October 2011 – Compliance Building

Halloween and Compliance

A compliance professional can turn the fun and chaos of Halloween into a boring night on the study of procedure. Here, I’ll prove it.

Let’s start with costumes.

Have you imposed a “no costume = no candy” rule. Perhaps you merely skimp on the older kids who have skimped on dressing up. If you, like me, are suddenly living in winter you need to figure out what do with the kids who are all bundled up fighting the cold. They might all look like Eskimos tonight instead of zombies and superheroes.

Perhaps you are afraid to skimp because those older kids who didn’t put much effort into a costume may put more effort into toilet paper and eggs. Are you willing to compromise on your rule because you are afraid of the repercussions. How would that reflect on your compliance program?

Let’s move on to technology.

What about using Halloween metaphors to remind yourself about protecting your computer? Try the FCC:

Are cyber ghouls and online scammers feasting on your computer? This Halloween, learn how to stop them at OnGuardOnline.gov.
Don’t let someone decide to be you for Halloween. Read more about online identity theft at OnGuardOnline.gov.
Don’t let computer security worries haunt you at night. OnGuardOnline.gov says download software updates and patches often.
Garlic? Stake through the heart? OnGuardOnline.gov says only the latest security software protects you from online vampires.
Zombie warning! Update your security software often to protect your computer from zombie bots. Read more at OnGuardOnline.gov.
Don’t let old security software spook you. Keep firewall, anti-virus, and anti-spyware software updated, and visit OnGuardOnline.gov.
Beware of online tricks this Halloween and enable your computer’s firewall. Find out more at OnGuardOnline.gov.
Don’t let a virus ruin your computer’s Halloween spirit. Visit OnGuardOnline.gov for tips to keep your computer virus-free.
Don’t be a “phish” for Halloween. Visit OnGuardOnline.gov to learn how to spot computer scams that try to hook your personal info.
When you tell kids about Halloween safety, tell them about online safety too. To learn how, read Net Cetera at OnGuardOnline.gov.
If you leave your laptop for ‘just a sec,’ it could become someone else’s Halloween treat. Visit OnGuardOnline.gov to learn more.
Can you spot an internet scam dressed up as a great deal? Visit OnGuardOnline.gov for tips on how to spot online frauds.

And let’s put a little scare into you while your little ones are running around the neighborhood.

A team of local law enforcement agencies in Milwaukee are going door-to-door in search of sex offenders who are breaking their compliance rules. “Offenders are not allowed to have anything related to trick-or-treating that includes bowls of candy Halloween decorations, pumpkins. They can’t have their porch light on indicating that the residence is participating in any trick-or-treat activities,” said Melissa Othmer of the Department of Corrections, Probation and Parole.

Boo!

The jack o’ lantern Death Star is by Noel Dickover with instructions on his site, Fantasy Pumpkins, on how to create one yourself.

Compliance Bits and Pieces for October 28

These are some compliance-related stories that caught my attention recently:

The Role of Compliance and Ethics in Risk Management by Bruce Carton in Compliance Week’s Enforcement Action

Carlo V. di Florio, director of the SEC’s office of compliance inspections and examinations, recently spoke at the National Society of Compliance Professionals’ National Meeting held in Baltimore, Maryland. di Florio focused his remarks on three main points:

Ethics is fundamental to the securities laws, and ethical culture objectives should be central to an effective regulatory compliance program;
Leading standards have recognized the centrality of ethics and have explicitly integrated ethics into the elements of effective compliance and enterprise risk management; and
Organizations are making meaningful changes to embraced this trend and implement leading practices to make their regulatory compliance and risk management programs more effective.

SEC Raises the Bar on Tone at the Top by John T. Dalton in SAI Global’s Viewpoint

A Reuters article last week revealed that the Securities and Exchange Commission (SEC) has begun taking a new tact when conducting its compliance examinations at brokerage firms. Of note, this new practice by the SEC will require more direct involvement by a company’s executives and members of senior management in the compliance exam process, including on-site meetings and interviews with examiners. According to the article, the SEC had previously relied upon chief compliance officers as its primary points of contact for examinations, but that by involving top management, the SEC now hopes “to get more respect for chief compliance officers.

Everything Old is New Again: Alcoa and Olympus by Tom Fox

In an article in the Wall Street Journal (WSJ), entitled “Kickback Probe at Alcoa Heats Up”, reporter Dionne Searcey takes a look at the arrest of two figures in the bribery investigation of Alcoa’s activities in Bahrain in connection with the government owned manufacturing company known as Alba. In an article in the New York Times, entitled “Acquisitions at Olympus Scrutinized,” reporter Hiroko Tabuchi reviews “a tale of deals and advisors, with puzzling results.” Both cases present novel twists and turns that, if you told someone the facts, you would be accused of making up both stories.

Stay Away From These 5 Investigation Interview Mistakes by Lindsay Walker in Corporate Compliance Insights

1. Not Prepping for the Interview
2. Failing to Ask the Question
3. Failing to Build Rapport
4. Failing to Stop Denials
5. Showing Judgment

Firms Must Protect Customer Information – Always by Mark Astarita in SEClaw.com

The SEC has provided another example of an unintentional violation [of Regulation S-P], and charged three former brokerage executives for failing to protect confidential information about their customers. According to the Commission, when GunnAllen Financial Inc. was winding down its business operations last year, its former president and former national sales manager violated customer privacy rules by improperly transferring customer records to another firm. The SEC also accused the firm’s compliance director with failing to enforce the supervisory procedures in an unrelated incident.

DOL issues final rule on 401(k) investment advice exemptions By Hazel Bradford in Pensions & Investments

The Department of Labor on Monday finalized a rule spelling out permissible scenarios for giving investment advice to 401(k) participants without running afoul of prohibited transaction rules. The rule, which will goes into effect in 60 days, allows for providing investment advice under one of two scenarios: through the use of a computer model certified as unbiased, or through an adviser paid a “level,” or flat, fee that does not change based on investment choices.

Thanks to LexisNexis for selecting Compliance Building as one of the Top 25 Business Blogs of 2011. You can also vote on which of the 25 should be The Top blog.

The Top 25:

New Financial Legislation Takes Another Step

Four bills made their way through the Capital Markets and Government Sponsored Enterprises Subcommittee of the House Financial Services Committee last week and this week were approved by the full Financial Services Committee .

The Congress had to throw in some attacks against the Securities and Exchange Commission.

“We cannot wait for the SEC to act when millions of Americans are out of work and small businesses can’t access capital because of outdated regulations. Small business accounts for the majority of new jobs created in the U.S. The Committee took action today and passed common-sense ideas that will promote jobs,” said Financial Services Chairman Spencer Bachus. “Capital formation is essential for a robust economy. The bills approved today provide the modernized regulatory environment that is needed to help small businesses create jobs.”

Sources:

The Leaves Say You Will Go Free

The insider trading case against Raj Rajaratnam seemed very tight. The prosecutors had him on tape discussing the inside information from wiretaps.
So why did he fight his insider trading charges and get a lesser sentence than the 11 years that was handed down last week?

Ola Leaves.

Suketu Mehta in the Daily Beast discussed the rational and irrational explanations.

A Sri Lankan diplomat close to Rajaratnam told me that she’d met him shortly before he was convicted. “He’d gone to the ola-leaf readers. They told him he’d be acquitted.”

Not tea leaves. Ola leaves.

Three thousand years ago, seven rishis (sages) in India set themselves a mission. They would write down the fate of as many people in the world as they could.

These forecasts are said to have been originally written on goatskins, later transcribed onto copper plaques and then onto ola leaves.

Maybe Rajaratnam’s inevitable appeal will mean the ola leaves were right.

Sources:

Leaves of life in the Sunday Times
The Outsider by Suketu Mehta in the Daily Beast

Outsourcing Compliance and the CCO

One of the requirements of registration as a registered investment adviser is the appointment of a Chief Compliance Officer and the establishment of a formal compliance program. The SEC stated that a firm need not hire a new person to be the CCO. However, there will be a substantial time commitment.

You can spread some of the compliance work to multiple people in the firm, though the CCO will ultimately be responsible for oversight. Another option is to send some of the work outside the firm that would outsource some or most of the compliance functions.

Insider trading monitoring is one of the candidates for outsourcing. There is a lot of data and a lot of paperwork to track. Even for a private equity firm that does not regularly trade in public securities, there is plenty to keep a person occupied during the week. For a private equity firm, some trade tracking software will go a long way to help the CCO (and the employees) deal with the invasive and tedious requirement to track employee trading.

The SEC rules also require an annual review and update of the compliance policies and procedures. This too is a likely area for outsourcing. A third party can provide additional insight to the firm as to what your peer firms are doing and what issues the regulators are focusing on.

Compliance Bits and Pieces for October 21

These are some compliance-related stories that recently caught my attention:

The Abacus Sign by Felix Salmon

It’s funny, on the sign — something true, and accurate, and touching, and grammatical, and far too long to be a slogan, and gloriously bereft of punctuation, and ending even more gloriously in a mildly archaic preposition. Friedersdorf has managed to encapsulate the essence and the impropriety of the Abacus deal in just 45 words, and it’s fantastic that Spitz and Curran — and Furnas and Jardin and everybody who shared this image — managed to give those words the global recognition they deserved.

Coming Soon: #Occupy [Name of Your Company Here] by Broc Romanek in The Corporate Counsel .net

As we all begin to plan for another wild proxy season, I wonder how many are planning for the potential of major disruptions at their annual shareholder meetings as Occupy Wall Street-type protests quickly spread to avenues that we never dreamed of. Are you planning for protests at your annual meeting? How about one of your board meetings? Your CEO’s house? Your CEO’s golf game? Or when your CEO lands in the corporate jet at the airport? Or any of these for one – or more – of your directors?

More Woes for Companies with Chinese Connections by Kevin LaCroix in The D&O Diary

In a settlement that involves a company with significant Chinese operations — and that also may represent something of a template for the settlement of FCPA enforcement follow-on civil lawsuits — SciClone Pharmaceuticals and the individual defendant directors and officers have agreed to settle the consolidated derivative lawsuits that were filed following the company’s announcement that it was the target of SEC and DoJ investigations for possible FCPA violations.

Seven common regulatory compliance requirement assumptions to avoid by Kevin Beaver in IT Compliance Advisor

Compliance means different things to different people. Indeed, regulatory compliance requirements are — and should be — handled differently based on the unique needs of the business. The ugly reality is that there are so many assumptions being made about compliance that it often skews the perception of what’s really going on.

Compliance Building is a nominee for the Lexis Nexis Corporate & Securities Law Top 25 Blogs. Lexis Nexis invites you to comment on the announcement post:

Top 25 Business Law Blogs 2010 – Corporate & Securities Law Community

Occupy the SEC

I will admit that I have been personally dismissive of the Occupy Wall Street movement and the splinter group of Occupy Boston that I pass by on the way to the office. Yesterday’s post on Occupy LEGO Land was an example. They lack a message and I personally think most of their message are off base. (Down with Evil Corporations)

One thing that caught my eye was infrastructure. Occupy Boston has a wooden street right down the middle of their tent city. There is a food tent and a legal tent. (There’s probably more examples of physical infrastructure.) That means collective decision-making and an allocation of resources. That means a community has formed from the mob of the 99%.

That collective decision-making can be seen in the General Assembly Meeting that happens every night. There is a participatory democracy, with everyone given a right to speak.

Why not take that model to the regulators? Why not make the Securities and Exchange Commission listen to the comments from everyone?

…What’s that? … They do that? … Where?

Actually, the SEC allows anyone to submit comments on their proposals. Take for example the hundreds (thousands?) of comments the SEC received on Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act. Anyone can submit a comment by sending a letter, using the web, or sending an email.

Will they listen? I assume they read each and every comment letter. The participatory democracy of a few hundred campers on the Greenway does not scale to the complex economy of a few million. Regulators need to choose among competing interests that protect the public, yet give the regulated the guidance they need. Everyone’s voice can still be heard.

Sources:

The Friday Podcast: What Is Occupy Wall Street? in NPR’s Planet Money
What Does David Gergen Think of #occupywallstreet? by William Carleton
Ben & Jerry’s Becomes First High-Profile Company to Support Occupy Wall Street by Carmel Lobello
The Narcissism of Revolution in Corporate Tool by Josh King

Occupy LEGO Land

As the #OccupyWallStreet protests grew, it was inevitable that the movement would spread in unusual ways. That includes plastic toys.

“We must not be LEGO ‘lands’
— We must be a LEGO NATION.”

#OccupyLegoLand is a Facebook Fan Page that gives voice to LEGO minifigures. Like Occupy Wall Street, they are battling on many fronts: working in horribly exploitative conditions, war, bankers, and the release of the new iPhone.

#OccupyLegoLand aims to rebuild the world, brick by brick.

Sources:

#OccupyLegoLand on Facebook
Free Your Toys and Join #OccupyLegoLand by Jason B. Jones in Wired’s GeekDad

I Wonder if We Will Laugh at his Phone When He Gets Out?

You could watch the movie Wall Street and many things may still ring true. Of course its the 1980s, so the clothes and the women’s hair stick out. But the icon is the big brick cell phone. It was huge and expensive for its time. And all it did was makes phone calls. It was enough of an iconic image that it carried over to the sequel, with the prison guard handing Gecko back his belongings one by one, including the big cell phone.

With Raj Rajaratnam receiving the longest prison sentence ever for insider trading, I wonder which of his personal belongings will be the most iconic in next decade? Rajaratnam 11 year sentence was short of the 19 to 24 years that prosecutors sought. If you look to the movie for inspiration, Gordon Gecko was released from prison after serving eight years.

Of course his phone will be horribly out of date, assuming we still use phones and don’t have chips implanted or whatever the next Steve Jobs-like innovator thinks we should have in our pocket.

Insider trading will still be something that people go to prison for. Not lots of people. Just a few criminals who push too far and whose actions are too nefarious. Plenty more get hefty fines and have to return their ill-gotten gains.

It’s easy to look at these criminals for causing the 2008 financial crisis and the financial mess. Many people are clamoring for more Wall Street heads on pikes. However, insider trading did not cause the 2008 financial crisis.

Sources:

Rajaratnam and the “No One Has Gone to Prison” Myth by Tim Cavanaugh in Reason
Galleon Chief Sentenced to 11-Year Term in Insider Case by Peter Lattman in Dealbook

Compliance Bits and Pieces for October 14

These are some compliance-related stories that recently caught my attention:

A Study of Individual Liability under the Foreign Corrupt Practices Act (.pdf 6 pages)By M. Scott Peeler of Chadbourne & Park LLP

In this Special Report, Scott Peeler reviews lessons and patterns from his review of government initiated civil and criminal FCPA cases filed against individuals since 2005.

The Importance of a Strong Insider-Trading Compliance Program by Bruce Carton in Securities Docket

The short answer to the question of whether public companies have exposure to liability for insider trading by employees is, in theory, yes. But as a practical matter, the reality is that the liability is extremely limited. All public companies are not subject to the same requirements that apply to regulated entities such as broker-dealers and investment advisers. Under Section 15(f) of the Securities Exchange Act of 1934 and Section 204A of the Investment Advisors Act, such regulated entities are specifically required to adopt, maintain, and enforce policies and procedures designed to prevent insider trading. Indeed, regulated entities can be subject to “control person” liability if they “knowingly or recklessly failed to establish, maintain, or enforce” the insider-trading policies or procedures required by these laws.

Short-Term Debt, Rollover Risk, and Financial Crises by Tanju Yorulmazer in Liberty Street Economics