2011 – Page 4 – Compliance Building

SEC Says it is Bringing Charges Against Wall Street

You’ve probably heard the charges made by politicians and activists that the Securities and Exchange Commission is ineffective and not bringing charges against those who caused the 2008 financial crisis.

“YOU’RE WRONG!” says the SEC.

The SEC has begun publishing “Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis.”

Key Statistics (through Oct. 19, 2011)

Number of Entities and Individuals Charged	81
Number of CEOs, CFOs, and Other Senior Corporate Officers Charged	39
Number of Individuals Who Have Received Officer and Director bars, Industry Bars, or Commission Suspensions	24
Penalties Ordered	> $1.2 billion
Disgorgement and Prejudgment Interest Ordered	> $393 million
Additional Monetary Relief Obtained for Harmed Investors	$355 million^*
Total Penalties, Disgorgement, and Other Monetary Relief	$1.97 billion

^* In settlements with Evergreen, J.P. Morgan, State Street, and TD Ameritrade

In the prism of the enormous losses of the 2008 financial crisis this may not seem by much. I think most people, though rightly upset, will have a hard time finding criminal conduct among those activities subject to the jurisdiction of the SEC. Sure, the proliferation of CDOs in 2007 can be seen as suspect. But criminal?

Sources:

SEC Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis
SEC Compiles List of Financial Crisis Cases; Says More on the Way Soon
by Bruce Carton in Compliance Week’s Enforcement Action

Compliance Bits and Pieces for November 4

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

How Trustworthy Are You? from the Trusted Advisor

A summary infographic on five questions from the Trust Quotient self-assessment

Investigation Nation: SEC Employees and Inspector General Play Cat-and-Mouse by Bruce Carton in Compliance Week’s Enforcement Action

A group called Citizens for Responsibility and Ethics in Washington (CREW) has asked the SEC Inspector General to launch an investigation into whether SEC employees are using private email accounts and cell phones to avoid having their communications reviewed in SEC Inspector General investigations.

To Err Is Human . . . and Punishable by the SEC by Russell G. Ryan in CFO

Even as the SEC pleads for more resources from Congress to keep up with existing responsibilities and the mind-boggling array of new regulatory burdens dumped upon it by last year’s Dodd-Frank financial reform act, the agency reportedly intends to expand its enforcement reach. The regulator will apparently pursue not only its signature cases against deliberate and reckless fraudsters, but also cases against people who make merely negligent mistakes. Apparently, as the SEC has progressed with its investigations relating to the financial meltdown, it has found many examples of negligence and bad judgment, but fewer instances of deliberate fraud than most people assume.

The Seven Deadly Sins for a Compliance Program by Tom Fox

1. Putting the Code of Conduct on your Shelf
2. Ignoring your Company’s Culture
3. Worshiping at the Altar of Highest Grade Point Average
4. Letting the Money Talk
5. The Parent Trap – Do as I say, not as I do
6. Ethics in the Corner
7. Shooting or Ignoring the Messenger

When Prediction Markets Go Bad in Saturday Morning Breakfast Cereal

For some R Rated Humor

FCPA as a Strike Breaker

The United Steelworkers sent a request to investigate to the U.S. Justice Department. The union believes Freeport-McMoRan has violated the Foreign Corrupt Practices Act by engaging the bribery of security forces in Indonesia. The Jakarta Post said national police chief Gen. Timur Pradopo admitted his personnel had received ‘meal money’ to guard the company’s gold and copper mine in Grasberg, West Papua. The union is arguing that those payments to police from Freeport-McMoRan’s local subsidiary constitute bribes. Production at the mine has been crippled and infrastructure sabotaged by protesters. Seven people have been killed in clashes between workers and police and mysterious hit and run attacks.

According to the Jakarta Post a diplomatic cable leaked by Wikileaks also revealed that Freeport paid the Indonesian Military (TNI) and the Police to secure mining activities in the restive province.

A spokeperson for PT Freeport Indonesia said funds given to security personnel guarding project sites in Papua are allowed under the Voluntary Principles on Security and Human Rights, a set of guidelines created by the United States and Britain in 2000 for the extractive industry dealing with security issues. “The support for the government-provided security includes in-kind assistance and monetary allowances to mitigate living costs and the hardship elements of a remote posting assignment to our mining area in Papua,” the statement said.

A member of the Indonesian Forum for the Voluntary Principles for Security and Human Rights, Agus Widjojo, said that security officers should not directly receive “meal money” without reporting it to the Finance Ministry. “It may be true that police officers face particularly tough situations in Papua. But it does not mean they can receive the money directly from Freeport without reporting it to the state’s finance agency,” he said.

Back in 2006, the New York City Comptroller asked the SEC to look into Freeport-McMoRan for knowingly made “false or misleading” statements about payments to the Indonesian military. In a letters to the agency, the comptroller, William Thompson Jr. said he believed the company might have violated the Foreign Corrupt Practices Act.

Could it be a bribe to pay the police to do their job? The United Steelworkers take the position that Indonesian security personnel are being paid to act in the defense of the interests of Freeport-McMoRan in
conflict with their duty to protect Indonesian people.

At the very least, it’s an interesting strategy by the union to help workers in another country.

Sources:

November 1, 2011 letter from the United Steel Workers to the U.S. Department of Justice (.pdf)
Freeport claims ‘meal money’ to security forces is legitimate in the Jakarta Post
National Police admit receiving ‘meal money’ from Freeport in the Jakarta Post
The Voluntary Principles on Security and Human Rights (.pdf)
Steelworkers Call For FCPA Probe Of Freeport-McMoRan by Samuel Rubenfeld in the WSJ.com’s Corruption Currents
Freeport Says ‘Meal Money’ Payments Are Legal in The FCPA Blog
A Delicious Fact Pattern in the FCPA Professor
Inquiry sought on mining company by Raymond Bonner and Jane Perlez in The New York Times (2006)

Form PF and Private Funds

IN addition to filing Form ADV with the SEC when they register with the Securities and Exchange Commission, private fund managers will also need to start filing Form PF next year. The amount of information required by Form PF is tiered. Advisers managing less than $150 million in private funds are not required to file, as these firms are not likely to generate systemic risk within the financial industry. Smaller private fund advisers must file Form PF only once a year within 120 days of the end of the fiscal year, and report only basic information regarding the private funds they advise. This includes limited information regarding size, leverage, investor types and concentration, liquidity, and fund performance. Smaller advisers managing hedge funds must also report information about fund strategy, counterparty credit risk, and use of trading and clearing mechanisms. Larger private fund advisers must provide more detailed information than private fund advisers. For example, large hedge fund advisers managing more than $1.5 billion (this threshold was raised from $1 billion in the proposed rule) need to file additional information on Form PF. Large private equity advisers with $2 billion in assets under management (this threshold was raised from $1 billion in the proposed rule) also must submit additional information on Form PF. Altogether, the seven types of private fund defined in Form PF are: (1) hedge fund; (2) liquidity fund; (3) private equity fund; (4) real estate fund; (5) securitized asset fund; (6) venture capital fund; and (7) other private fund. For real estate private equity funds, the FORM PF defines “private equity fund” as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course. So real estate funds should only have to make the shorter annual report. Regarding timeframes, smaller private fund advisers and smaller private equity fund advisers only need to file Form PF once per year. Larger hedge fund advisers must file Form PF quarterly and have 60 days after each quarter ends to submit the form. (This is longer than the originally proposed 15 days.) Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. However, three categories of advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012:

Advisers with at least $5 billion in assets under management attributable to hedge funds.
Liquidity fund advisers with at least $5 billion in combined assets under management attributable to liquidity funds and registered money market funds.
Advisers with at least $5 billion in assets under management attributable to private equity funds.

One other noteworthy change to Form PF requirements is that advisers will not be required, as originally proposed, to formally certify that information submitted on Form PF is “true and correct” under penalty of perjury. SEC has chosen FINRA to accept Form PF filings. That means more use of the IARD filing system. And perhaps, moving a step closer to FINRA becoming the SRO for investment advisers. Sources:

IA 3308 – Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF (.pdf – 192 pages)
Form PF(.pdf -63 pages))
SEC Approves Confidential Private Fund Risk Reporting SEC Press Release
Form PF Filings to be Submitted via FINRA in Hedge Fund Law Blog
FINRA Form PF Letter to the SEC
IA 3297 – Approval of Filing Fees for Exempt Reporting Advisers and Private Fund Advisers (.pdf)

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