wednesday that it would set aside $13.7 million in cash and pay out the rest in trading rebates to settle disputes by investors arising from technical malfunctions in Facebook’s initial public offering on May 18, the biggest technology I.P.O. ever.

Dirty Dozen: Lawyer Receives Longest-Ever Sentence for Insider Trading by Bruce Carton in Compliance Week’s Enforcement Action

Unlike Raj Rajaratnam, attorney Matthew Kluger was not a billionaire hedge fund founder. Unlike Rajaratnam, Kluger pleaded guilty to the charges of insider trading, sparing the government the expense of a trial. Unlike Rajaratnam, Kluger accepted responsibility for his actions, telling the court he was “terribly, terribly sorry.” Unlike Rajaratnam, Kluger told the court he would “do anything I can to try and regain a modicum of the trust that I destroyed [with] so many people and so many institutions. On Monday of this week, however, U.S. District Judge Katharine Hayden sentenced Kluger to 12 years in prison, one year more than Rajaratnam received and the longest sentence ever handed down for insider trading.

US Hedge Fund Industry Submits White Paper on Shadow Banking to European Commission in Jim Hamilton’s World of Securities Regulation

Hedge funds do not pose systemic risk and regulatory arbitrage risks, said the US hedge fund industry, and thus bank-like regulation of these funds is not necessary. In a white paper on shadow banking submitted to the European Commission, the Managed Funds Association cautioned that bank-like regulation of hedge funds would have the unintended consequence of placing unnecessary restrictions on the activities of hedge funds to the detriment of investors. The white paper detailed a litany of shadow banking characteristics that hedge funds do not share.

New York Court of Appeals: Compliance Officer’s Whistle Blowing Not Protected by Mike Mintz in Martindale.com’s blog

The case, Sullivan v. Harnisch, Slip Op. 03574 ( May 8, 2012) arose out of the termination of a hedge fund officer after he confronted his boss about a series of improper trades. The Court of Appeals had previously recognized an exception to the at-will doctrine in Wieder v. Skala, 80 N.Y. 2d 628 (1992) which involved an attorney who was fired after reporting the unethical conduct of another lawyer at the firm.

SecondMarket weighs in on “verification” of accredited investor status by William Carleton

Quid pro quo for lifting the ban on “general solicitation or general advertising” in Rule 506 offerings, Congress requires companies should “verify” that persons purchasing are, in fact, accredited investors. The thinking is that the current system of self-policing won’t stand up to the onslaught of interest that may follow an offering hyped to the general public. That is, Congress assumes potential purchasers – whipped up into a frenzy on Twitter about a startup likely to be sold next month to Google or Facebook for a billion dollars – will be to prone to lie.



Enterprise Moves to Intrepid
Atop a barge on Wednesday, June 6, 2012, the space shuttle Enterprise was towed on the Hudson River past the Statue of Liberty on its way to the Intrepid Sea, Air and Space Museum, where it will be permanently displayed, .
Image Credit: NASA/Bill Ingalls

House Hearing on Investment Adviser Oversight Act

On Wednesday, the House Financial Services Committee held a hearing on the Investment Adviser Oversight Act. This bill would create a new self-regulatory organization for investment advisers.

Chairman Bachus opened up by offering to revise the list of exemptions. This worries me, since private funds are currently exempted.

My Congressman, Barney Frank, the ranking minority member of the Committee, pointed out that it is important not to leave state regulators out of the oversight mix. He pointed out that the entire budget of the SEC and CFTC  combined is less than J.P. Morgan’s derivative trading loss last month. The inadequate funding of the SEC is why the Committee is even considering a Self Regulatory Organization.

Congressman Barrett pulled out the Madoff failure as a complete indictment of the SEC. FINRA examined the broker-dealer side of Madoff several times and did a much more thorough job. (I will guess than “Madoff” will be mentioned many times today.)

Congressman Lynch raised concerns about the cost of an SRO on small advisers and the need to keep state regulators involved.

Congressman Scott thinks there is a big gap in investor protection because the SEC reviewed only 8% of the 12,000 registered advisers and compared this to FINRA’s 58% inspection rate in 2011.

Congressman McCarthy mentioned Madoff. She prefers the SEC but realizes the reality that Congress will not fully fund the SEC.

Current text of H.R. 4624, the “‘Investment Adviser Oversight Act of 2012”

WITNESS LIST

  • Mr. Dale Brown, President and Chief Executive Officer, Financial Services Institute
  • Mr. Thomas D. Currey, Past President, National Association of Insurance and Financial Advisors
  • Mr. Chet Helck, Chief Operating Officer, Raymond James Financial Inc., on behalf of the Securities Industry and Financial Markets Association
  • Mr. Richard Ketchum, Chairman and Chief Executive Officer, Financial Industry Regulatory Authority
  • Mr. John Morgan, Securities Commissioner of Texas, on behalf of the North American Securities Administrators Association
  • Mr. David Tittsworth, Executive Director and Executive Vice President, Investment Adviser Association

Mr. Brown supports the bill. “Consumers should not have to be regulatory experts to determine if they are being protected.” He cites data that 40% of investment advisers have never been examined. He endorses FINRA because they have the existing infrastructure.

Mr. Currey supports the bill and cites the same data as Mr. Brown.

Mr. Helck also supports the bill.

Mr. Ketchum supports the bill. (No surprise, since he is apparently hoping to expand the reach of FINRA.)

Mr. Morgan highlights the breadth and scope of oversight in Texas. He also pointed out the smaller income and scale of many advisers. He is concerned about the time and money a new SRO would impose on state registered advisers.

Mr. Titsworth is opposed and cites a long list of other organizations that are opposed to the SRO model and are critical of FINRA.  The cost of an SRO will greatly exceed the cost of just funding the SEC.

Chairman Bachus attacked the Boston Consulting group report on regulatory costs.

Mr. Morgan highlights some of the Constitutional concerns with requiring state regulators to report to an SRO.

The hearing turned into an attack on SROs and FINRA in particular. SROS are not required to submit to the cost-benefit analysis and FOIA requirements that an governmental regulator is subject to.

A Congressman asked why we think that creating another regulator will fix the problem. The Madoff failure was a regulator failure. (The SEC is hampered by a lack of funding.)

From the perspective of small advisers, the bill would subject state registered advisers to state regulatory oversight and SRO oversight.

Another pitch for FINRA came from the area of dual-registrants. They are already subject to FINRA on the broker-dealer side. By putting one organization in place as a regulator, you potentially fill a gap.

The panel’s score was 4 in favor, 2 against. Certainly, there is more to come.

Washington DC – Capitol Hill: United States Capitol  by Wally Gobetz
CC BY-NC-ND 2.0

Dawn of the Zombie Funds

The Securities and Exchange Commission has a shotgun in its hand and is looking for zombies. “We are going to take a close look at that and see whether or not there’s a problem,” said Robert Khuzami, the SEC’s enforcement director. Khuzami is the one pointing the shotgun.

Many private investment funds either prevent redemptions or have some limit on redemptions. That gives the fund manager a better ability to make a long term investment. Otherwise, the fund manager’s ability to invest will be subject to the short term withdrawals of its limited partners. A typical equity mutual fund can allow broader redemption rights because its investments in the stock market are very liquid and easy to value. At the other extreme is a real estate fund. Buying and selling real estate takes weeks and often months to settle. The business plan for a private equity fund or venture capital fund investment may run for a decade.

Private investment funds will typically have a lifespan of many years with the ability of the fund manager to extend that lifespan. During the lifespan, the investor/limited partner has no contractual right to get its money back. This limitation is magnified for investors in a fund of funds. The fund of funds manager is stuck with whatever the underlying fund manager is doing.

Although the limits on redemption are needed, that doesn’t mean that there is no abuse. A few fund managers may have let the fund turn into a zombie and merely sit back and collect management fees.

“We’re looking at zombielike funds that potentially have stale valuations,” says Bruce Karpati, co-head of the SEC’s asset-management enforcement unit. “The investigation into zombie funds is an important effort being driven across the country.”

From a compliance perspective, improper valuations are the most likely source of trouble. Overvaluing assets will increase management fees. An examination by the investors or the SEC will be a problem if the fund manager cannot document and justify the valuations. The SEC has made many public statements that it will take a close look at the valuation practices of private investment funds.

If you’re a zombie fund manager, lookout. The SEC is hunting the walking dead.

Sources:

>Letter from the Illinois State Board of Retirement to Invesco

      (.pdf) from the

Wall Street Journal

The US Private Real Estate Fund Compliance Guide

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires US advisers to private funds with at least $150 million in assets under management to register with the Securities and Exchange Commission as investment adviser. Venture capital fund managers are explicitly exempted from many aspects of registration. Real estate funds are not explicitly exempt from registration. For private real estate advisers, the key question whether to register depends on if the funds contain a sufficient amount of securities.

PEI Media’s brand new publication, The US Private Real Estate Fund Compliance Guide, is a detailed source of practical and insightful advice on SEC registration and compliance for private real estate fund managers who are registering for the first time, newly registered investment advisers, or experienced advisers who are seeking guidance on the latest regulatory reforms and changes.

Lead-edited by Charles Lerner of Fiduciary Compliance Associates, this publication addresses in detail key compliance areas including the registration process, marketing, custody, anti-corruption, setting up a compliance program, managing conflicts of interest, books and records, valuation and pricing, and advisory boards.

View the full table of contents and an extract (.pdf)

Update:

If you’re interested in the book, I have an offer for 20% off the list price. Email me at [email protected] and I can send you the code.

 

Social Media Policy Update

In the frenetic early days of social media foward-thinking companies thoughtfully sat down and crafted sensible policies to help guide employees who had suddenly turned into web publishers.The companies recognized the risks involved, whether the employee was acting recklessly, or merely writing down unacceptable material without realizing the implications. It was still a small area of risk.

Things change. Facebook has launched as a public company worth billions (although apparently not worth $100 billion). Social media is challenging traditional media in several different way.

You would think that employers should be even more aggressive about curtailing employees and making it clear what is acceptable and note. The National Labor Relations Board apparently thinks otherwise. The NLRB has released its third report on social media cases brought to the NLRB [pdf].

Good luck trying to figure out what the NLRB considers acceptable in a social media policy and what it considers unacceptable.

Confidentiality:

  • Illegal: A policy that prohibits the “release [of] confidential guest, team member or company information”.
  • Legal: A policy that cautions employees to be suspicious when asked to disclose confidential information.

Copyright:

  • Illegal: “Get permission before reusing others’ content or images”.
  • Legal: “Respect all copyright and other intellectual property laws.”

Offensive or abusive language:

  • Illegal: “Offensive, demeaning, abusive or inappropriate remarks are as out of place online as they are offline”
  • Legal: “Employees should avoid harming the image and integrity of the company and any harassment, bullying, discrimination, or retaliation that would not be permissible in the workplace is not permissible between co-workers online, even if it is done after hours, from home and on home computers”.

Accuracy:

  • Illegal: Requiring employees to be “completely accurate and not misleading”.
  • Legal: “Make sure you are always honest and accurate when posting information or news, and if you make a mistake, correct it quickly.”

Non-Public information

  • Illegal: “Do not reveal non-public information on any public site.”

So not everything a policy may work, so how about a savings clause like this?:

This policy is for the mutual protection of the company and our employees, and we respect an individual’s rights to self-expression and concerted activity. This policy will not be interpreted or applied in a way that would interfere with the rights of employees to self organize, form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, or to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection or to refrain from engaging in such activities.

The NLRB says no. A savings clause “does not cure the ambiguities in a policy’s otherwise unlawful provisions.

On the bright side, the NLRB did include the complete text of a social media policy that the NLRB considers lawful.

Sources:

NLRB Approved Social Media Policy

The National Labor Relations Board has been ruling on social media policies and making a mess of the regulatory landscape. In its May 30, 2012  report on recent social media cases (.pdf) the Board eviscerates many social media policies that resulted in adverse employment action. In the process it confuses the landscape of acceptable social media policy provisions. More to come on that in another post.

One good part of the report is that it does include the full text of a policy that the NLRB found to be lawful. Since they went to the trouble of blessing the policy, I went to the trouble of reproducing it below.

Social Media Policy

Updated: May 4, 2012

At [Employer], we understand that social media can be a fun and rewarding way to share your life and opinions with family, friends and co-workers around the world. However, use of social media also presents certain risks and carries with it certain responsibilities. To assist you in making responsible decisions about your use of social media, we have established these guidelines for appropriate use of social media.

This policy applies to all associates who work for [Employer], or one of its subsidiary companies in the United States ([Employer]).

Managers and supervisors should use the supplemental Social Media Management Guidelines for additional guidance in administering the policy.

GUIDELINES

In the rapidly expanding world of electronic communication, social media can mean many things. Social media includes all means of communicating or posting information or content of any sort on the Internet, including to your own or someone else’s web log or blog, journal or diary, personal web site, social networking or affinity web site, web bulletin board or a chat room, whether or not associated or affiliated with [Employer], as well as any other form of electronic communication.

The same principles and guidelines found in [Employer] policies and three basic beliefs apply to your activities online. Ultimately, you are solely responsible for what you post online. Before creating online content, consider some of the risks and rewards that are involved. Keep in mind that any of your conduct that adversely affects your job performance, the performance of fellow associates or otherwise adversely affects members, customers, suppliers, people who work on behalf of [Employer] or [Employer’s] legitimate business interests may result in disciplinary action up to and including termination.

Know and follow the rules

Carefully read these guidelines, the [Employer] Statement of Ethics Policy, the [Employer] Information Policy and the Discrimination & Harassment Prevention Policy, and ensure your postings are consistent with these policies. Inappropriate postings that may include discriminatory remarks, harassment, and threats of violence or similar inappropriate or unlawful conduct will not be tolerated and may subject you to disciplinary action up to and including termination.

Be respectful

Always be fair and courteous to fellow associates, customers, members, suppliers or people who work on behalf of [Employer]. Also, keep in mind that you are more likely to resolved workrelated complaints by speaking directly with your co-workers or by utilizing our Open Door Policy than by posting complaints to a social media outlet. Nevertheless, if you decide to post complaints or criticism, avoid using statements, photographs, video or audio that reasonably could be viewed as malicious, obscene, threatening or intimidating, that disparage customers, members, associates or suppliers, or that might constitute harassment or bullying. Examples of such conduct might include offensive posts meant to intentionally harm someone’s reputation or posts that could contribute to a hostile work environment on the basis of race, sex, disability, religion or any other status protected by law or company policy.

Be honest and accurate

Make sure you are always honest and accurate when posting information or news, and if you make a mistake, correct it quickly. Be open about any previous posts you have altered. Remember that the Internet archives almost everything; therefore, even deleted postings can be searched. Never post any information or rumors that you know to be false about [Employer], fellow associates, members, customers, suppliers, people working on behalf of [Employer] or competitors.

Post only appropriate and respectful content

  • Maintain the confidentiality of [Employer] trade secrets and private or confidential information. Trades secrets may include information regarding the development of systems, processes, products, know-how and technology. Do not post internal reports, policies, procedures or other internal business-related confidential communications.
  • Respect financial disclosure laws. It is illegal to communicate or give a “tip” on inside information to others so that they may buy or sell stocks or securities. Such online conduct may also violate the Insider Trading Policy.
  • Do not create a link from your blog, website or other social networking site to a [Employer] website without identifying yourself as a [Employer] associate.
  • Express only your personal opinions. Never represent yourself as a spokesperson for [Employer]. If [Employer] is a subject of the content you are creating, be clear and open about the fact that you are an associate and make it clear that your views do not represent those of [Employer], fellow associates, members, customers, suppliers or people working on behalf of [Employer]. If you do publish a blog or post online related to the work you do or subjects associated with [Employer], make it clear that you are not speaking on behalf of [Employer]. It is best to include a disclaimer such as “The postings on this site are my own and do not necessarily reflect the views of [Employer].”

Using social media at work

Refrain from using social media while on work time or on equipment we provide, unless it is work-related as authorized by your manager or consistent with the Company Equipment Policy. Do not use [Employer] email addresses to register on social networks, blogs or other online tools utilized for personal use.

Retaliation is prohibited

[Employer] prohibits taking negative action against any associate for reporting a possible deviation from this policy or for cooperating in an investigation. Any associate who retaliates against another associate for reporting a possible deviation from this policy or for cooperating in an investigation will be subject to disciplinary action, up to and including termination.

Media contacts

Associates should not speak to the media on [Employer’s] behalf without contacting the Corporate Affairs Department. All media inquiries should be directed to them.

For more information

If you have questions or need further guidance, please contact your HR representative.

Compliance Bits and Pieces for June 1

These are some compliance related stories that recently caught my attention.

The Symbolism of the Bull and the Bear by Amy Farber, New York Fed Research Library

The term “bear” dates back to 1709, when it was used as shorthand for the bearskin jobber occupation. The title “bearskin jobber” originates from a proverb highlighting the practice of selling bearskins before catching the bear. In a more modern sense, a bear is someone who expects prices to fall, thus selling stocks in hopes of a future compensation.

Reasonable Efforts May Be A Promisor’s Best Efforts by Keith Paul Bishop in California Corporate & Securities Law

Does a “best efforts” clause require a party to subordinate its interests to the other party or undertake extraordinary efforts to fulfill its obligations? Does a “best efforts” clause establish a fiduciary relationship between the parties? Is a “best efforts” requirement the same as good faith? … [T]he Court of Appeal rejected the plaintiff’s contention; holding that when a contract does not define “best efforts”, the promisor “must use the diligence of a reasonable person under comparable circumstances”.

Drachma! by David R. Kotok in Barry Ritholz’s The Big Picture

Since reintroduction in 1832, all modern Grecian drachma forms have ended badly.  The single exception WAS the exchange of the drachma for the euro in 2001. That chapter of Greek history is being re-written now.

After NLRB’s Memo, Drafting Employment Policies Got Trickier by Daniel Schwartz in Connecticut Employment Law Blog

I’ve had a little more time to digest the latest memo from the NLRB opining on what is and what isn’t appropriate for employers to have in their policies. And I’ve come to a very serious conclusion:

It’s an utter mess.

Occupy the regulatory system! by Suzy Khimm in the Washington Post

Many of the Occupy wonks once worked on Wall Street, and some of them still do. They’re former derivatives traders, risk analysts, compliance officers and hedge fund quants. They hail from Morgan Stanley, Deutsche Bank, Bear Stearns, D.E. Shaw, Merrill Lynch and JPMorgan Chase — and at least one is a former Securities and Exchange Commission regulator. They’re more likely to use a flowchart than protest signs to fight big banks. But they identify with the movement’s animating belief that America’s financial heavyweights wield too much power, and that its political leaders are too eager to do their bidding.

A Guidebook For What It Means To Know Your Customer by Joshua Horn in Fox Rothschild’s Securities Compliance Sentinel

On July 9, FINRA Rules 2090 and 2111 go into effect.  In Rule 2090, FINRA has defined what a member firm/registered representative must do to know their customers.  In addition, Rule 2111 defines suitability when it comes to investment recommendations.  For what this means for you as a practical matter, I have written the attached guidebook.  http://www.foxrothschild.com/uploadedFiles/attorneys/eBook_aGuideToAnswerThatAgeOldQuestion.pdf

In Hindsight, 37.5 Million Dollars Isn’t Cool. You Know What’s Cool? A Billion Dollars by Bruce Carton in Compliance Week’s Enforcement Action

Yes, Sean Parker’s character (played by Justin Timberlake) uttered that memorable line in The Social Network, but you know who else might be saying that soon? Irving Picard, the court-appointed trustee in the Madoff case who is tasked with recovering funds for the victims of Madoff’s Ponzi scheme.
Image of the Bull and Bear at the Frankfurt Stock Exchange is by Thomas Richter