Month: March 2015

Compliance Bricks and Mortar for March 13

bricks flower wall weed

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

Protections for CCOs from Wrongful Termination by Tom Fox in the FCPA Compliance and Ethics Blog

You can consider the departure from MF Global of its Chief Risk Officer, the financial services equivalent of a CCO. As reported in a New York Times (NYT) article entitled “MF Global’s Risk Officer Said to Lack Authority” Ben Protess and Azam Ahmed reported that the company replaced its Chief Risk Officer, Michael Roseman, after he “repeatedly clashed with Mr. Corzine [the CEO] over the firm’s purchase of European sovereign debt.” He was given a large severance package and left the company. When he left, there was no public reason given. His replacement was brought into the position with reduced authority

View From the Front Lines: Do the Right Thing, Even if it is Not Convenient by Meric Craig Bloch in SCCE’s Compliance & Ethics Blog

ou are responsible for protecting your own ethical health. No investigation is worth risking your integrity and future effectiveness—not to mention your continuing employment—for the sake of determining what exactly happened in a particular case. When you get frustrated, feel unappreciated or misunderstood, or are laboring under a heavy workload, it can be tempting to cut corners and rush to judgment to close the investigation. This temptation rarely comes from poor professional values. The temptation might come from a confidence in “rough justice” so that the implicated person gets what they so richly deserve. Whatever your motivation, resist it.

Compliance Officer’s 10 Principles by Roy Snell in SCCE’s Compliance & Ethics Blog

  1. Live each day with courage
  2. Take pride in your work
  3. Always finish what you start
  4. …

No payout for pre-Dodd-Frank SEC whistleblowers – 2nd Circuit by Alison Frankel for Reuters

Stryker believed he was entitled to a reward under the whistleblower bounty program the SEC adopted after Congress passed the Dodd-Frank Act in 2010. The SEC said in 2013 that he was not because he provided the information that led to its investigation of ATG before Congress created the Dodd-Frank whistleblower program.

Central bank humor from Saturday Morning Breakfast Cereal

saturday morning breakfast cereal

Wall Weed is by Leo Reynolds

Lighting Up the Towers of Secrecy Through Anti-Money Laundering Requirements

Money Laundering: Hiding ownership and profits in offshore jurisdictions using myriad mechanisms in Switzeland, money laundering capital of the world, & other islands and nations. Favorite tool of mega-rich arch-criminal banking & corporate investors

A group of nonprofit organizations urged the Treasury Department’s Financial Crimes Enforcement Network to repeal the 2002 temporary exemption from provisions of the Patriot Act that had been granted to the real estate industry. The letter was a reaction to the Towers of Secrecy story in the New York Times.

Behind the dark glass towers of the Time Warner Center looming over Central Park, a majority of owners have taken steps to keep their identities hidden, registering condos in trusts, limited liability companies or other entities that shield their names. By piercing the secrecy of more than 200 shell companies, The New York Times documented a decade of ownership in this iconic Manhattan way station for global money transforming the city’s real estate market.

The issue with imposing anti-money laundering requirements on real estate transactions is deciding who is responsible for doing so. Is it the real estate broker? the buyer? the buyer’s attorney (if there is one)? If there is a mortgage loan, the lender is running a KYC program. But if there is no loan, there is no AML check.

You can also understand privacy concerns of many wealthy buyers. Tom Brady and Giselle Bundchen don’t need crazed fans outside their door. Besides the nuisance, there are legitimate personal safety concerns.

When it comes to anti-money laundering requirements in real estate there are really several different sectors. The Towers of Secrecy story focuses only on ultra-expensive residential real estate. When the purchase price is in the tens or hundreds of millions of dollars it is easier to impose some transaction costs and paperwork associated with anti-money laundering. It’s hard when the scale comes down to regular priced real estate that you and I could afford.

Commercial real estate already operates under the concern of anti-money laundering. There may not be any specific proscribed steps, but its still illegal to conduct business with sanctioned individuals.

These are the groups that signed the letter:

Center for Effective Government
Citizens for Responsibility and Ethics in Washington (CREW)
EG Justice
Financial Accountability and Corporate Transparency (FACT) Coalition
Global Financial Integrity
Global Integrity
Global Witness
Government Accountability Project
(GAP)
Jubilee USA Network
Missionary Oblates USA
New Rules for Global Finance Coalition
Open The Government.org
Oxfam America
Tax Justice Network USA
Transparency International
Transparency International – USA
U.S. Public Interest Research Group (PIRG)

Sources:

Cybersecurity Sweep Phase 2

ia watch ia week

According to a story in IA Watch, advisers should expect a second phase of the SEC’s look at cybersecurity. In an interview with IA Watch on March 9, Jane Jarcho, OCIE’s national associate director of the Investment Adviser/Investment Company exam program, described the current thinking behind its “phase 2” initiative around cybersecurity.

According to the story, OCIE plans to put out a sample document request letter or a list of focus areas for phase 2 using a risk alert, just as it did for phase 1. It sounds like phase 2 is still in the planning stages, but it’s likely to begin this summer.

Sources:

The SEC, Whistleblowers, and Employment Agreements

whistle blower

The Securities and Exchange Commission is taking a look at the backlash in corporate America over the increased whistleblower regime. As with all new regulations, businesses will change practices to meet the requirements and take steps to lessen the impact. According to a story in the Wall Street Journal, the SEC is looking at these practices.

The 2010 Dodd-Frank financial-reform bill granted a financial incentive for whistleblowers. A tipster can get between 10% and 30% of the penalty collected if their information leads to an SEC action. The whistleblower program handed out an award for more than $30 million last year that caught the attention of many.

The Dodd-Frank whistleblower regulations prohibit companies from interfering with employees reporting potential securities-law violations to the SEC. But the SEC did include a provision in the regulations that promoted talking to the company first.

As you might expect companies want to lessen the chances that an employee that notices a problem will go running to the SEC. A case in point is the recent claim of impropriety and then recant by a compliance officer at Cabot Lodge Securities. The specific details of those transactions were redacted in the complaint so we don’t know exactly what happened. It looks like the whistleblower did not know all of the facts and shot off an errant complaint.

Company’s counters to these problems apparently are taking many forms. I assume a few will catch the SEC’s attention and will find them unacceptable. Prohibiting an employee from telling the government about wrongdoing is going to be a problem.

Requiring an employee to turn over any compensation from government probes to the company is an interesting approach. It removes the financial incentive for participating in the whistleblower program. There are other situations where employees are required to turn over compensation to the company. Those are generally situation where the employee has done something good.

I’m sure there is a wide assortment of severance arrangements. I assume the concern is that there could be a situation where a company paid-off an employee with a rich severance to prevent the employee from reporting a problem to the government.

I’m sure there will be more from this in the future.

Sources:

Compliance Bricks and Mortar for March 6

bricks curvy

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

Compliance Leadership and “The Grey Area” by Roy Snell in SCCE’s The Compliance & Ethics Blog

When people sit in a room, especially under stress, after finding a potential problem, they tend to try to broaden the definition of the law rather than narrow it. The problem is that they should have probably tried to narrow the grey areas of the law rather than broaden them. They should have talked about the spirit of the law to help narrow the definition. They should discuss what it would look like in the local newspaper to narrow it. They should talk about their principles and ethical culture to try to narrow it.

SEC’s Ceresney: Common FCPA Violations in Pharma Industry by Jaclyn Jaeger in Compliance Week

In remarks this week at CBI’s Annual Pharmaceutical Compliance Congress in Washington D.C., SEC Director of Enforcement Andrew Ceresney highlighted three types of misconduct that most often arise in the pharmaceutical industry concerning violations of the Foreign Corruption Practices Act.

The Parameters of the Attorney/Client Privilege and Grinding it out with Anthony Mason by Tom Fox in the FCPA Compliance and Ethics Blog

Just as Mason did the hard work in Riley’s grind-it-out offense; for the attorney/client privilege to be of use to you, certain hard work must be done to establish the attorney/client privilege in the corporate context. The five prongs listed by Keltner must be fulfilled for the privilege to apply. Simply having a chat with your lawyer or even the company’s lawyer will not invoke the privilege or protect you.

Regulating the Underground: Secret Supper Clubs, Pop-Up Restaurants, and the Role of Law by Sarah Schindler in the CLS Blue Sky Blog

As manifestations of the so-called sharing economy become more common in more municipalities, local governments must consider how to handle their emergence. The goal should be devising a regulatory scheme that is easy and inexpensive enough to ensure that these creative additions to the local economy will be able to operate, but that is also protective of public health and safety.

Fed Stress Tests Find Banks Adequately Capitalized by Ryan Tracy and Victoria McGrane in the Wall Street Journal

The largest U.S.-based banks are strong enough to keep lending during a severe recession, the Federal Reserve said Thursday, a sign many banks will soon get permission to return profits to investors by raising dividends or buying back shares.

Regulatory Rollback Unlikely Despite Gallagher by Ben Dipietro in WSJ.com’s Risk & Compliance Journal

U.S. Securities and Exchange Commission Commissioner Daniel Gallagher issued a statement this week saying the accumulated effect of regulations on the financial services industry since the Dodd-Frank Act was passed have amounted to “death by a thousand cuts.” As Mr. Gallagher put it: “No regulator, as far as I know, has considered the overall regulatory burden on financial services firms when determining whether to impose additional costly regulations,” adding regulators are like “the proverbial ostrich–head firmly entrenched in the sand” when it comes to understanding how these rules divert capital from creating real economic growth. Attorneys who track SEC issues say the comments reflect the sentiments of the big banks but doubt they’ll lead to a reduction in the number and scope of such rules.

Getting Caught With IPO Fever

Stock Market Launch

A decade ago shares in an initial public offering were handed out as gifts to curry favor with business executives. The shares were all but guaranteed to pop on the opening day for an easy gain. The recent Twitter IPO had that similar feeling of a guaranteed pop. Gregory Gray thought he could make some money on this and brought investors along for the rollercoaster ride. Instead, the Securities and Exchange Commission allege that he took the investors along on a broken down merry-go-round.

Gray raise $5.2 million from investors to invest in pre-IPO shares with a targeted price of $20 according to the fund documents. It was a good bet. Twitter priced at $26, rose as high as $50 and closed on the opening day at $45.

The key was getting his hands on the shares and doing so at that price. The majority of investing world also believed that the pre-IPO shares were a good bet. So the shares would be hard to get.

According to the SEC, Gray missed his target. He only managed to purchase $1.8 million worth of shares at an average price of $23.44.

Gray also apparently missed the reason that anyone would sell the shares at a discount. Insiders’ shares are typically subject to a lock-up. Gray’s shares were subject to a restriction that they could not be sold for six months. That first day pop was meaningless for Gray and his investors.

Those facts alone are merely a missed investment opportunity. But… according to the SEC, Gray lied to his investors about how many shares he acquired and the lock-up. The SEC also alleges that moved cash among his funds to cover-up the lies.

Sources:

SEC Guidance On Gifts and Entertainment Compliance

gift box

Any story about the SEC, funds, gifts will catch my attention. Last week, the Staff of the SEC’s Division of Investment Management issued IM Guidance Update No. 2015-1 on gifts and entertainment in the fund industry.

The Guidance refers to section Section 17(e)(1), which did not seem familiar to me. The reference is to the Investment Company Act, so it’s not explicitly applicable to private funds.

The Guidance makes the point that the receipt of gifts or entertainment by fund employees may implicate Section 17(e)(1) of the Investment Company Act of 1940. Therefore gifts and entertainment should be addressed by the fund’s compliance policies and procedures. I’m not sure that’s big news to anyone in complaince.

Section 17(e)(1) generally prohibits fund employees, acting as agent, from accepting any compensation from any source for the purchase or sale of any property to or for the fund, other than regular wages from the fund. That means, a fund portfolio manager accepting any gifts/entertainment from a broker-dealer for the purchase or sale of the fund’s portfolio securities would violate Section 17(e)(1).

What to do? A fund can impose a blanket prohibition on receiving gifts or entertainment. The Guidance also suggests a pre-clearance mechanism for the acceptance of gifts or entertainment.