Christopher Cox Joins Bingham

bingham-cox

Christopher Cox, former Chairman of the U.S. Securities and Exchange Commission, is going to join Bingham McCutchen LLP in their Orange County office.

From 1977 to 1986, Cox worked out of the Orange County office Latham & Watkins. At the time of his retirement in 1986 he was the Partner in Charge of the Corporate Department in that office. Cox was elected to Congress in 1988 from a Congressional District based around Orange County and served for 17 years.

Cox will be part of Bingham’s corporate, mergers and acquisitions, and securities practice.

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New Massachusetts Campaign Finance, Ethics and Lobbying Law

Massachusetts-State-House

After the well-publicized scandals with Salvatore DiMasi and Dianne Wilkerson, the lawmakers on Beacon Hill passed ethics legislation yesterday banning politicians from accepting gifts and upping the consequences for ethical violations.

The Governor had threatened to veto a sales tax increase unless this act was passed, along with reforms in the pension system and the the transportation network.

Here are some of the highlights of the new ethics law:

Gift Ban

  • Prohibits public officials from accepting gifts of “substantial value” for or because of their position.
  • Bans lobbyists from giving gifts.

Tougher Penalties

  • Increases the maximum punishment for bribery to $100,000 and 10 years imprisonment.
  • Increases the maximum penalties for conflict of interest law violations involving gifts and gratuities, revolving door violations and other abuses to $10,000 and 5 years imprisonment.
  • Increases penalties for a civil violation of the conflict of interest laws from up to $2,000 per violation to up to $10,000 per violation. For bribery, the civil penalty would increase to $25,000.
  • Increases the civil penalty for a violation of the financial disclosure law from $2,000 per violation to $10,000 per violation.
  • Increases the criminal penalty for violating registration-related lobbying rules to up to $10,000 and 5 years imprisonment.

Stronger Lobbying Laws

  • Defines lobbying to include background work, strategizing, research and planning.
  • Expands the revolving door provision to apply to members of the executive branch.
  • Reduces the amount of allowable incidental lobbying from 50 hours in each 6-month reporting period to 25 hours in each 6-month reporting period.

Expanded Enforcement Authority

  • Makes compliance with the Ethics Commission’s summons mandatory.
  • Grants the Secretary of State authority to impose fines and to have the same civil enforcement authority over lobbying violations as the Ethics Commission has over ethics violations.
  • Gives the Attorney General concurrent jurisdiction with the Ethics Commission to enforce civil violations of the conflict of interest laws.

Enhanced Campaign Finance Laws

  • Eliminates arrangements between state political parties and elected officials.
  • Bars individuals from making committee checks to themselves.
  • Requires disclosure of expenditures and sources of funding for any anonymous third-party campaign mailings or ads that support or criticize a candidate or campaign.
  • Increases penalties for late-filed campaign finance reports.

Open Meetings

  • Expands and better defines the requirements of the open meeting law

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Private Fund Investment Advisers Registration Act of 2009

treasury

The Department of Treasury released its proposed legislation in increase the regulatory oversight on private investment funds: Private Fund Investment Advisers Registration Act of 2009. The Administration’s legislation would require that all investment advisers with more than $30 million of assets under management to register with the SEC.

This is presumably the Obama plan and becomes the fourth piece of legislation proposed this year to regulate private investment funds. It joins the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009.

Disclosures to the SEC:

The legislation would grant broad power to the SEC to require the disclosure of information about the fund “as are necessary or appropriate in the public interest and for the assessment of systemic risk by the Board of Governors of the Federal Reserve System and the Financial Services Oversight Council, . . ” This includes:

  • amount of assets under management
  • use of leverage (including off-balance sheet leverage)
  • counterparty credit risk exposures
  • trading and investment positions, and
  • trading practices

Of course is also requires the private fund to allow examinations by the SEC.

Disclosures to Investors:

The legislation would grant broad power to the SEC about the disclosures that need to made by private funds to investors, prospective investors, counterparties, and creditors, of any private fund.  The SEC would be able to require disclosure “as necessary or appropriate in the public interest and for the protection of investors or for the assessment of systemic risk.”

Defining Clients (updated)

The legislation would all the SEC to “ascribe different meanings to terms (including the term ‘client’) used in different sections” of the Investment Advisers Act. This is an attempt to address the demise of the Hedge Fund Rule and allow the SEC to define the investors in private investment funds as “clients” of the fund manager. The courts had ruled that the SEC overstepped their authority when they tried this definition on their own.

I am not a big fan of this approach. The Act would better amending 203(b)(3) to exclude the new term “private fund” from the 15 client rule exemption. I don’t like the idea that a limited partner investor in a private fund could be deemed a “client” of the adviser in addition to the fund itself.

CFTC

The legislation calls for the SEC and CFTC to establish joint rules for investment advisers who are already subject to the CFTC and would now also be regulated by the SEC.

Summary

This legislation is very similar to the Private Fund Transparency Act of 2009 proposed by Senator Reed. It pushed most of the decision-making onto the SEC for the Commission to come up with the disclosure requirements. At this point, it is not clear which of the competing acts will end up becoming law, if any.

References:

California Adopts e-Discovery Rules

California

Never mind the budget crisis or handing out IOUs, California has passed its own Electronic Discovery Act. California joins the 30 other states that have decided to include provisions in their rules aimed directly at the discovery of Electronically Stored Information.

The Act amends the California Code of Civil Procedure by expressly permitting discovery of electronically stored information. The goal is to improve discovery measures during litigation and to avoid undue involvement by the court in resolving e-discovery disputes. The Act defines Electronically Stored Information as “information that is stored in an electronic medium” and defines “electronic” as “relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.”

California’s new e-discovery rules closely parallel the federal version. The Act primarily applies the existing rules in the California Civil Discovery Act to ESI and establishes procedures to request and respond to e-discovery.

California’s Electronic Discovery Act is similar to the Federal Rules. The California act also has  Federal Rules safe harbor for the failure to produce Electronically Stored Information.  “Absent exceptional circumstances, the court shall not impose sanctions on a party or any attorney of a party for failure to provide electronically stored information that has been lost, damaged, altered, or overwritten as a result of the routine, good faith operation of an electronic information system.” Cal. Code of Civil Procedure 1985.8 (l)

California Governor Arnold Schwarzenegger signed the Act on June 29 and it goes into effect immediately.

References:

Code of Civil Procedure

Special Report on Sovereign Wealth Funds

Pensions and Investments

Pensions & Investments published a Special Report on Sovereign Wealth Funds. The report is based on a survey conducted in April by the Oxford University Center for Employment, Work and Finance: Oxford SWF Project.

Sovereign wealth funds are perceived to be shrouded in mystery because, like many private investment funds, they do not publicly report their investment activity. One item that attracts attention is the size of these funds. They are collectively a pool of capital estimated to be somewhere between about three trillion to nearly seven trillion dollars. The largest individual fund is believed to have assets of over $600 billion.

The special report was based on interviews of investment managers who routinely work with sovereign investment funds, not directly with officers of the funds themselves. So, the information is second hand.

The report predicts a movement away from U.S. Treasuries and towards equities and real estate.

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Ethics and the Sales Relationship in World-Class Bull

hbr-may-2009

The May issue of the Harvard Business Review offers up an ethics problem in its monthly case study: World-Class Bull (subscription required for full article). The three commentaries offer very different reactions to the facts presented in the case study’s fact pattern. John Humphreys, Zafar U. Ahmed, and Mildred Pryor penned the fact pattern.

The case study revolves around the acquisition of a new customer. The existing sales agent was having no luck. A hot shot salesman took on the challenge by using the customer’s love of livestock to generate the relationship and close the sale.

On one hand, you need to applaud the salesman for learning more about the customer and how to engage the customer in a relationship. The ethical issue arises because of the apparent subterfuge of the salesman in engaging the customer and developing the relationship. The ethical issue is raised to a higher level when the sales manager sends an email to the entire sales team applauding the salesman and describing all of the subterfuge in detail.

James Borg, author of Persuasion: The Art Of Influencing People, lauds the salesman for taking the steps to engage the customer on a personal basis. However, he thinks the sales manager should “be hauled in front of the company’s Idiocy Review Board for sending an ill-advised, potentially damaging e-mail.”

Don Peppers and Martha Rogers, the coauthors of Rules to Break and Laws to Follow: How Your Business Can Beat the Crisis of Short-Termism, flat out declare the saleman’s tactics as unethical. They think the company should immediately fire the sales manager, discipline the salesman, send a message to all employees firmly asserting that deceiving customers or prospects is not the Company’s way of doing business, and rewrite the ethics code.

Kirk O. Hanson, the University Professor of Organizations and Society and the executive director of the Markkula Center for Applied Ethics at Santa Clara University in California, thinks the company should publicly reprimand the salesman and doubts that the sales manager is salvageable.

I see a problem with the salesman’s tactics, but I would not be so harsh as to pass judgment without an investigation and without reviewing the company’s code of ethics. There is flat statement in the case study by the salesman that he didn’t violate a single item in the ethics code. To me it seems hard to punish the salesman if he didn’t violate the company’s policies or ethics code. Since the conduct seems questionable, perhaps there is a flaw in the ethics code. I agree with Peppers and Rogers that you may need to rewrite the ethics code. Of course, it could also be that the salesman did know the content of the code of ethics.

Like the other commentators I have a bigger problem with the sales manager for not recognizing the ethical problem and sending out the laudatory email without a review or investigation. That is the bigger failure. For a company to maintain high ethical standards, front-line managers like the sales manager are key. They must understand how the actions by the people they manage affect the long term success of the company. The sales manager failed this test.

Obama Plan for Financial Regulatory Reform and Private Investment Funds

obama plan

Along with the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009, we also have the Obama plan for financial reform: Financial Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and Regulation.

Under the Obama plan, all advisers to private pools of capital, including hedge funds, private equity funds and venture capital funds, would be required to register with the SEC under the Investment Advisers Act of 1940. There would be an exception for advisers whose assets under management did not exceed “some modest threshold.” All registered private investment funds would be subject to

  1. Reporting information on the funds they manage that is sufficient to assess whether any fund poses a threat to financial stability
  2. Recordkeeping requirements,
  3. Requirements regarding disclosures to investors, creditors and counterparties and
  4. Regulatory reporting requirements
  5. Regular, periodic examinations by the SEC to monitor compliance with these requirements
  6. Confidential reporting on assets under management, borrowings, off-balance sheet exposures, and other information deemed necessary to assess whether a fund or group of related funds is so large, highly leveraged, or interconnected that it poses a threat to financial stability.

As with the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009, it is too early to tell what will come of this. Although, it seems clear that many private investment funds are going to be subject to greater regulation.

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California IOUs

California

California started issuing IOUs instead of checks. I know some people that got an IOU instead of their tax refund. They are not alone. In the last week, State Controller John Chiang’s office issued 91,000 IOUs worth $354 million to people expecting tax refunds, to state vendors and to local governments.

Banks have been willing to accept the IOUs and redeem them for cash. However, some major banks are getting ready to stop cashing them, although credit unions appear to be willing to continue redeeming the IOUs.

Since an IOU doesn’t work for anyone who needs cash, markets have opened for buying and selling these IOUs. There have been some sitings on eBay and Craigslist. It looks like eBay has been vigilant about pulling down listings. Craigslist has dozens of listings.

It should be so surprise that the IOUs are securities and subject to securities laws. The SEC has issued an Investor Alert on State of California IOUs.

While the IOUs are “securities” for purposes of the federal securities laws, as obligations of the State of California they are “municipal securities.” This means that sales of the IOUs are not required to be registered with the Commission. Also, as municipal securities, the IOUs are subject to the rules issued by the Municipal Securities Rulemaking Board, which include a requirement that the securities sold are suitable for the purchaser.

In addition, persons engaged in the business of buying and selling the IOUs may need to be registered as market intermediaries, such as brokers, dealers, or municipal securities dealers, alternative trading systems, or national securities exchanges.

Meanwhile, California’s bind debt rating has been lower to BBB from A minus, with another downgrade to junk status possible next week.

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Enterprise 2.0 by Andrew McAfee

mcafee

I just read an early preview chapter from Andrew McAfee’s forthcoming book Enterprise 2.0: New Collaborative Tools for Your Organization’s Toughest Challenges. The book is scheduled for release later this year from Harvard Business Press. You can also download and read the preview chapter: Introduction of Enterprise 2.0.

Much like Professor McAfee, I too was a skeptic of how web 2.0 tools could be used inside a business. I started exploring these tools when my old law firm started to consider an upgrade of their intranet platform to SharePoint 2007. That software package has some basic enterprise 2.0 tools. If we upgraded, we would have blogs, wikis and RSS feeds as part of intranet platform. But I didn’t really know what they were or how they could help a law firm. At the time, the terms sounded like something out of a Dr. Seuss book. But I looked a little closer and saw that they had some potential.

I quickly discovered that two people I knew had blogs: Ron Friedmann’s Strategic Legal Technology and Joy London’s Excited Utterances. Originally, I thought they were just websites. (Does it really matter anymore?) I did a little more research and decided to try setting my own blog. I set aside an afternoon to set up a blog. Google claimed their Blogger platform was easy to set up and it was free. Instead of an afternoon, it took me ten minutes to set up the blog. Five minutes was spent figuring out a name and four minutes was spent choosing colors. That left a lot of time that afternoon to think about the implications of what I had done. This was the birth of my first blog, KM Space, in February of 2007.

I first encountered Professor McAfee at the Enterprise 2.0 Conference 2007.  Since then, we have had a few opportunities to talk about the implication of these tools inside a business.

I see transformational change in the availability of information. For decades it was business that had the powerful internal network that allowed them to share information across the enterprise. Now with the increasing ubiquity of internet access, the internal business network and tools that run on it are becoming inferior to the tools available through the internet for finding and dealing with information. There are many lessons for a business to learn from the consumer tools for handling information. This is big change.

The other aspect is email. Most businesses rely on email and attachments as their collaboration platform. If you look back 20 years, email was barely a factor in the way business teams collaborated. So there is no reason to think that email is either the endpoint or the zenith of the way business team collaborate.

Like Professor McAfee, I see a transformation change. I am looking forward to reading the Enterprise 2.0 when it is finally published.

Discretion and Compliance

Martin Lomasney
Martin Lomasney

Martin Lomasney created a famous saying on the importance of discretion:

“Never write if you can speak; never speak if you can nod; never nod if you can wink.”

At the time of Lomasney, it was not email but telegrams that were the principal method of electronic communication. But those telegrams just ended up on pieces of paper.

This was also the time before e-discovery. Now every email is subject to ending up in a lawyer’s hand during a law suit.

Think before you hit that send button. Maybe a phone conversation will be better. Or a nod.