Category: Publish to KM Space

Complexity

Does your policy look something like this sign? This is a real sign that was posted near schools on Bogie Lake Road in White Lake, Michigan.

The speed limit is normally 45 on that street, except during these half hour periods on school days when the speed limit drops down to 25, except the first period which is only 26 minutes. The end result is that drivers need to almost stop in order to read the sign. Presumably, they also need to make sure their watch is precise because they can travel at 45 mph at 6:48 am, but need to slow down to at 6:49 am. They need a copy of the school calendar to determine if it’s a school day, and not merely a work day.

The sign became complex because of cost, the underlying regulations, and the surrounding environment. The complexity is there for a good reason. There are three schools on that stretch of road, a high school, a middle school, and an elementary school. As you might expect, each school has different pick up and drop off times, resulting in different times that drivers need to be aware of the extra traffic and danger of children in the area.

The size and style of the sign is strictly regulated, so the sign maker has limited flexibility.

Because of cost, the sign designer puts the burden on the driver. Another choice would have been a “school speed limit only when lights are flashing” sign. But that costs significantly more than the this sign. That shifts the burden to the municipality to pay the additional cost to put up an automated sign. By the way the cost is significant: $50,000.

The complicating factor is that three schools are clustered together. That is unusual and clearly the rules for signs were not designed to deal with that type of complexity.

I assume by the strict rules for school speed zones, they only apply during the drop-off and pick-up time for each school. That leaves a gap in the times. The hours could have been from 6:49 am to 9:07 am and 2:03 pm to 4:29 pm. Presumably, the sign maker thought that choice was unduly strict.

The sign is complex because the underlying rules are complex. (I’m sure you can think of your own policies that are complex because the underlying law is complex.)

Perhaps one of the goals of compliance should be to craft simpler policies out of the complex maelstrom of applicable laws. That will ultimately limit employees from taking actions that would be permitted by the underlying law. The trade off is a policy that’s simpler to understand. After all, if you can’t understand the policy or easily figure out if it applies to you, then compliance with the policy is only a matter of luck.

Thankfully, the sign was removed and replaced by a simpler sign.


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How Wall Street Killed Financial Reform

I’m sure you heard in the news that JP Morgan lost $2 billion in a trades using complex derivatives tied to corporate bond defaults. But didn’t we fix this two years ago when Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act? It seems like JP Morgan’s mistakes should be the first test of Dodd-Frank. The law fails. It’s just lucky that JP Morgan’s trade was stopped before it destroyed the bank.

By coincidence, Matt Taibbi wrote a piece in Rolling Stone about the failings of Dodd-Frank: How Wall Street Killed Financial Reform. I generally find Mr. Taibbi’s take on finance to be a bit over the top, with more hyperbole in a world that lacks the subtle shades of compromise. This article is no different. But he also gets lots of the right points. Dodd-Frank will not result in financial reform.

Taibbi makes five key points.

1. Strangle it in the Womb

Financial reform started off with some great ideas. But they were watered down as the law progressed through the legislative process. For example, Mr. Volker’s simple concept of banning proprietary trading got twisted and poked, allowing broad exemptions. The Consumer Financial Protection Bureau went from being an independent watchdog to an office under the budgetary constraints of the Federal Reserve System.

2. Litigation

The federal regulators will need to contend with courtroom challenges to their regulations, with industry arguing that they go beyond the scope of the legislation or failed to adequately run a cost-benefit analysis of the regulation.

3. If You Can’t Win, Stall

Many sections of the law are experiencing “unforeseen delays.” Taibbi blames Wall Street lobbyists. I blame the law itself. Dodd-Frank deferred much of the implementation to the regulators, meaning they would need to craft new complex regulations and definitions of key terms that are mere sketched out in the law itself. This overloaded the ability of the regulators to produce new regulations. They are tasked with a ten-fold increase in the rule-making agenda. That means the regulators need more staff and the time to get them up to speed. But Congress largely failed to provide the financial support.

4. Bully the Regulators

When Congress is frustrated with a regulator, they just cut funding. Rather than increase the SEC’s budget to allow for the resources to create and implement the new regulations, Republican congressmen tried to cut the Commission’s budget.

5. Pass a Gazillion Loopholes

Congress is moving bills forward to further undercut Dodd-Frank. We saw that with the Rapid passage of the Jumpstart Our Business Startups Act. (I would argue that it undercuts Sarbanes-Oxley, not Dodd-Frank.) As the balance of power in Congress shifts, parts of financial reform become less viable. I think the true test will come a year from now, after the Presidential election. A Romney win and some Republican congressional wins will likely lead to a rapid erosion of Dodd-Frank.

The one point that Taibbi only alludes to is that Congress does not understand the financial markets or the securities laws. I watched some of the Congressional testimony on the JOBS Act. Only a handful of the member of Congress had any idea what was really in the law. Dodd-Frank is even worse. It was a massive law. I would place a wager that no more than 10 members of Congress actually read the whole law before voting on it. Even fewer understood the implications.

 

Social Media and the Financial Risk

This is not meant to be a scare tactic. It’s just pointing out that web publishing tools have made it very easy to be a publisher. That’s great from an information perspective because it’s so much easier to find relevant information.

The problem is that the ease of publishing and finding information has nothing to do with it’s quality, veracity, or appropriateness. What your business publishes, what your employees publish, and what your business’s critics publish all affect your business and can affect its bottom line. (Positively or negatively.)

Infographic sources:

Compliance and Patriots’ Day

And the shot heard ’round the world
Was the start of the Revolution.
The Minute Men were ready, on the move.
Take your powder, and take your gun.
Report to General Washington.

– Schoolhouse Rock!

Patriots’ Day honors the anniversary of the Battles of Lexington and Concord, the first battles of the Revolutionary War. That means Paul Revere and William Dawes mount their horses to re-create the warning: “The British are coming!” That means battle re-enactments in Lexington. That means the Boston Marathon passes through. That means a Red Sox home game.

What does this have to do with compliance or business ethics? Nothing.

Patriots’ Day is a Massachusetts holiday. Since Maine was once part of Massachusetts, it is also a holiday in Maine. Although they switch the possessive to Patriot’s Day.

So I’m out of the office.

Sources:

 

The Death of Martindale Connected

When Lexis backed a social networking platform for lawyers, I paid attention. I didn’t think a platform for lawyers would be interesting, but if it connected to some of Lexis’s massive collection of legal content it could at least be informative. That never came to the Martindale Connected platform. The platform has remained boring and uninformative.

One part of Connected’s approach was to create an authenticated community. So that the person is who they say they are. At first, that limited membership to practicing lawyers. That meant law firm marketers were excluded. Eventually, Martindale changed its mind and opened the doors to a broader membership. The additional membership did very little to energize the platform.

Now the spammers have arrived. I found this sitting in my inbox from Martindale Connected:

Dear new friend,
How are you hope fine my dear my name is Benita you can call me isatu I really like your profile in this site I would to get to know you, i want us to be friends well i will be waiting for your reply to my email ([email protected]) not in the site i will tell you more about my self and will attached my picture in my next mail thanks wait your reply
Benita  or you can call me Isatu.
(  [email protected] )

I checked my Martindale inbox and found a half dozen of spam messages like this that must have had their notifications trapped in my corporate spam filter.

I’m skeptical that Benita is a student (Judge) in Florida.

Or that Mrs Lisa Lechuga wants to give me $2,400,000 “for the good work of humanity, and also to help the motherless and less privilege and also for the assistance of the widows”.

Or that Lillian Mokan was “moved and become interested in you, I will like you to send me an email to my address ([email protected]) so that i can give you my pictures for you to know whom i am.”

I guess Martindale’s standards for validating users has either failed or they have dramatically lowered their standards. It’s one thing to be boring, it’s another to be annoying.

I was replicating my posts in Connected, but now I have decided to stop.  No reason to pile more dirt in the graveyard.

Related:

Crowdfunding the Crowdfunders

With President Obama set to sign the Jumpstart Our Business Startups Act on Thursday, it seems the race is on to create a crowdfunding portal and to start making money. Crowdfunding has been around for a long time and the use of a crowdfunding portal dates back several years. Now there is a crowdfunding accreditation program and a trade association.

Crowdsourcing.org has launched the Crowdfunding Accreditation for Platform Standards program to promote the adoption of best practices. Eight platforms have obtained the green ribbon since the program started on March 21:

PleaseFund.Us
Crowdcube
Crowdfunder 
Grow Venture Community
GreenUnite
HelpersUnite
SymBid
Fundrazr

David Marlett announced the formation of the National Crowdfunding Association, “the professional organization of all companies and individuals with an interest in crowdfunding. The NCFA is charged with “supporting, educating and protecting the American crowdfunding industry.” According to the press release, over “fifty companies and individuals dedicated to the nascent crowdfunding industry came together to form the association.

Mr. Marlett claims to have launched the first crowdfunding agency on March 21, 2012 and is now the executive director of the National Crowdfunding Association. They even have twitter accounts, Facebook pages, and blogs. (Does that make it real?)

Over on the transcedant Quora, questions keep coming on Crowdfunding: Crowdfunding will explode after the JOBS Act passes. How can I invest in a crowdfunding site?

My original thought on crowdfunding was a line from Groucho Marx, “Please accept my resignation. I don’t care to belong to any club that will have me as a member.” if these investments and opportunities are so good, why hasn’t a professional investor delivered the funding? Why would the company want my $1,000? Maybe they are not that good? Maybe they are inexperienced? Maybe they are just looking to make a quick buck?

In looking at the race to create crowdfunding portals and associations of portals I have the same concerns. There are plenty of existing sites and existing companies that could easily choose to dominate the marketplace, if they so choose. The Securities and Exchange Commission has to craft a regulatory structure to deal with the CROWDFUND Act. That will take months.

For now it seems there will be tussle for attention in the space. The megaphones are out. There will be losses.

A Conversation with Paul Volcker

In a night out that only a compliance geek would love, I spent Monday night listening to Malcolm Salter talk with Paul Volcker, former Chairman of the Federal Reserve. Harvard University’s Edmond J. Safra Center for Ethics and the Center’s director, Lawrence Lessig, hosted the event in the Ames Courtroom at Harvard Law School. The topic, as you might expect, was Implementing Financial Reform

It was clear that Mr. Volcker is a supporter of traditional commercial banking. He stated that they are essential to commerce. Their core functions of taking deposits, making loans, and operating the payment system are essential and need to be protected. There is a price for that protection: government oversight and restrictions.

The 2008 crisis came from non-banks. Hedge funds and investment banks touted their efficiency, lack of regulatory oversight, brilliant managers, and best financial engineers. In 1998 they invented Credit Default Swaps. They blew themselves up.

There were $60 trillion of CDS instruments insuring $6 trillion of loans. Today there are $700 trillion of the greater category of derivatives.  That is an order of magnitude larger that the world’s GDP.

Mr. Volker was quick to point out that proprietary trading was not the cause of the 2008 crisis, it was the origination of many, many bad home loans to people who could not repay them. However, proprietary trading did play a role.

Mr. Salter pulled out a thick binder contained the proposed Volcker Rule. (I did the same thing at the PEI CFO Forum.) But Mr. Volcker found that disingenuous. The rule itself is only about 35 pages and the rest of the binder contained the commentary and thousands of questions posed by regulators.

Mr. Volcker compared the current rule on proprietary trading to a rule on Truth in Lending that he implemented while he was Chairman of the Federal Reserve. The initial draft from his staff was 170 pages, he sent it back with a requirement that it be no more than 100 pages. He wanted it simpler and they delivered. To his surprise, most of the industry comments were to have more details in the rule.

It became apparent to me that Mr. Volcker was advocate of a principle-based oversight rather than a rules-based oversight. The more rules there are, the more gamesmanship that the industry will engage in. He pointed to the example of Barclays and Deutsche Bank re-shaping their US subsidiaries so they would no longer be classified as bank holding companies. He thinks it will be relatively easy for regulators to spot proprietary trading by focusing on volume an volatility.

Switching topics, Mr. Volcker pointed out that the standards for bank capital requirements were another part of the 2008 crisis. Under the regulatory capital requirements, banks were not required to set much capital aside for mortgages and sovereign debt.  There is some backlash in the Volcker rule because it allows proprietary trading in US government securities, but not in non-US sovereign debt. That has been the case for many years, going back to Glass-Steagall. The problem is drawing the line between which sovereign debt is safe and which is not.

Mr. Volcker does not think that the proposed rule is on a deathwatch. Rule-making is inherently complex and this is a complex area. To add to the complexity, several government agencies are involved in the rule. He also pointed out that much more lobbying and money is involved in the rule-making process than when he was Chairman of the Fed. You want industry responses to rules. The difficult part is when that response is coupled with a campaign contribution to Congress.

Circling back to the ethics aspect (the event was sponsored by the Center for Ethics), Mr. Volcker pointed out that proprietary trading causes an inherent conflict of interest with your customers. The trader is no longer acting as a broker, pulling a buyer and seller together. The proprietary trading bank is buying and selling for its inventory.

Proprietary trading creates a conflict in the compensation structure. Traders get paid on short-term gains, often before the trade’s economic effect is fully realized. That outsized and short-term compensation becomes a siren song for bankers looking for fatter wallets, causing them to take bigger risks. (Like, say originating sub-prime loans and reselling them.)

Additional materials:

Battling Back Against Spammers

The SEC posted a warning on Bogus E-Mail Purporting to be from SEC Office of the Whistleblower. The SEC’s Office of the Whistleblower is real; the e-mail is a hoax.

Earlier this week I received an angry email complaining about spam sent by me. That left me a bit confused because I don’t send out spam. It turns out a scumbag was sending around a fake message from the SEC’s Whistleblower Office:

Dear customer, Securities and Exchange Commission Whistleblower office has received complaint about alleged misconduct at your company, including Material misstatement or omission in a company’s public filings or financial statements, or a failure to file Municipal securities transactions or public pension plans, involving such financial products as private equity funds.

Failure to provide a response to this complaint within 21 day timeframe will result in Securities and Exchange Commission investigation against your company. You can have access to the complaint details in U.S. Securities and Exchange Commission Tips, Complaints, and Referrals portal under the following link …

It turns out the email was using a hotlink to a copy of the SEC logo I store on this website. So the email displays the SEC logo by pulling the image from Compliance Building.

My first action was to delete the image file. I don’t want to help the spammers. This left a little red “x” in the email indicating a missing image.

Then I noticed that the email was running rampant. My site stats tools did not pickup hotlinked image files. My webhost pointed me to the visitors log. That showed thousands of instances of that image file being accessed every hour.

I decided to change course and fight back. Since I know just enough html to get myself in trouble, I decided to change the image, but keep the same image file name and file path. I inserted the simple image you see at the top of this story.  Email recipients of the spam will see that image instead of the SEC logo. Hopefully that will make email much less effective.

In case you couldn’t follow, the spam email originally looked like this:

By changing the image file on my site, the spam email now looks like this:

I’m just sorry that I didn’t see the usage sooner. I also contacted the site that supposedly hosted the complaint details. They removed the offending file, hopefully putting an end to the mischief. The spam email seems to still be in wide circulation since I see that image file getting accessed so often.

Technical Problems

Sometimes things just go wrong. No matter how hard you try (or don’t) you need to expect the unexpected. Software and systems inevitable break and go down. And when a system goes down, it will inevitably go down at the least convenient time.

The key is testing, redundancy, and back-up. You can’t prepare for all of the potential problems. But you can prepare for some.

My latest technical problem happened right here. Something went wrong with the code that runs this website. Technical support offered some mumbo jumbo on what I could do. I only know just enough html and css to get myself in trouble. I tried a few things, but they each failed to work. I was in way over my head.

I could have spent hours and hours poring through the error logs and files. Or I could have hired someone who knew what they were doing to help out. I don’t have the time or money to do that.

That left me with one choice. Nuke it and start over. Fortunately, I have a system that runs regular back ups. And it worked.

The website’s design is still a mess. The problem appears to have resided somewhere in the old design. That can be fixed eventually. The key is that the data is still intact.

Lesson Learned. Prepare, back-up, and test. I think there is even an SEC rule on the topic.

I end with a recent cartoon from Saturday Morning Breakfast Cereal on the stock market, blame, and reward.