Month: October 2009

Shifting Regulatory Landscape in the US and Abroad

PERE Real Estate CFOs Forum

This afternoon, I am speaking at the PERE Real Estate CFOs Forum in New York on the Shifting Regulatory Landscape in the US and Abroad.

Moderator: Gilbert D. Porter, Partner, Haynes & Boone LLP
Panel Members:
Andrea Carpenter, Director, INREV (European Association for Investors in Non-listed Real Estate Vehicles)
Doug Cornelius, Chief Compliance Officer, Beacon Capital Partners
R. Eric Emrich, Chief Financial Officer, Lubert Adler Partners, L.P

We are starting the discussion with the EU AIFM Directive and its potential implication on fundraising and operations in the European Union.  Then we move onto the four bills aimed at regulating private funds: the Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009 and the . Then we end with the SEC’s proposed Pay to Play rule and the Say on Pay bill.

I am leading the Pay to Play and Say on Pay discussions. Here is the slide deck that I am using:

Shifting Regulatory Landscape in the US and Abroad

Capital Markets Regulatory Reform: Enhancing Oversight of Private Pools of Capital

Capitol_dome

Today, the House Committee on Financial Services heard testimony on Enhancing Oversight of Private Pools of Capital. This seems to be is response to the draft Private Fund Investment Advisers Registration Act. Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released a discussion draft of the bill.

This was likely to be a battle over who gets regulated. Congressman Kanjorski opened that door by including a registration exemption for “Venture Capital” funds, with no definition of what that means.

Panel Two—Enhancing Oversight of Private Pools of Capital

Rep. Paul E. Kanjorski emphasized that the committee wanted to works with the industry to impose regulations that would not burden the industry with lots of compliance costs.  His audience of fellow Congressmen was limited. There were more empty seats than Congressmen.

The panelists emphasized that the full burden of the Investment Advisers Act would inhibit the private fund industry. They also pointed out that many of the types of private pools of capital (other than hedge funds) do not have systemic risk and were not part of the cause of the financial industry issues.

The hearing did include a battle over whether there should be registration and who should be registered. “We only deal with sophisticated investors, we think we should be treated differently than retail investments.”

Update on the European Directive to Regulate Alternative Investment Fund Managers

eu

The draft Directive on Alternative Investment Fund Managers pdf-2 was published on April 30, 2009. The Proposed Directive has been subject to lots of criticism. Many of the provisions in the Proposed Directive misunderstood the characteristics of different types of alternative investment funds.

It now seems the Proposed Directive will be implemented in one form or another. (The EU’s focus on financial market reform has not been distracted by health care reform like happened here in the US.)

The first problem with the proposed directive is that it has broad definition of “alternative investment fund” so it can sweep up all hedge funds. It seems the the Presidency of the European Council has noticed that the existing definition would capture funds that clearly should not be the target of the Proposed Directive. [see AIFM Issues Note from the EU Presidency]

Unless non-EU managers comply with the rules within three years of the Directive coming into force (probably around 2015) they will be barred from offering their products in the EU. Britain, another center of hedge funds and private equity is campaigning to water down the directive. France, Spain and Germany seem to be very pro-directive and in favor of stiffer regulations.

Britain’s financial services minister, Paul Myners, told a conference: “Smell the coffee! There is going to be a directive.”

For more detail read a client alert from Shearman & Sterling: Update on the European Directive to Regulate Alternative Investment Fund Managers.

References:

Updated FTC Guidelines Affect Testimonial Advertisements, Bloggers, Celebrity Endorsements

On October 5, the FTC released their updated guidelines to advertisers on how to keep their endorsement and testimonial ads in line with the Federal Trade Commission Act.

The guidelines were last updated in 1980. Clearly technology and publishing has changed significantly in the past 30 years.

The revised Guides also add new examples to illustrate the long standing principle that “material connections” (sometimes payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. These examples address what constitutes an endorsement when the message is conveyed by bloggers or other “word-of-mouth” marketers. The revised Guides specify that while decisions will be reached on a case-by-case basis, the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. Thus, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service. Likewise, if a company refers in an advertisement to the findings of a research organization that conducted research sponsored by the company, the advertisement must disclose the connection between the advertiser and the research organization. And a paid endorsement – like any other advertisement – is deceptive if it makes false or misleading claims.

By the way, I don’t receive any income, advertising dollars or free product in connection with ComplianceBuilding.com. If do, I’ll let you know when I write about it. (Feel free to send that new BMW for me to review.)

The other interesting aspect of the Guidelines is how they treat celebrity endorsers. The revised Guidelines make it clear that celebrities must disclose their relationships with advertisers when making endorsements outside the context of traditional ads, such as on talk shows or in social media. I am waiting to hear the first disclaimer on Regis and Kelly.

Text of the Federal Register Noticepdf-2

National Breast Cancer Awareness Month

national breast cancer awarenes month

October is National Breast Cancer Awareness Month. Compliance Building, like many others, has gone pink to promote and support the world’s fight against breast cancer.

After watching the NFL players sporting pink accents on Sunday, I figured I could do the same thing. So I updated the website and changed many of the colors to pink.

Since the National Breast Cancer Awareness Month began in 1985, mammography rates have more than doubled for women age 50 and older and breast cancer deaths have declined. As a result, breast cancer deaths are on the decline. Encourage the women in your life to get mammograms on a regular basis.

You can also offer financial support. I encourage you to donate to the Susan G. Komen for the Cure.

Breast cancer is the most common cancer in women in the United States, aside from skin cancer. According to the American Cancer Society, an estimated 192,370 new cases of invasive breast cancer are expected to be diagnosed among women in the United States this year. An estimated 40,170 women are expected to die from the disease in 2009 alone. Today, there are about 2.5 million breast cancer survivors living in the United States.

Thanks to the folks at Corporate Compliance Insights for giving me the idea: CCI “Goes Pink” To Support Breast Cancer Awareness Month.

More on the Private Fund Investment Advisers Registration Act of 2009

Capitol_dome

There are three and half bills in Congress for regulating private investment funds. The Hedge Fund Adviser Registration Act of 2009, the Hedge Fund Transparency Act of 2009 and the Private Fund Transparency Act of 2009 are all sitting in committee. The half is the proposal from the Obama administration: Private Fund Investment Advisers Registration Act of 2009. The Obama bill has not yet been submitted.

The National Venture Capital Association has been lobbying hard (or at least effectively) to get some changes in the bill before it is submitted. There is now new language in the bill that reads:

(l) EXEMPTION OF AND REPORTING BY VENTURE CAPITAL FUND ADVISERS.—The Commission shall identify and define the term ‘venture capital fund’ and shall provide an adviser to such a fund an exemption from the registration requirements under this section. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.

Of course that still defers the very difficult task of defining a “venture capital fund” from the various types of private investment funds.

In a statement from Mark G. Heesen, president of the National Venture Capital Association:

“This proposal recognizes that venture capital firms do not pose systemic financial risk and that requiring them to register under the Advisers Act would place an undue burden on the venture industry and the entrepreneurial community. The venture capital industry supports a level of transparency which gives policy makers ongoing comfort in assessing risk.”

References:

Bits and Pieces on Compliance

Here are a few stories and items that caught my eye recently, but I have not had time to build-out to a full post:

Role of Federal Sentencing Guidelines in FCPA Cases from the WrageBlog

Given the tremendous fines imposed upon Siemens AG and Kellogg Brown & Root LLC (“KBR”) in the past 10 months, many have asked how the DOJ calculates criminal fines in FCPA cases and how statutory penalties and the United States Sentencing Guidelines (“U.S.S.G.”) interact in that calculation.

Behind the Numbers: The Anatomy of a Ponzi Scheme from The Fraud Guy

Many articles have been out in the press since Ponzi schemes have begun unraveling over the course of the last year which either describe Ponzi schemes inaccurately or really don’t help the public understand how the schemes actually work and what happens with the money.  This article (publication pending), “The Anatomy of a Ponzi Scheme” may help people understand how Ponzi schemes and their orchestrators work.

Complying With Mass. Data Security Regs Proves Costly from Melissa Klein Aguilar for Compliance Week

For those organizations already tackling the task of complying with a new Massachusetts data security regulations that are currently slated to take effect March 1, compliance is proving costly, a recent survey shows. . .  A joint survey of more than 200 members of the International Association of Privacy Professionals conducted by the IAPP and the law firm Goodwin Procter found that 33 percent of the organizations polled have already spent more than $50,000 on complying with the rules.

Massachusetts Holds Public Hearing on Information Security Regulations — Regulators Contemplating Additional Revisions in Final Rulemaking from Security, Privacy and The Law

The Massachusetts Office of Consumer Affairs and Business Regulations (OCABR) held a public hearing in connection with its promulgation of revisions to the Commonwealth’s information privacy regulations, 201 CMR 17.00. The standing-room-only crowd endured a modest, unventilated conference room in the Transportation Building to make comments on the stringent regulations. OCABR Undersecretary Barbara Anthony led the meeting with OCABR Deputy General Counsel Jason Egan and Assistant Attorney General Diane Lawton. The principal author of the original regulations, OCABR General Counsel David A. Murray, could also be seen in the audience.

Due Diligence Failure Leads to SEC Enforcement Action? from Mark J. Astarita of SECLaw.com

The SEC has charged Detroit-area stock broker Frank Bluestein with fraud, alleging that he lured elderly investors into a $250 million Ponzi scheme.

Lehman Bankruptcy Court Declares “Bankruptcy Default” Under Swap Agreement To Be Unenforceable from Goodwin Procter

On September 17, in one such closely watched matter, U.S. Bankruptcy Judge James Peck ordered Metavante Corporation (“Metavante”), a counterparty to Lehman Brothers Special Financing (“LBSF”) in an interest rate swap transaction in which Lehman Brothers Holdings, Inc. (“LBHI”) is the credit support provider, to perform its obligations to pay quarterly fixed amounts owing under the transaction, notwithstanding the bankruptcies of LBSF and its parent. Judge Peck concluded that Metavante could not rely solely on the filing of the Lehman bankruptcy cases to refuse to make payment to Lehman while also not terminating the agreement.

Some of these have been in my personal Twitter feed (@dougcornelius) or my Posterous (Compliance Building’s Posterous).

Ruehle Decision on Internal Investigations Overturned

The Ninth Circuit stepped into a conflict between former Broadcom CFO William Ruehle and lawyers at Irell & Manella. The disagreement concerned a type of misunderstanding on whether lawyers during an internal company probe are representing a singular executive or the company itself.

At issue was whether Irell clearly explained to Ruehle that it was representing the company and anything he told them could be shared with third parties. They ended up realeing information to the government. Irell lawyers maintained they told Ruehle. Ruehle said he couldn’t remember receiving such notice.

The lower court said the law firm breached its duty of loyalty to Ruehle by revealing his statements to the government and banned the government from using those statements in its trial.

Most famously, the judge also referred the lawyers to the California state bar for disciplinary action. [See my previous post: Attorney-Client Privilege and Internal Investigations]

In this opinion penned by Judge Richard C. Tallman, the court rejected Carney’s analysis and ruled that the “overwhelming evidence” shows that Ruehle’s statements to the Irell lawyers were not made in confidence. Ruehle should have understood that lawyers investigating the stock-option issue would likely share any information he provided with the company’s auditors.

Again, its important realize that once you start including non-lawyers in your communication, you have likely waived the attorney client privilege. The Ninth Circuit focused on the point that Ruehle knew his comments were to be shared with the accountants. You can’t have an expectation that information shared with accountants will have the protection of attorney-client privilege.

if you are a corporate officer subject to an investigation, you need to be aware that statements made during an internal investigation may end up in the government’s file. You can’t always count on the attorney client privilege to protect these statements.

References:

National Cyber Security Awareness Month

NCSAM

October is National Cyber Security Awareness Month.

Check out the top tips to keep you safe online: