Bingham’s Take on Compliance Reviews of an Extraordinary Year

Nancy M. Persechino of Bingham McCutchen LLP put together her take on the Compliance Reviews of an Extraordinary Year. She also includes a chart of the changes in law and rules, new guidance, and enforcement actions (.pdf).

Given the market turbulence of the past year and the rapidly changing business and regulatory environments, many CCOs may wish to do more than simply dust off last year’s review and update its contents. At least one thing remains the same: the purpose of the annual review is to assess the adequacy of the firm’s policies and procedures in ensuring compliance with securities laws and the effectiveness of their implementation. Nothing tests the adequacy of policies and procedures quite like a crisis. So, why not treat the extraordinary events of the last year as a great “forensic test” and ask, “What went right? What didn’t?”

Madoff Liquidation and Suits Filed Against Madoff

On January 2, 2009, the trustee charged with liquidating Bernard Madoff Investment Securities, LLC issued a notice outlining the requirements for filing SIPC claims. Notice of Commencement of Liquidation Proceeding for Madoff Investment Securities

Anyone having a claim or potential claim against BMIS should read that notice. It provides that customers of BMIS must file their claims with the trustee on or prior to March 3, 2009 to receive the maximum protection.

It further provides that a first meeting of BMIS’s customers and creditors will be held on February 20, 2009, at 10:00 a.m., at the Auditorium at the United States Bankruptcy Court, Southern District of New York, One Bowling Green, New York, New York 10004.

The trustee also has established an official website [http://www.madofftrustee.com] to provide public information about the bankruptcy court proceeding.

Typical lawsuits that one might expect to see in a situation such as this one are those filed by investors against Madoff and his entities. The most notable of such actions filed to date include class actions Kellner v. Madoff [No. 08CV05026 (E.D.N.Y. filed Dec. 12, 2008)] and Chaleff v. Madoff ( No. 08CV08260 [C.D. Cal. filed Dec. 15, 2008)] and individual action Sciremammano v. Madoff [No. 08CV11332 (S.D.N.Y. filed Dec. 30, 2008)].

  • The Kellner case asserts a class action on behalf of all persons and entities who invested with Madoff, BMIS, or other selling agents affiliated with Madoff or BMIS, from as early as the formation of BMIS in the 1960s. The complaint alleges violations of the securities laws and related federal laws, including the Racketeer Influenced and Corrupt Organizations Act  and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, violations of New York General Business Law provisions concerning deceptive acts and practices, fraud, negligent misrepresentation, breach of fiduciary duty, conversion, and unjust enrichment.
  • In the Chaleff case, a class action was brought against Madoff, BMIS, Brighton Company and its general manager, Stanley Chais, alleging securities law violations on behalf of all persons or entities that invested through or in Chais or Brighton, had capital invested with Madoff or BMIS on December 12, 2008.
  • The plaintiffs in the Sciremammano case are individuals who began investing with Madoff in 1995. They seek injunctive relief to stop the alleged fraud and preserve assets, disgorgement of gains with interest, and civil monetary penalties. The alleged violations include fraud under the federal securities laws, fraudulent practices under New York state law, violations of the Investment Advisers Act of 1940, and breach of fiduciary duty.

Employer Notices to Employee Under the Family and Medical Leave Act

An employer must provide written notice to an employee each that an employee gives notice of the need for FMLA leave. The employer has to give the notice within a reasonable time after notice of the need for
leave is given by the employee (within one or two business days if feasible.) [See 29 CFR 825.301 (c)]

The employer has to provide the employee with written notice detailing the specific expectations and obligations of the employee and explaining any consequences of a failure to meet these obligations. The written notice must be provided to the employee in a language in which the employee is literate (see Sec. 825.300(c)).

Section 29 CFR.301(b) provides that the written notice must include, as appropriate:

  1. that the leave will be counted against the employee’s annual FMLA leave entitlement (see Sec. 825.208);
  2. any requirements for the employee to furnish medical certification of a serious health condition and the consequences of failing to do so (see Sec. 825.305);
  3. the employee’s right to substitute paid leave and whether the employer will require the substitution of paid leave, and the conditions related to any substitution;
  4. any requirement for the employee to make any premium payments to maintain health benefits and the arrangements for making such payments (see Sec. 825.210), and the possible consequences of failure to make such payments on a timely basis (i.e., the circumstances under which coverage may lapse);
  5. any requirement for the employee to present a fitness-for-duty certificate to be restored to employment (see Sec. 825.310);
  6. the employee’s status as a “key employee” and the potential consequence that restoration may be denied following FMLA leave, explaining the conditions required for such denial (see Sec. 825.218);
  7. the employee’s right to restoration to the same or an equivalent job upon return from leave (see Secs. 825.214 and 825.604); and,
  8. the employee’s potential liability for payment of health insurance premiums paid by the employer during the employee’s unpaid FMLA leave if the employee fails to return to work after taking FMLA leave (see Sec. 825.213).

The notice may include other information–e.g., whether the employer will require periodic reports of the employee’s status and intent to return to work, but is not required to do so. A prototype notice is DOL Form WH-381 (.pdf).

Fact Sheet 28 for The Family and Medical Leave Act

In addition to putting up the new FMLA poster, covered employers must  give notices to employees about their rights under the Family and Medical Leave Act. Section 29 CFR 825.301 describes the required notices.

If you have written guidance to employees concerning employee benefits or leave rights, such as in an employee handbook, information concerning FMLA entitlements and employee obligations under the FMLA must be included in the handbook or other document. For example, if an employer provides an employee handbook to all employees that describes the employer’s policies regarding leave, wages, attendance, and similar matters, the handbook must incorporate information on FMLA rights and responsibilities and the employer’s policies regarding the FMLA.

If you company does not have handbooks or other written material, then you need to provide general written guidance about employee rights and obligations under FMLA whenever an employee requests leave. According to the Department of Labor FMLA website, delivering a copy of Fact Sheet No. 28 will fulfill this requirement.

Record Keeping Under the Family and Medical Leave Act

The Family and Medical Leave Act does impose some record-keeping requirements on employers. [See 29 CFR 825.500].

The law does not impose any particular form or order of the records. Employers umst keep the records for at least three years.

Covered employers who have eligible employees must maintain records that must disclose the following:

  1. Basic payroll and identifying employee data, including name, address, and occupation; rate or basis of pay and terms of compensation; daily and weekly hours worked per pay period; additions to or deductions from wages; and total compensation paid.
  2. Dates FMLA leave is taken by FMLA eligible employees (e.g., available from time records, requests for leave, etc., if so designated). Leave must be designated in records as FMLA leave; leave so designated may not include leave required under State law or an employer plan which is not also covered by FMLA.
  3. If FMLA leave is taken by eligible employees in increments of less than one full day, the hours of the leave.
  4. Copies of employee notices of leave furnished to the employer under FMLA, if in writing, and copies of all general and specific written notices given to employees as required under FMLA and these regulations (see Sec. 825.301(b)). Copies may be maintained in employee personnel files.
  5. Any documents (including written and electronic records) describing employee benefits or employer policies and practices regarding the taking of paid and unpaid leaves.
  6. Premium payments of employee benefits.
  7. Records of any dispute between the employer and an eligible employee regarding designation of leave as FMLA leave, including any written statement from the employer or employee of the reasons for the designation and for the disagreement.

Gibson Dunn 2008 Year-End FCPA Update

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Gibson Dunn & Crutcher LLP has published its 2008 Year-End FCPA Update.

By any measure, 2008 was a monster year in Foreign Corrupt Practices Act (“FCPA”) enforcement.  With thirty-three enforcement actions between the Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”), the statute’s dual enforcers, 2008 was the second busiest numerical year on the books, trailing only 2007.  But beyond the numbers (after all, with the massive Siemens resolution, 2008 dwarfs all other years combined in fines and disgorgement), 2008 saw the FCPA’s enforcement regime mature like never before.  There were no unimportant FCPA enforcement actions this year.  Whether the trend was increasingly aggressive enforcement against individuals, ramped up international coordination, the joining of FCPA prosecutions with prosecutions for distinct federal crimes, or others trends discussed herein, every case fits an important trend in foreign bribery enforcement that we expect to continue into 2009 and beyond.

They go on to highlight five trends in FCPA enforcement:

1.  Escalating corporate financial penalties;
2.   Increasing focus on individual prosecutions;
3.   Internationalization of foreign anti-corruption enforcement;
4.   DOJ’s coupling of FCPA prosecutions with other charges; and
5.   Continuing upswing in FCPA litigation.

The Growing Importance of Enterprise Risk Management

Kyle McNabb writes about The Growing Importance of Enterprise Risk Management on his Forrester blog. In this article he lets us know about the things he learned after talking with a large number of professionals that work for or directly support executives responsible for compliance and risk management endeavors

  1. Boards and CFOs will prioritize initiatives supporting their enterprise risk management efforts.
  2. They will focus on driving risk management into business decisions.
  3. They believe technology’s fundamental to helping them succeed.

What it means for information and knowledge management:

  1. Understand the business context of an important role – those responsible for risk management.
  2. Redefine how information management technologies provide value to the enterprise.

AICPA Exposure Draft on Compliance Audits

aicpalogoThe AICPA released a Proposed Statement on Auditing Standards for Compliance Audits (.pdf) This would replace SAS No. 74 Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance.

Comments or suggestions on any aspect of this exposure draft would be appreciated. To facilitate the ASB’s consideration of responses, comments should refer to specific paragraphs and include supporting reasons for each suggestion or comment.

Written comments on the exposure draft will become part of the public record of the AICPA and will be available for public inspection at the offices of the AICPA after June 1, 2009, for one year. Responses should be sent to Sharon Macey at [email protected] or Audit and Attest Standards, AICPA, 1211 Avenue of the Americas, New York, NY 10036-8775 in time to be received by April 30, 2009.

Model Due Diligence Questionnaire for Hedge Fund Investors

The Managed Funds Association put together a Model Due Diligence Questionnaire for Hedge Fund Investors (.pdf). This questionnaire was designed to identify the kinds of questions that a potential investor may wish to consider before investing in a Hedge Fund. The questions that may help amplify on or provide additional details to the disclosure in a Hedge Fund’s offering documents.

Sound Practices for Hedge Fund Managers

The Managed Funds Association updated its Sound Practices for Hedge Fund Managers (.pdf) in November, 2007 in response to the initial drafts of the President’s Working Group on Financial Markets.

The objectives of Sound Practices are to:

  • Strengthen business practices of the hedge fund industry through a strong framework of internal policies and practices
  • Encourage individualized assessment and application of recommendations
  • Enhance market discipline in the global financial marketplace

Sound Practices, which was originally published in 2000 and is now in its fourth edition, provides peer-to-peer recommendations for establishing standards of excellence in virtually every aspect of business. The recommendations included in Sound Practices are divided among the seven topics listed below:

  • Management, Trading, and Information Technology Controls
  • Responsibilities to Investors
  • Determination of Net Asset Value
  • Risk Management
  • Regulatory Controls
  • Trading Relationship Management, Monitoring, and Disclosure
  • Business Continuity, Disaster Recovery, and Crisis Management