Category: Compliance Bricks and Mortar

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

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Board Members Should Take Note — Delaware Supreme Court Issues Important Decision on Caremark Compliance Standard
by Michael Volkov
Corruption, Crime & Compliance

The Delaware Supreme Court returned to this issue in a recent case – Marchand v. Barnhill et al, HERE, a case involving Blue Bell Creameries  and a listeria outbreak.  The facts, while compelling, involve a serious health and safety issue but nonetheless has significant implications for overall ethics and compliance functions. 
In 2015, Blue Bell, a large ice cream manufacturer, experienced a listeria outbreak, which caused the death of three individuals.  Blue Bell had to recall its products and shut down production.  Shortly after that, Blue Bell suffered a “liquidity crisis,” and the company was forced to secure financing that caused a fall in its stock price.  A stockholder brought a derivative suit alleging that the directors breached their fiduciary duty of loyalty under Caremark.  The trial court granted defendants’ motion to dismiss finding that plaintiffs did not plead any facts to support the claim that the board “utterly failed to adopt or implement any reporting and compliance systems.”

https://blog.volkovlaw.com/2019/08/board-members-should-take-note-delaware-supreme-court-issues-important-decision-on-caremark-compliance-standard/

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Diversified Portfolios Do Not Reduce Competition
by Barbara Novick, BlackRock, Inc.
Harvard Law School Forum on Corporate Governance and Financial Regulation

Theories about the incentives of company executives due to common owners fail to consider the metrics by which the performance of executives is measured and the composition of pay packages, which is primarily in company stock. For example, according to their 2018 annual proxy filing, American Airlines’ CEO has had 100% of his direct compensation paid in the form of equity since 2015. Further, airline executives’ performance is measured by metrics such as pre-tax income, margin improvement, and stock price—all measures driven by own-company performance. 

https://corpgov.law.harvard.edu/2019/08/07/diversified-portfolios-do-not-reduce-competition/

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Corzine Hedge Fund Firm Granted SEC Registration With Limits
by Limes Weiss
Bloomberg

The SEC order includes “trading parameters” that bar JDC-JSC from engaging in proprietary trading and require it to have a “reasonable basis” to expect that, under normal conditions, each of its funds could be “orderly liquidated” within five trading days. That could restrict Corzine to trading in only the most liquid of markets, such as those for currencies and large-cap stocks, said David Tawil, co-founder of Maglan Capital, a New York-based hedge fund.

https://www.bloomberg.com/news/articles/2019-08-06/corzine-s-hedge-fund-firm-granted-sec-registration-with-limits?

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Final Volcker Rule Regulation Eases Hedge Fund and Private Equity Fund Restrictions
by Deborah J. Enea and Elizabeth R. Glowacki

The final rule also eased the Volcker Rule’s restrictions on affiliations between investment advisers and hedge funds or private equity funds. Investment advisers can have the same name or a variation of the same name as the hedge funds and private equity funds that they sponsor and in which they invest, subject to the following conditions: …

https://www.pepperlaw.com/publications/final-volcker-rule-regulation-eases-hedge-fund-and-private-equity-fund-restrictions-2019-08-01/

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Chief compliance officer liability and the opioid epidemic
by Jaclyn Jaeger
Compliance Week

In a period of three months, two chief compliance officers have been charged for their individual roles in the opioid epidemic—a clear indication the Department of Justice continues to expand the scope of prosecutions to those who fail in their compliance responsibilities.

https://www.complianceweek.com/regulatory-enforcement/chief-compliance-officer-liability-and-the-opioid-epidemic/27512.article#.XUhsorrCtdg.twitter

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If you’re reading this on Friday morning, I’ll be on my bike riding from New York border to Sturbridge for the unofficial Day Zero ride of the Pan Mass Challenge. The official start is Saturday morning, when I’ll ride from Sturbridge to Bourne, and then from Bourne to Provincetown on Sunday. That will be almost 300 miles of bike riding, surrounded by thousands of other riders raising money to fight cancer.

Thanks to so many of you who read Compliance Building for your generous donations and kind words. I have my donor list and those kind words printed and tucked into the back pocket of my jersey. I’ll keep them with me over the three days of cycling I have to complete this weekend.

If you have not contributed, there is still plenty of time to make a donation to fight cancer. I love seeing donation messages pop up while I’m riding. Donate here: http://pmc.org/egifts/DC0176

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As for compliance-related matters, here are some of the stories that recently caught my attention.

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Let’s Ride, Walmart’s Compliance Chief (and Cyclist) Urges Company Employees
by Sue Reisinger 
Law.com

Daniel Trujillo, Walmart Inc.’s executive vice president and global chief ethics and compliance officer, is a triathlete who can often be seen riding his bike to work. Now Walmart is using Trujillo’s love for the sport by having him lead its new bike-to-work program.
…
He recently blogged about the program, noting that only a small group of employees, including several in-house counsel, now bike to the office in Bentonville, in northwest Arkansas. The company already supports a popular “bike-to-work Fridays” concept, and the goal of the new program is to have 10% of the home office workforce riding bikes to work by 2023.

https://www.law.com/corpcounsel/2019/07/30/lets-ride-walmarts-compliance-chief-and-cyclist-urges-company-employees/?slreturn=20190701073035

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When Sanctions and Cybersecurity Collide
By Matt Kelly
Radical Compliance

Compliance professionals talk constantly these days about cybersecurity, third-party risk, and sanctions compliance. Now we have an example from the news that is one headache-inducing brew of all three — and also, I fear, a harbinger of compliance and risk challenges to come. 
The company in question is Hikvision, a Chinese maker of security cameras. Last year Congress passed the National Defense Authorization Act, which bans the use of Hikvision cameras by U.S. government agencies, for fear that the Chinese government might hack into the cameras to spy on American interests. 

http://www.radicalcompliance.com/2019/07/31/when-sanctions-cybersecurity-collide/

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Disclosure and Notification Considerations When Managing a Crisis
by Cleary Gottlieb Steen & Hamilton LLP
NYU Law’s Compliance & Enforcement blog 

One of the first things a company should consider in a crisis is whether disclosure to authorities is mandatory.  Mandatory disclosure obligations vary widely across legal regimes and may be imposed by Congress, government regulators, self-regulatory bodies, or even stock exchanges.  For example, regulated entities may face immediate disclosure obligations to report violations of financial laws to FINRA (Rule 4530) or annual disclosure obligations to report misconduct to the CFTC in the entity’s chief compliance officer report (although earlier disclosure of a crisis may be advisable).  Often the relevant laws, rules, and regulations do not specify what information must be disclosed, injecting substantial discretion into what is otherwise a mandatory obligation.

https://wp.nyu.edu/compliance_enforcement/2019/07/31/disclosure-and-notification-considerations-when-managing-a-crisis/

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

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Proskauer Launches Private Equity SEC Enforcement Tracker

The tracker contains key information from the actions, including summaries of key issues, settlement terms, and relevant statutory provisions.  The tracker will be an important resource for us and our clients, providing us with quick access to comparable cases and allowing us to identify important enforcement trends impacting private equity advisers as they develop.  We are also making available summary information from the database for all SEC enforcement actions against private equity advisers over the last 6 years.
Click here to view the tracker.

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Upcoming Deadline for Form SHL – Foreign Ownership of US Securities
Ropes & Gray

Very generally, Form SHL is required to be completed by, among others, U.S. resident issuers (including pooled investment vehicles such as private investment funds, hedge funds, mutual funds and other similar commingled vehicles), the securities of which are held by foreign residents, to the extent the total fair value of such securities equals or exceeds $100 million.¹Investment advisers and managers typically file Form SHL on behalf of the U.S. resident issuers they advise.² As a result, if a U.S. fund has foreign investors with a value of $100 million or more, the fund’s investment adviser will need to complete a Form SHL.

https://www.ropesgray.com/en/newsroom/alerts/2019/07/Upcoming-Deadline-for-Form-SHL-Foreign-Ownership-of-US-Securities

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Tipper X: The Wall Street Informant
by Andrew Thomas
The Epoch Times

Hardin told them that insider trading was rampant in the industry. The agents gave him their card, and told him that he had an opportunity to build bigger cases. He called them the next day, and told them he would help.
The agents told him that he was going to have to wear a wire to record conversations with anyone who was involved in the insider trading game whenever he had the opportunity. Hardin went home, and made a list of who he felt were the worst of the worst.

https://www.theepochtimes.com/tipper-x-the-wall-street-informant_3007726.html

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Assessing Risks and Potential Liability in Responding to a Crisis
Cleary Gottlieb Steen & Hamilton LLP

A company faced with a crisis needs to act quickly to assess and determine the scope of any potential liability in order to guide its first response and frame the forthcoming investigation.  Issues overlooked in the early phases of an investigation could prove very costly down the road, limiting options or potentially subjecting a company to greater penalties.  Understanding the full scope of potential liability early in an investigation allows a company to develop a plan of action through consideration of how such penalties can potentially be mitigated and whether it is sensible to set aside reserves for potential fines and other expenses associated with an investigation.  The severity of such penalties may also shed light on who needs to be informed, including for example, whether any public disclosures will be necessary. 

https://wp.nyu.edu/compliance_enforcement/2019/07/22/assessing-risks-and-potential-liability-in-responding-to-a-crisis/

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Cryptocurrency Investor Gets Second Chance to Show AT&T Liability in $24M Hack
by Nathan Solis
Courthouse News Service

Hackers attacked blockchain and cryptocurrency investor Michael Terpin’s cellphone on two separate occasions, according to his initial complaint filed in the Central District Court of California in August 2018. Following the hacks, Terpin says he told AT&T he was also the victim of a SIM card swap.
The relatively low-tech hacking technique involves a hacker posing as a customer and asking the mobile carrier to transfer the phone number to a separate phone SIM card, which then gives the hacker access to the victim’s online accounts – including bank accounts and cryptocurrency wallets used to store digital currency.

https://www.courthousenews.com/cryptocurrency-investor-gets-second-chance-to-show-att-liability-in-24m-hack/

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Kansas Supreme Court limits the extraterritorial application of state’s Blue Sky law
by Brad Rosen
Jim Hamilton’s World of Securities Regulation

The Kansas Supreme Court reversed the criminal convictions of the principals of a Kansas limited liability corporation for selling or offering to sell unregistered securities and committing fraud in selling or offering to sell securities. The prosecution had alleged that jurisdiction applied even though the defendants used intermediaries residing in California who made sales presentations in California and sold the securities from California to individuals who did not reside in Kansas (State v. Lundberg, July 19, 2019, per curiam).

https://jimhamiltonblog.blogspot.com/2019/07/kansas-supreme-court-limits.html

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Gibson Dunn Offers 2019 Mid-Year Securities Enforcement Update
by Mark K. Schonfeld and Amy Mayer
The CLS Blue Sky Blog

The first half of 2019 has seen a continuation of the Securities and Exchange Commission’s emphasis on protecting the interests of Main Street investors. Chairman Clayton reiterated these themes in his testimony in May before the Financial Services and General Government Subcommittee of the U.S. Senate Committee on Appropriations.[1] In addition to the no less than 43 references to Main Street investors, the Chairman’s testimony highlighted: (1) the Retail Strategy Task Force, formed in 2017, to use data-driven strategies to generate leads for investigation of industry practices that could harm retail investors, as well as (2) the mutual fund share class initiative as an example of returning funds to retail investors through a program to incentivize self-reporting and cooperation. To be sure, the Commission brought a number of enforcement actions focusing on various offering frauds, often with themes related to some form of cryptocurrency or digital asset.[2] The Chairman also noted in his Congressional testimony that the Commission’s FY 2020 budget request contemplates adding add six positions to the Commission’s investigations of conduct affecting Main Street investors.

http://clsbluesky.law.columbia.edu/2019/07/24/gibson-dunn-offers-2019-mid-year-securities-enforcement-update/

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Taking Insider Trading Too Far: What’s Left of the ‘Personal Benefit’ Requirement After ‘U.S. v. Martoma’?
by Benjamin Gruenstein and Miriam Rosenbaum 
New York Law Journal

Courts in the Southern District of New York are now instructing juries that intent to benefit the tippee is sufficient to establish the personal benefit requirement. In United States v. Chow, 17-cr-667 (S.D.N.Y. 2018), a case in which a partner of a private equity firm provided a material, nonpublic tip to his friend and business associate, the court instructed the jury on the personal benefit test as follows: …

https://www.law.com/newyorklawjournal/2019/07/23/taking-insider-trading-too-far-whats-left-of-the-personal-benefit-requirement-after-u-s-v-martoma/?slreturn=20190625132356

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If you enjoy reading Compliance Building, please consider throwing a few dollars to a charity I support: the Pan Mass Challenge. It’s a bike ride across Massachusetts to raise money in the fight against cancer. 100% of your contribution goes to the Dan-Farber Cancer Institute. I could use your support when I start the ride next weekend: https://profile.pmc.org/DC0176

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

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REIT Manager Overpaid Itself When Calculating Incentive Fee
Cipperman Compliance

A large REIT manager, together with its CEO and CFO, agreed to pay over $60 Million in disgorgement, interest and penalties for inflating incentive fees and taking reimbursement for significant expenses.  The SEC asserted that the defendants, contrary to disclosures and agreements, used their insider positions to calculate incentive fees in a manner that unjustly enriched themselves over the investors to whom they owed a fiduciary duty.  The SEC also charged the defendants with collecting millions in expense reimbursements as part of various merger transactions.  The SEC accused the defendants of securities fraud and falsifying books and records.

https://cipperman.com/2019/07/18/reit-manager-overpaid-itself-when-calculating-incentive-fee/

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SEC Staff Statement on LIBOR Transition

The expected discontinuation of LIBOR could have a significant impact on the financial markets and may present a material risk for certain market participants, including public companies, investment advisers, investment companies, and broker-dealers.  The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner.[6]  The Commission staff is actively monitoring the extent to which market participants are identifying and addressing these risks.

https://www.sec.gov/news/public-statement/libor-transition

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Summer compliance reading for boards of directors
by Jeff Kaplan
Conflicts of Interest Blog

A recent post by attorneys at the Sullivan & Cromwell law firm on the blog of the Harvard Law School Forum on Corporate Governance and Financial Regulation examined an important decision issued last month by the Delaware Supreme Court which “reversed the dismissal of a stockholder derivative lawsuit against the members of the board of directors and two officers of Blue Bell Creameries USA, Inc., a leading manufacturer of ice cream products. The lawsuit arose out of a serious food contamination incident in 2015 that resulted in widespread product recalls and was linked to three deaths. The Delaware Supreme Court, applying the ‘duty to monitor’ doctrine enunciated in In re Caremark International, Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), and noting the very high hurdle to claims under it, nonetheless ruled that the plaintiff had adequately alleged the requisite bad faith by the members of the Blue Bell board. 

http://conflictofinterestblog.com/2019/07/summer-compliance-reading-for-boards-of-directors.html

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How Good Training Finds Its Wings
by Matt Kelly
Radical Compliance

[O]ne of the biggest challenges for compliance training is how to keep the material fresh, so employees pay attention to the lessons you want to impart. That’s true of the FCPA, social media policy, or collusion, just as much as it’s true of flight safety videos. We go through the lessons once or twice, absorb the main points, and then start to tune out during future lessons. 
Compliance officers know this is true. How often do we need to be told that in the event of a water landing, we should pull on the red tube to inflate our safety vest? Or that the nearest exist might be behind us? Or that we should adjust our own oxygen mask before helping the child next to us? 

http://www.radicalcompliance.com/2019/07/15/how-good-training-finds-its-wings/

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Political Connections and Insider Trading
By Thuong Harvison
The CLS Blue Sky Blog

I use political contributions as a proxy for political connections. Corporate insiders can build these connections personally (i.e., individual contributions) or through their firms (i.e., PAC contributions). For each publicly traded firm and each of its corporate insiders, in each election cycle from 1988 to 2016, I compute political connection measures based on political donation history as well as the power of the political candidates supported. Overall, about 10 percent of the firms make some political contributions to at least one candidate in an election cycle. Firms also support more candidates than do individual insiders. While a typical firm donates to about 50 candidates in each cycle, a typical insider donates to only two candidates. To examine the trading activities of these insiders, I use the sample of all their trades from 1988 to 2016.

http://clsbluesky.law.columbia.edu/2019/07/12/political-connections-and-insider-trading/

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Please support my Pan Mass Challenge ride to fight cancer. On the first weekend in August, I’ll be riding across Massachusetts to raise money for cancer research. I could use your support: https://profile.pmc.org/DC0176

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

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Allison Herren Lee Sworn In As SEC Commissioner

Allison Herren Lee was sworn into office on July 8 as an SEC Commissioner.
Ms. Lee was nominated to the SEC by President Donald J. Trump and unanimously confirmed by the U.S. Senate.
“Allison’s expertise in securities law, including from her prior tenure at the Commission, will be invaluable to our efforts to advance the interests of investors and our markets,” said Chairman Jay Clayton. “Many of Allison’s former – and as of Monday, current – colleagues have expressed to me their support for Allison’s return. On behalf of all of my colleagues, Commissioners and staff alike, I am pleased to welcome her back.”
“I’m honored to return to the SEC and to work with the dedicated public servants on the staff, and my fellow Commissioners, to carry out the SEC’s critical mission,” Commissioner Lee said.

https://www.sec.gov/news/press-release/2019-121

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D&O Liability Insurance: Hazards for the CCO
Janaya Moscony and Julie DiMauro 
The FCPA Blog

Whether a chief compliance officer (CCO) is required to be indemnified by a company depends on the state of incorporation, so it is important to make sure that the CCO is properly recognized as a corporate officer of the insured entity.
Some states require that CCOs need only be appointed in the bylaws of the insured entity as a corporate officer, while other states might additionally require that the CCO also be appointed as a corporate officer in state filings.

http://www.fcpablog.com/blog/2019/7/10/do-liability-insurance-hazards-for-the-cco.html

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Statement Regarding Offers of Settlement
SEC Chairman Jay Clayton

When the Securities and Exchange Commission is considering filing (or has filed) an action alleging violations of the federal securities laws, it often is in the public interest to pursue a timely, reasonable and consensual resolution of the matter. The Commission has long recognized that an appropriately-crafted settlement can be preferable to pursuing a litigated resolution, particularly when the settlement is agreed early in the process and the Commission obtains relief that is commensurate with what it would reasonably expect to achieve in litigation. In plain language, the sooner harmed investors are compensated, the offending conduct is remediated, and appropriate penalties are imposed, the better.

https://www.sec.gov/news/public-statement/clayton-statement-regarding-offers-settlement

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Revisiting Compliance Program Reporting Relationships
by Michael W. Peregrine
The CLS Blue Sky Blog

Corporate leaders may wish to revisit the important yet sensitive topic of reporting relationships in compliance programs following the release of new guidance from the Department of Justice’s Criminal Division.
That guidance, entitled Evaluation of Corporate Compliance Programs[1], (The “New Guidance”) discusses in detail the three main thematic questions that prosecutors should apply in evaluating corporate compliance programs and how those questions can be used to elicit information as to compliance program adequacy and effectiveness. One of those thematic questions is whether the corporation’s compliance program is being implemented effectively. The autonomy of compliance program leadership is one of several cited indicia of effective implementation. This is certainly consistent with the significant value historically attributed to the organization’s compliance function and to the role of chief compliance officer (“CCO”).

http://clsbluesky.law.columbia.edu/2019/07/05/revisiting-compliance-program-reporting-relationships/

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Massachusetts Securities Division Proposes Uniform Fiduciary Standard; Could Create Patchwork of Obligations Across State Lines
Sidley’s Securities and Derivatives Enforcement and Regulatory Update

On June 14, 2019, the Massachusetts Securities Division proposed and offered for public comment a state regulation to apply a fiduciary standard of conduct to broker-dealers, agents, investment advisers and investment adviser representatives (collectively, Investment Professionals) when they advise their customers.¹ The fiduciary standard would require Investment Professionals to make recommendations and advice — including recommendations related to the selection of account types — solely in the best interest of their customers and clients, without regard to the interests of the Investment Professional. The fiduciary standard would also apply to all clients of Investment Professionals, including not only retail but also some institutional clients. The Division’s proposal appears to be a clear reaction to Secretary of the Commonwealth William Galvin’s disappointment with the new Regulation Best Interest (Regulation BI) from the U.S. Securities and Exchange Commission (SEC).

https://www.sidley.com/en/insights/newsupdates/2019/07/massachusetts-securities-division-proposes-uniform-fiduciary-standard

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Lawyers as compliance officers: a behavioral ethics perspective
by Jeff Kaplan
Conflict of Interest Blog

What role do corporate lawyers play in preventing wrongdoing by executives in their client organizations? And how is this role impacted by behavioral ethics?
In “Behavioral Legal Ethics Lessons for Corporate Counsel,” to be published in the Case Western Reserve Law Review, Paula Schaefer of the University of Tennessee College of Law  first examines “the corporate lawyer’s consciously held conceptions and misconceptions about duty owed to her corporate client when company executives propose a plan that will create substantial liability for the company—when and if it is caught.” As she shows, lawyers often have an unduly limited view of what that duty is.

http://conflictofinterestblog.com/2019/06/lawyers-as-compliance-officers-a-behavioral-ethics-perspective.html

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Theranos: Too Good To Be True
Jonathan T. Marks
Board And Fraud

Adept individuals, like Holmes, with widespread access to corporate information, a mindset of entitlement, and the confidence to pull it off compound the risk of fraud. Moreover, placing these individuals in a culturally lax environment with poor tone from the top and weak or poorly designed internal controls is a recipe for disaster. A company with such conditions could become the lead scandal in tomorrow’s news just like Theranos, Enron, WorldCom, Adelphia, HealthSouth, and others (name your favorite).

https://boardandfraud.com/2019/07/02/theranos-too-good-to-be-true/

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

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SEC Enforcement Against Private Equity Firms in 2018: Year in Review
James E. Anderson, Elizabeth P. Gray, Justin L. Browder, and Jonathan Tincher

In 2018, the Securities and Exchange Commission (the “SEC”) continued to pursue a series of enforcement actions against private equity fund sponsors. The issues raised by the cases reflect the SEC’s ongoing scrutiny of expense allocation practices, application of management fee offset provisions, acceleration of consulting and advisory fees, unauthorized principal, agency and affiliate transactions, and compliance with regulatory and investor reporting requirements. Many of these issues were first brought to the fore in two notable SEC staff speeches in 2014 and 2015,1 and the 2018 cases demonstrate that they continue to be of central importance. Private equity sponsors should continue to remain focused on enhancing their compliance programs in these areas as they move forward in 2019.

https://www.willkie.com/~/media/Files/Publications/2019/03/SEC_Enforcement_Against_Private_Equity_Firms_in_2018_Year_in_Review.pdf

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How to Design an Ethical Organization
Nicholas Epley and Amit Kumar
Harvard Business Review

Creating an ethical culture thus requires thinking about ethics not simply as a belief problem but also as a design problem. We have identified four critical features that need to be addressed when designing an ethical culture: explicit values, thoughts during judgment, incentives, and cultural norms.

https://hbr.org/2019/05/how-to-design-an-ethical-organization

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A Fraudster Loses to the SEC But Beats the Clock on Penalties
Matt Robinson
Bloomberg

Over the course of 12 years, Charles Kokesh quietly misappropriated more than $30 million from investors, a jury found in 2014. Kokesh, now 71, cultivated some expensive and unusual hobbies, such as importing Argentine polo ponies and participating in cowboy-style shooting competitions, according to trial testimony. But the really unusual part of the story is how the U.S. Supreme Court decided he wouldn’t have to pay back most of the cash.

https://www.bloomberg.com/news/articles/2019-06-25/a-fraudster-loses-to-the-sec-but-beats-the-clock-on-penalties

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Real Meaning of the Walmart Case
Matt Kelly
Radical Compliance

So what lessons can we learn from the Walmart case? The same lessons we’ve been learning for the last 10 years. They’re good lessons, and important lessons. Dropping the phrase “Walmart, largest company in the world” will always help when you talk about FCPA risks to your board, employees, or third parties. I’m delighted we have Walmart to dissect and discuss for years to come.

But the Walmart settlement broke no new ground for the enforcement of ethics and compliance; so no, it’s not a landmark.

It’s a bookend.

http://www.radicalcompliance.com/2019/06/24/real-meaning-walmart-fcpa-case/

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Statement of Concerned Securities Law Professors Regarding Investment Advisers and Fiduciary Obligations
The CLS Blue Sky Blog

We circulate this statement as law professors specializing in the field of securities regulation who are concerned that the Securities and Exchange Commission (the “Commission”) has moved in a new direction that is both contrary to its past practice and harmful to the interests of investors. In Release No. IA-5248 (“Commission Interpretation Regarding Standard of Conduct for Investment Advisers”) (June 5, 2019) (“Release 5248”), the Commission has turned its back on its history and reinterpreted the case law in a surprising manner that reverses what it said only a year ago. 

http://clsbluesky.law.columbia.edu/2019/06/25/statement-of-concerned-securities-law-professors-regarding-investment-advisers-and-fiduciary-obligations/

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

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Day of Reckoning for KPMG – Failures in Ethics
Tom Fox
FCPA Compliance Report

How bad was KPMG’s conduct? It was so bad that I had to interrupt my previously started blog post series on continued allegations of bribery and corruption against US and other companies selling medical equipment into China, to blog about KPMG. In short, the conduct outlined in the Order is so egregious, detailing a culture which is completely unmoored from any ethical foundation, that any company using KPMG as an auditor must ask some very serious questions about not only the quality of the services they have received but also the very foundation of those services.

http://fcpacompliancereport.com/2019/06/day-reckoning-kpmg-failures-ethics/

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CFTC Whistleblower Alert: Be on the Lookout for   Insider Trading or Improper Use of Information

The Whistleblower Office of the Commodity Futures Trading Commission (CFTC) is issuing this alert to  inform members of the public about how they may make themselves eligible for both financial awards  and certain protections while helping stop the improper use confidential information. 

https://whistleblower.gov/sites/whistleblower/files/2019-06/Insider%20Trading%20WBO%20Alert.pdf

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Understanding the Money Laundering Risks in the Capital Markets
Financial Conduct Authority

The aim of this thematic review was to carry out a diagnostic piece of work looking at the money-laundering risks and vulnerabilities in the capital markets and, where possible, to develop case studies to help inform the industry. …

We visited 19 participants covering different segments of the market. Our population included investment banks, recognised investment exchanges, trade bodies, a custodian bank, clearing and settlement houses, inter-dealer brokers and trading firms. When we refer to ‘firms’ in this report, we are referring to the full range of firms involved in the market transaction chain. When we refer to ‘participants’, we mean those firms we included in our sample for this project. Our visits were diagnostic; we sought information and examples to further inform and enhance our view of the risks and vulnerabilities in the capital markets. We did not assess the systems and controls of participants.

https://www.fca.org.uk/publication/thematic-reviews/tr19-004.pdf

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Compliance and Inconsistent Discipline
Matt Kelly
Radical Compliance

Because inconsistent discipline smacks of privilege undeserved. The company has one set of rules that apply to some people; and another set of rules that apply only to a select few. Those privileged few get special treatment, when most of the organization believes they shouldn’t — and that’s what drives employees bananas. That’s what ruins corporate culture and turns your corporate compliance program into a laughingstock.

http://www.radicalcompliance.com/2019/06/14/compliance-inconsistent-discipline/

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Prequin Special Report: Subscription Credit Facilities

Subscription credit facilities: angels or demons? A legitimate and valuable tool for managing liquidity and streamlining transactions in a competitive market, or a cynical ploy for massaging IRRs? The debate continues in private equity and wider private capital circles.

https://docs.preqin.com/reports/Preqin-Special-Report-Subscription-Credit-Facilities-June-2019.pdf

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

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Tuesday: Tax transparency, the myth of the unlevered IRRs
Private Funds Management

LPs want to know what effect this has on IRR. ILPA recommends that net IRR should be presented both with or without use of the credit facility, as referenced in this video from one of our sponsors Withum. This sensible-seeming suggestion may not be as simple as it seems. “Speed to close and ability to close all cash are becoming more important in this competitive environment. Without a line we would need to call capital in advance and leave cash on the balance sheet,” said Blue Wolf Capital CFO Josh Cherry-Seto. “We would at least a few times call large amounts of capital for investments that do not consummate. It is not such a simple exercise and I don’t think, if calculated honestly, the results would be favorable.” Cherry-Seto was speaking at Private Funds CFO’s fund finance roundtable, which will be published in July.

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Preemption of state securities laws
by Eversheds

With the recent announcement by the Securities and Exchange Commission (SEC) that it will hold an open meeting on June 5, 2019, to consider adopting Regulation Best Interest, one of the major issues that the SEC may clarify is its view of whether Regulation Best Interest preempts state securities regulations that impose a fiduciary duty on broker-dealers.

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Boeing and More Compliance Lessons Learned: Silos, Risk and Training
by Tom Fox
FCPA Compliance Report

I was stuck by an extraordinary above the fold article in the Sunday New York Times (NYT), entitled The Late Change, and Fatal Flaws in Boeing’s Plane by a plethora of reporters including Jack Nicas, Natalie Kitroeff, David Gelles and James Glanz. (The physical location of the article in the print edition was also significant as it reminded me of when the NYT broke the story of Wal-Mart’s corruption allegations in Mexico, in the same place, right hand column above the fold in an edition of the Sunday Times back in 2012). Matt Kelly wrote a great blog post on the article and his interpretation of it in Radical Compliance, entitled Another Lesson from Boeing: Silos. Kelly was spot on regarding his analysis of the siloed nature of Boeing’s design and construction process that caused or contributed to the catastrophic failure of the 737 Max due to the failure of the Maneuvering Characteristics Augmentation System (MCAS).

http://fcpacompliancereport.com/2019/06/boeing-compliance-lessons-learned-silos-risks-training/

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Carnival Dinged $20M on Compliance
By Matt Kelly
Radical Compliance

Compliance professionals will be fascinated — and encouraged, really — because this case is all about Carnival failing to establish a strong, effective compliance function. That was the failure. Carnival was supposed to hire a CCO years ago to help strengthen a culture of compliance, it hasn’t done that yet, and that lack of leadership allowed a culture of non-compliance to continue.

http://www.radicalcompliance.com/2019/06/05/carnival-dinged-20m-compliance/

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NASAA adopts investment adviser information security model rule package
Jay Fishman, J.D. 
Jim Hamilton’s World of Securities Regulation

The North American Securities Administrators Association, Inc. (NASAA) has adopted an information security model rule package to enhance state-registered investment advisers’ cybersecurity and privacy practices.  The package consists of: 
1.A model rule requiring investment advisers to adopt policies and procedures regarding information security (both physical security and cybersecurity) and to deliver its privacy policy annually to clients;
1. An amendment to the existing investment adviser NASAA model recordkeeping requirements rule mandating that investment advisers maintain records of their cybersecurity and privacy policies and procedures; and 
3. Amendments to the existing investment adviser NASAA Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers and NASAA Prohibited Conduct of Investment Advisers, Investment Adviser Representatives and Federal Covered Investment Advisers Model Rule USA 2002 502(b) model rules, to include failing to create, maintain, and enforce the cybersecurity and privacy policies and procedures.   

https://jimhamiltonblog.blogspot.com/2019/05/nasaa-adopts-investment-adviser.html

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

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The Troika Laundromat
The Organized Crime and Corruption Reporting Project

Laundromats are complex systems for moving money that allow corrupt politicians, organized crime figures, and wealthy business people to secretly invest their ill-gotten millions, launder money, evade taxes, and fulfill other goals.
OCCRP has previously exposed three such schemes: The Proxy Platform, the Russian Laundromat, and the Azerbaijani Laundromat.
Now, OCCRP and its reporting partners reveal a unique new Laundromat, created by a prestigious financial institution. This time, the work shows not only its beneficiaries but also exposes its mastermind and operator — Troika Dialog, once Russia’s largest private investment bank.

https://www.occrp.org/en/troikalaundromat/

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Will Congress Expand the Insider Trading Prohibition?
by Peter J. Henning
DealBook

A common complaint about insider trading law is that there is no statute that expressly sets forth the requirements to prove insider trading. That can make it difficult to determine whether a violation has occurred.
The House Financial Services Committee is seeking to remedy that. It recently passed a bill that would — for the first time — set forth what is required to prove insider trading.

https://www.nytimes.com/2019/05/24/business/dealbook/insider-trading-act.html

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DC Circuit Opinion Reaffirms Fiduciary and Disclosure Obligations of Advisers While Rejecting SEC Finding of “Willful” Violations
By Joshua M. Newville, Samuel J. Waldon, Anthony Drenzek and Ariella Muller

The DC Circuit recently released an opinion addressing the SEC’s administrative findings against registered investment adviser The Robare Group (TRG) for failure to disclose alleged conflicts of interest. Although the court affirmed the SEC’s finding of a violation of Section 206(2) of the Advisers Act, it held that Commission could not find willful violations under Section 207 based on the same negligent conduct.

https://www.privateequitylitigation.com/2019/05/dc-circuit-opinion-reaffirms-fiduciary-and-disclosure-obligations-of-advisers-while-rejecting-sec-finding-of-willful-violations/

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Crypto Assets and Insider Trading Law’s Domain
by Andrew Verstein 
Harvard Law School Forum on Corporate Governance and Financial Regulation

Insider trading doctrine clearly applies to most familiar crypto assets and their traders. The legal requisites for insider trading regulation—jurisdiction, material non-public information, breach of duty—are frequently conjoined. The most obvious examples of this concern misappropriation by employeesof crypto asset trading venues about the venue’s plans to support a crypto asset; allegations of this sort of insider trading have already ended up in federal court. But there are many more examples, such as misappropriation by government officials and members of mining pools. Ultimately the question is not whether insider trading law applies to crypto assets; it is whether we want it to.

https://corpgov.law.harvard.edu/2019/05/29/crypto-assets-and-insider-trading-laws-domain/

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Interesting Action From OFAC
by Matt Kelly
Radical Compliance

Compliance officers might want to take a close look at the wrist-slap that State Street Corp. received from the Office of Foreign Assets Control on Tuesday, for violations of sanctions against Iran. It’s a small but telling example of how a robust compliance program brings benefits, OFAC or otherwise.
OFAC did cite State Street for violating Iran sanctions, because the bank acted as custodian for a customer’s retirement plan and processed $11,365 worth of pension payments to the customer, a U.S. citizen, while he was residing in Iran in the mid-2010s.

http://www.radicalcompliance.com/2019/05/28/interesting-action-from-ofac/

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These are some of the compliance related stories that caught my attention this week.

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The Looming SEC IEO Fintech Smackdown
by John Reed Stark

Not to be confused with initial coin offerings (or “ICOs”), an IEO is a crypto-financing model offered and administrated via a cryptocurrency trading platform on behalf of a company (typically some form of start-up) that seeks to raise funds with its newly issued cryptocurrency digital tokens. Each IEO negotiates its unique terms, deals, and conditions with the various cryptocurrency trading platforms.

https://www.linkedin.com/pulse/looming-sec-ieo-fintech-smackdown-john-reed-stark/

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Some Securities Fraudsters Escape Paying SEC Fines
by Dave Michaels
Wall Street Journal

The Securities and Exchange Commission over the five fiscal years that ended in September 2018 took in 55% of the $20 billion in enforcement fines set through settlements of court judgments according to agency statistics. During the prior five years, from 2009 through 2013, the SEC collected on 60% of the $14.6 billion.

https://www.wsj.com/articles/some-securities-fraudsters-escape-paying-sec-fines-11558344601?shareToken=stcd26267268cf44699be99d966e93fc32

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Ethics Bots and Other Ways to Move Your Code of Business Conduct Beyond Puffery
by Michael Blanding
Working Knowledge

When health insurer Cigna Corp. appeared in front of a judge for allegedly misleading shareholders on Medicare regulations this spring, plaintiffs thought they had a strong case. After all, Cigna had published its own document titled “Code of Ethics and Principles of Conduct” that specifically required employees to uphold all regulations and “act with integrity in all that we do.”
When the panel of three judges took a look at the argument, however, they threw it out of court as irrelevant. “We think the statements in Cigna’s Code of Ethics are a textbook example of ‘puffery,’” the judges wrote. “They are too general to cause a reasonable investor to rely upon them.”

https://hbswk.hbs.edu/item/ethics-bots-and-other-ways-to-move-your-code-of-business-conduct-beyond-puffery?cid=wk-rss

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Three Compliance Lessons from Preet Bahara
by Tom Fox
FCPA Compliance & Ethics

Preet Bharara gave the morning keynote at the second day of Compliance Week 2019. It was interesting because rather than a speech he did so with a one-hour Q&A format with Allen & Overy partner Gene Ingoglia facilitating the session through the role of the questioner. The questions were built around Bharara’s recently released book Doing Justice: A Prosecutor’s Thoughts on Crime, Punishment, and the Rule of Law.

http://fcpacompliancereport.com/2019/05/three-compliance-lessons-preet-bharara/

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Recruiting and Retaining Compliance Staff is Key Risk for Banks, Regulator Says
by Kristin Broughton
Wall Street Journal

Criminals laundering money through the financial system have long been one of the top risks facing the banking industry. Building a solid defense against such intrusions is becoming another, a U.S. financial regulator said Monday.
U.S. banks are having a hard time recruiting and retaining compliance professionals, particularly those who specialize in financial crimes, the Office of the Comptroller of the Currency said in a semiannual report on the risks facing lenders.

https://www.wsj.com/articles/recruiting-and-retaining-compliance-staff-is-key-risk-for-banks-regulator-says-11558395878?shareToken=sta0ad1cfbeeec4a5594014a9356f51c3f

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