Year: 2010

Ethics of Congressional Stock Ownership

The Washington Post published a story using Congressman John Dinghell as an example of the ethics issues involved when you have an investor lawmaker: Dingells and GM illustrate limits of congressional conflict-of-interest rules. Kimberly Kindy and Robert E. O’Harrow Jr. use Congressman Dinghell because of his financial connection with General Motors. This connection was one both of capital and income. His wife was an executive at General Motors and they held a significant amount of GM stock. (She no longer works for GM and old GM stock… well you know what that is worth.)

I did not find the Dinghell example to be compelling. Congressman Dinghell represents metropolitan Detroit. His constituents are just as interested in the future of the automotive business as he is. It seems to me that his personal interests are aligned with those of his district. He and his wife were up front about their ownership of GM and their connection with the company.

That is not to say that legislators’ ownership of stock is not a problem. Uncertainty created about lawmakers’ motivation undermines confidence in Congress and the political process. It is often impossible to know whether the lawmaker is acting in the interest of citizens or their own portfolios.

Insider Trading

On top of that, the lawmakers on Capitol Hill are not prevented from trading on stock with inside information. Congressional portfolios have regularly outperformed those of average Americans over the years. There

Availability of Records

Over at the Sunlight Foundation they decided to drill down further at look at the availability of Congressional ethics filings. Daniel Schuman found that many ethics filings are required to be publicly reported, but are not available online and that many ethics filings are not publicly reported. A cynic would say that Congress does not want this information to be widely available.

References:

SUPERfreakonomics and Compliance

superfreakonomics

Steven D. Levitt and Stephen J. Dubner are back putting the freak in economics. As they did in Freakonomics, SUPERfreakonomics uses economic analysis to give some insights into actual human behavior.

When the original Freakonomics came out it was very original. Since then other books have hit the mainstream trying to do the same thing, most notably Malcolm Gladwell. SuperFreakonomics is good but comes across as much less original than the original. There are many other reviews of the book by people more competent at book reviews than me. The authors’ take on global warming has stirred up lots of controversy.

SuperFreakonomics has plenty of stories that compliance professionals should find interesting. It’s certainly worth your time to read the book.

One item in the book that caught my interest was some research by Melissa Bateson in her department’s break room. Faculty members paid for coffee and beverages by dropping money into an “honesty can.” Each week professor Bateson posted a new price list. She didn’t change the prices, but she did post a different photograph on the list each week. She alternated between using a picture of flowers and using a picture of human eyes.

i'm watching you

When the eyes were watching, nearly three times as much money ended up in the honesty can. Cues of being watched enhance cooperation in a real-world setting (.pdf) by Melissa Bateson, Daniel Nettle and Gilbert Roberts, published in Biology Letters 2006.

“We believe that images of eyes motivate cooperative behaviour because they induce a perception in participants of being watched. Although participants were not actually observed in either of our experimental conditions, the human perceptual system contains neurons that respond selectively to stimuli involving faces and eyes, and it is therefore possible that the images exerted an automatic and unconscious effect on the participants’ perception that they were being watched.”

Maybe I will scrap using my corporate signature in email and use that last set of eyes.

What are your thoughts?
eyes im watching you

FinCEN and Address Confidentiality Programs

How do you open a bank account when you are hiding from domestic violence?

The rules implementing the Bank Secrecy Act require a financial institution to implement a Customer Identification Program that includes procedures that enable it to form a reasonable belief that it knows the true identity of its customers. The rules also require that a financial institution obtain a residential or business street address from each customer.

To make it easier for the victims of domestic violence, sexual assault or stalking to stay hidden from their attackers, 31 states have enacted Address Confidentiality Programs to help protect the home address of victims. These programs provide a confidential mail forwarding system. Typically, the Secretary of the State assigns a substitute address to the program participant to be used as their legal mailing address. Staff retrieve the participant’s mail and forward it to the participant’s actual physical location.

That is where the Address Confidentiality Program program runs into the Customer Identification Program.

But the Financial Crimes Enforcement Network issued a letter ruling to help financial institutions get out of this pickle. The FinCEN regulations also allow:

“If the individual customer does not have a residential or business street address, then the rules permit the individual customer to provide a “residential or business street address of next of kin or of another contact individual.”

See 31 C.F.R. §103.121(b)(2)(i)(3)(ii), §103.122(b)(2)(i)(A)(3)(ii), §103.123(b)(2)(i)(A)(3)(ii) and§103.131(b)(2)(i)(A)(3)(ii)

In FIN-2009-R003, FinCEN found:

A customer who participates in a state-created ACP shall be treated as not having a residential or business street address and a secretary of state, or other state entity serving as a designated agent of the customer consistent with the terms of the ACP, will act as another contact individual for the purpose of complying with FinCEN’s rules. Therefore, a financial institution should collect the street address of the ACP sponsoring agency for purposes of meeting its CIP address requirement.

Problem solved. At least it will be once knowledge about the ruling is passed along to front line people enforcing the Customer Identification Programs.

Sources:

Ethics of Oreos in the Minibar

Is it ethical to replenish the items in your hotel’s minibar to avoid being charged for consumption?

Randy Cohen tackled this issue in last week’s The Ethicist. David Lat, publisher of the legal tabloid Above the Law, posed the question after eating a box of Oreos from his minibar and then later replacing them.

Mr. Cohen slapped him down and said that since you enjoyed the service, you must pay the price.

On the other hand, is the service so that you do not have to go out and get your own Oreos or is the service merely the supply of Oreos in the room? Is the advertised price for the convenience of not having to replace items you consume?

“At the moment you ate the Oreos from the hotel, you took advantage of the convenience of having them there on demand. You could have checked in then went somewhere else to look for food, but you didn’t. That convenience comes at a cost. The fact that you later replaced the product yourself doesn’t mean that you didn’t experience the convenience of having it there when you wanted it.”

Since Above the Law‘s audience is lawyers, there were many comments comparing Lat’s “borrowing” of the Oreos to the borrowing of funds from a client account. Those comparisons fail. A lawyer does not have a right to use client funds. Lat had a right to eat the Oreos.

It’s just a question of the price you pay for consumption. Is replacing the goods an appropriate cost to the consumer and acceptable to the hotel? The consumer would have to venture out into an unfamiliar city hoping to find Oreos in the exact same packaging as those he ate. Their is a significant cost to the consumer in spending that time. After all, part of the reason you pay the premium price for the items in the minibar is to avoid spending that time and being able to enjoy the Oreos without leaving your room.

Lat pointed out that the minibar did not have a sensor that automatically bills you when an item is removed. He also pointed out that the new Oreos had an expiration date much further out than those he consumed.

What are your thoughts?

References:

Monitoring Employee E-mail in Canada

canada

The key to a defensible system of e-mail monitoring is the creation of a comprehensive and communicated computer use policy. That is apparently as true in Canada as it in the United States.

Brian Bowman and Andrew Buck put together an excellent privacy primer on Monitoring employee e-mail: a privacy primer.

In what situations is e-mail monitoring justified? And what tests can we use to answer this question? Canada has no definitive answer either.

Are You Trying to be a Trust Agent?

Yes? Then you have probably already read at least part of Trust Agents: Using the Web to Build Influence, Improve Reputation, and Earn Trust, the new book from Chris Brogan and Julien Smith.

Most likely, you are wondering what a “Trust Agent” is supposed to be.

“Trust agents have established themselves as being non-sales-oriented, non-high pressure marketers. Instead, they are digital natives using the web to be genuine and to humanize their business.”

The main premise is that cultivating “trust” will enable you and your business to succeed. They talk about creating this trust using social networks and online media. Be a trust agent and people will gravitate towards you when they need something, and then trust you with their information and leads. The book combines some theory, with the author’s success stories, other relevant examples and actionable suggestions.

Unfortunately, I found big chunks of the book to miss the mark for my involvement on the web. My original jump into the web was to see how these tools would work as knowledge management tools inside an organization. I found these web 2.0 tools were well ahead of the enterprise tools. My approach in using the web is for personal knowledge management.

These tools (including this blog) are for me to find the information I need to succeed at my job and to organize that information for reuse. I use web tools for selfish reasons. They are really good at helping me collect information. That others can leverage my work is a by-product. That these tools allow me to stay connected with colleagues is a by-product.

Some of that stems from the nature of my job and my company. We don’t use the web to advance our corporate image. As the chief compliance officer I am not trying to sell anything, ever.

But I do like staying connected with my colleagues and peers. There are many more people outside your organization who do what you do or have the information you need to succeed, than there are inside your organization.

Trust Agents is about creating social capital. I think it could just as easily be called: “Don’t be a jerk online.” They go into a lot more detail than that and come up with six characteristics of Trust Agents.

1. Make your own game.

Try new ways of doing things. Stand out from the crowd. First movers have an advantage. They quote Warren Buffet on when to enter a market: “Be fearful when others are greedy, and be greedy when others are fearful.”

2. Be one of us.

Be part of the community. Don’t be the self-promotional jerk in the community who is continually handing out business cards and asking for business. Contribute to the community. You need to give first if you want to receive. The more you give, the better.

3. Use the Archimedes Effect

Archimedes propositioned that if he had a long enough lever and a fulcrum on which to place it, he could move the world. Leverage your message.

4. Try to be Agent Zero

Cultivate your personal networks and recognize their value. Connect with good people. Connect between different groups.

5. Become a human artist.

Learn how to work well with people and help empower people. You need to learn the etiquette and start off by listening to the community before you burst in with a full head of steam.

6. Build an army.

You can’t do it alone. You need to find people who are willing to collaborate with you.

If these concept resonate with you, then it is worth your time to read the book. If you are just starting out with web 2.0 tools you should heed the lessons in the book. Even if you are a wily veteran, you will find some useful information in this book.

Trust Agents is a bit uneven at times. In places it reads more like a collection of blog posts instead of a coherent narrative. Some of their ideas are better flushed out than others. Those six characteristics don’t have equal weight.

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This is the first book I’ve read in 2010. You can look back at the books I read in 2009.

Enterprise 2.0 Conference: Session Proposals

The Enterprise 2.0 Conference is coming back to Boston on June 14-17.  They are letting attendees vote on the sessions. This is a great way for the conference organizers to take advantage of 2.0 tools in organizing the conference.

I am part of two panels, if they get approved. If either of them interest you, go ahead and vote for them. You need to register on the voting site (not register for the conference) to vote.

Social Media Policies: Practical Advice From The Trenches

This will be similar to the panel I was on at the San Francisco Enterprise 2.0 event: Social Media: Policy Formation & Risk Management. Mike Gotta will repeat hie performance in moderating the panel.

What Enterprise 2.0 Can Learn from Knowledge Management

This panel will look to the lessons of knowledge management and how they can be applied to enterprise 2.0. The panel also features Jack Vinson, Carl Frappaolo and Patti Anklam.

With 466 submissions there are lots to choose from. Here are some others to think about.

Compliance Bits and Pieces for January 8

Here are some interesting stories from the past week:

BAE Bribe Suit Tossed On Appeal from The FCPA Blog

The decision is a big win for BAE (and all U.K. companies threatened with shareholder litigation in the U.S.). But it’s another setback for plaintiffs who bring claims based on allegations that, if true, would violate the Foreign Corrupt Practices Act.

Top Risks of 2010

If the 2009 top risks were first and foremost about developed states having their wits sufficiently about them to get through the financial crisis (with the US Congress leading the pack), as the world now emerges from recession the risks begin to shift to the challenges created by the emergence of a new global order–developed vs. developing states, the old unipolar system vs. the emerging non-polar one, and the old dominant globalized system of regulated free market capitalism vs. the growing strength of state capitalism.

Study debunks analyst recommendations myth

The study, conducted by Dr. Oya Altınkılıç of the University of Pittsburgh and Dr. Robert Hansen and Vadim Balashov of Tulane University, builds on a previous study by Altınkılıç and Hansen that had found analyst recommendations “tend to piggyback on the news” and are relatively “uninformative.”

Deducting Disgorgements from The FCPA Blog

The lesson is that FCPA-related disgorgements — which have reached hundreds of millions of dollars — may be deductible. It depends chiefly on what the SEC intends and how the agreement describing the disgorgement is written to reflect that intent.

Public Companies Fail to Disclose Ethics Waivers

usha rodrigues

According to Usha Rodrigues from University of Georgia Law School and Mike Stegemoller from Texas Tech University – Rawls College of Business, in their paper Placebo Ethics, public companies are failing to disclose ethics waivers.

They focused on Section 406 of Sarbanes-Oxley which requires public companies to disclose when they have granted an ethics waiver to top executives. Section 406(b) states:

“The Commission shall revise its regulations concerning matters requiring prompt disclosure on Form 8-K (or any successor thereto) to require the immediate disclosure, by means of the filing of such form, dissemination by the Internet or by other electronic means, by any issuer of any change in or waiver of the code of ethics for senior financial officers.”

The regulations for Section 406 provide:

§229.406 (Item 406) Code of ethics:
(a) Disclose whether the registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. If the registrant has not adopted such a code of ethics, explain why it has not done so.

(b) For purposes of this Item 406, the term code of ethics means written standards that are reasonably designed to deter wrongdoing and to promote:

(1) Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; …

Rodrigues and Stegemoller were able to take advantage of the overlap between the 406 disclosure requirements and the disclosures required by Item 404 of Regulation S-K for related party transactions with an amount in excess of $120,000. One of the challenges of determining compliance with disclosure requirements is you can’t tell if there was a need for a disclosure unless the information is disclosed. This overlap allowed them to find items in the 10-k proxy statement that should have been reported immediately under Section 406.

Their sample set was 200 public companies. From January 1, 2003 through December 31, 2007 they found only one waiver filed under Section 406 for these 200 companies. They also looked beyond their sample set and found that of the 5,000± public companies there have only been 36 waivers filed using Form 8-K.

They took the next step and looked at the 10-K filings for their sample set of companies for related party transactions. Fifteen companies failed to disclose related party transactions that should have been reported immediately under Section 406. They found lots of other disclosures that were in a gray area. (This should be no surprise to Michelle Leder at Foototed.org who loves finding these things.)

One theory is that the public companies prefer to dump these related party transactions into the 10-K proxy statement where there is already a flood of information rather than specifically calling out the transaction in a separate Form 8-K. (Again, Michelle Leder loves digging up this stuff.) There is a difference between immediate disclosure and eventual disclosure.

Another surprise in the paper was that most of the companies in the sample set did not prohibit related party transactions in their code of ethics. Only 30 prohibited these transactions. These omissions also would appear to be a violation of Section 406 since the regulation requires a code to deal with conflicts of interest. Personally, I don’t see how you can call something a code of ethics if it does not prohibit related party transactions.

References:

2009 Year-End FCPA Update

gibsondunn

In case you missed it, 2009 was full of FCPA enforcement actions and trials. The Department of Justice and Securities and Exchange Commission worked hand in hand over the past year bringing actions for FCPA violations. They set a record by bringing more FCPA prosecutions during 2009 than in any prior year in the FCPA’s history.

From Gibson, Dunn & Crutcher LLP
From Gibson, Dunn & Crutcher LLP

To pull it all together, the law firm of Gibson, Dunn & Crutcher LLP put together a 2009 Year-End FCPA Update.

This update provides an overview of the FCPA and a survey of FCPA enforcement activities during 2009.  It also analyzes recent enforcement trends and offers practical guidance to help companies and their executives avoid or minimize liability under the FCPA.

They also claim that there are over 100 FCPA investigations pending at the Justice Department, and “a robust stock of FCPA matters” under investigation at the SEC.

Mike Koehler takes issue with some of the numbers. But you can’t argue with the success of FCPA actions over the past year. Success breed success. In response the DOJ and SEC have organized special groups to focus on FCPA violations. I expect that we will continue to see more activity in this area.

References: