I’m sure many people are surprised at the decision from the Supreme Court that federal employment discrimination law protects gay and transgender employees. Title VII of the Civil Rights Act of 1964 prohibits employment discrimination “because of sex.”
Even if Congress did not have discrimination based on sexual orientation or transgender status in mind when it enacted the Civil Rights Act over a half century ago, the Supreme Court ruled that Title VII’s ban on discrimination protects gay, lesbian and transgender employees.
If you’ve been involved in discrimination training as part of your compliance program, you know that fewer than half of the states currently ban employment discrimination based on gender identity or sexual orientation. The Supreme Court decision is is a major victory for LGBT employees.
The decision is particularity remarkable given that President Trump has been able to appoint two justices during his term, giving the court what is usually a more conservative tilt, and seeming less likely to expand the interpretation of civil rights laws. President Trump’s first pick to the high court, Neil M. Gorsuch, is responsible for writing decision. I’m sure he’s quit surprised that his pick has written the most impactful ruling for gay rights since same-sex marriage was codified as a constitutional right in 2015.
The vast majority of private funds use the audited financial statements alternative for compliance with the Custody Rule. Fund managers have custody of the fund assets. Fund investors typically demand audited financial statements from their fund managers. So the audited financial statement work well with the Custody Rule and provides some third-party verification that the manager is not misusing or misappropriating client funds or assets.
The audited financial statements alternative under the Custody Rule has three main requirements:
Have the audit done by an independent public accountant that is registered with, and subject to regular inspection by, the Public Company Accounting Oversight Board,
Distribute the audited financial statements to all investors in the fund, and
Deliver the audited financial statements within 120 days of the end of the fund’s fiscal year.
The SEC just brought an action against a New Jersey fund manager for failing to meet these three requirements of the Custody Rule.
TSP Capital in Summit, New Jersey, has been registered with the SEC as an investment adviser since 2004. TSP Capital was the manager of two private funds. The largest was Cameroon Enterprises.
According to the SEC Order, TSP Capital relied on the Audited Financials Alternative to the Custody Rule but failed to comply with the requirements from 2014 through 2018. For 2014, the audit report was mailed to investors 686 days late; for 2015, the audit report was mailed to investors 927 days late. For the following years, TSP Capital did not succeed in engaging an audit firm to audit the Cameroon Fund’s annual financial statements.
This was likely easy to catch by the SEC. On the Form ADV filing, TSP Capital had to provide information about the fund in question 7.B.(1) Private Fund Reporting. Question 23(a)(1) asks :
“Are the private fund’s financial statements subject to an annual audit?”
TSP Capital answered this as “No.” I’m sure that checking “no” instead of “yes” is a red flag for the SEC.
The SEC made no claim of misuse of clients funds in the order. This was treated merely as a footfault.
Part of a private equity fund’s investment strategy is getting a seat at the table for a company they own. When that company’s shares also publicly traded, there are heightened compliance concerns. The fund’s management representative is likely to end up with material non-public information. The compliance challenge is to prove that the information does not make it to the fund’s trading desks.
Based on the SEC order, Ares had invested several hundred million dollars in a public company and had two representatives on a public company’s board. One of those was a senior member of the investment team. This representative had access to:
“potential changes in senior management,
adjustments to the Portfolio Company’s hedging strategy,
efforts to sell an interest in an asset,
the Portfolio Company’s desire to sell equity and use proceeds to retire certain debt, and
the Portfolio Company’s election, as allowed under the terms of the loan agreement, to pay interest “in kind” and not in cash.”
All of that would reasonably be considered material non-public information. Ares compliance group had trades in the company’s stock under special watch. It had the power to impose information walls, but apparently did not do so in this case.
Ares made follow-on purchases of the company’s stock.
Ares’ compliance staff failed, in numerous instances, to document sufficiently that they had inquired with the Ares Representative and the members of the deal team as to whether any of them had received potential MNPI from the Portfolio Company, or to apply a consistent practice to the inquiries made, resulting in ambiguity whether, or if, inquiries were made in certain instances.
This a classic compliance problem of proving that you don’t know something when the information exists within the firm. As a result, the SEC order takes the position that Ares’ compliance staff “failed to document properly whether they had assessed the extent to which Ares deal team members had any information that had the risk of being MNPI.”
Part of this appears to be the unusual circumstance. Ares does not commonly hold director seats on the boards of publicly-listed companies. The compliance policies and procedures didn’t adequately address the issue and the compliance staff did not adequately document an area of heightened risk.
The Securities Exchange Commission followed up on whistleblowers’ complaints against TCA Fund Management for inflating the value of the assets in its Global Credit Master Fund. In January, investor redemption requests exceeded the liquidity of the fund and it eased operations.
The SEC claims that TCA was booking loan fees as revenue at the non-binding term sheet stage, instead of when the loan closed. The SEC also claimed that the TCA was booking investment banking fees at the time the firm was engaged and not when the fee was earned . TCA would only be paid if a transaction closed. According to the SEC complaint these practices resulted in over $155 in improperly recognized revenue.
As for the value of the TCA assets, the SEC called it “grim.”
“For 2017 and 2018, the Funds’ auditor issued a qualified opinion with respect to Master Fund’s income and assets, including, for 2018, a qualified opinion with respect to 89% of Master Fund’s NAV. By May 2019, Master Fund had only 5% of its assets in cash, with most of the balance of the assets consisting of amounts owed to Master Fund on loans to thinly capitalized borrowers, a substantial amount of which are in default.”
Strangely, however, the SEC complaint does not accuse TCA of overstating its assets. The whistleblowers accuse the firm of not writing down asset value. I’m not sure why the SEC pulled its punch on the valuation issue.
The other issue that the SEC did not highlight in its complaint is that TCA would likely have been receiving excessive fees from the fund based on the inflated values. I assume the fee had some basis on NAV. With the NAV inflated, the fees would have been inflated.
According to the NBC News story, the problems first surfaced in a 2016 SEC exam. TCA had restated some values as a result of the process. The whistleblowers stepped up when they felt the SEC has missed the full extent of the fund’s misconduct.
Of course, we haven’t heard TCA’s side of the story. I’m just looking at this as a compliance lesson.
Valuation should be the number one issue for compliance in funds with illiquid assets. They are harder to value so more effort should be put into making sure the values can be justified.
There is no greater villain right now that fraudsters trying to profit from the COVID-19 pandemic. The Securities and Exchange Commission is more than willing to go after these bad guys.
Applied BioSciences Corp. issued a press release on March 31 stating that it had begun offering and shipping supposed finger-prick COVID-19 tests to the general public that could be used for “Homes, Schools, Hospitals, Law Enforcement, Military, Public Servants or anyone wanting immediate and private results.”
No. The SEC charged that the tests were not intended for home use by the general public and could be administered only in consultation with a medical professional. The SEC further charged that Applied BioSciences had not shipped any COVID-19 tests as of March 31. And furthermore, the SEC charged the company for failing to disclose that the tests were not authorized by the U.S. Food and Drug Administration.
The SEC suspended trading in the company’s securities and is seeking relief.
Do you have a fever?
Turbo Global claimed to have a multi-national public-private partnership to sell thermal scanning equipment to detect individuals with fevers. In a press release with its supposed corporate partner, Turbo claimed the technology is 99.99% accurate.
Turbo Global had no agreement to sell the product, there was no partnership involving any government entities, and the CEO of Turbo Global’s supposed corporate partner did not make or authorize the statements attributed to him.
When using a track record in marketing materials, compliance officers will focus on the numbers and how they are used to portray prior results. The Securities and Exchange Commission will also scrutinize these results when they inevitably stop by to exam registered fund managers.
Keeping the track record straight is even more difficult for a new firm. Inevitably the principals will want to market their successful investment activity at the legacy firm.
Old Ironsides Energy ran into this problem when marketing its Old Ironsides Energy II fund.
The Securities and Exchange Commission charged the firm with using misleading marketing materials that mischaracterized a large, legacy investment with strong, positive returns. Old Ironsides identified it as an early stage “direct drilling investment” over which Old Ironsides had direct management in partnership with project operators in its legacy portfolio. However the investment was better characterized as in interest in a private fund advised by a third party.
As you might expect, the private fund’s returns were really good. Also, Old Ironsides Fund II would not be investing in private funds.
It’s not that Old Ironsides couldn’t include that private fund in its returns. It needed to better describe that investment so that potential investors could understand it.
I found it strange that the SEC also include a charge that Old Ironsides failed to implement its policies and procedures. The P&Ps included a provision that:
“prohibited the use of performance results in Old Ironsides’ marketing materials that were false or misleading, including any misleading depictions of investment performance in both form and content leading to direct or indirect implications or inferences arising out of the context of the marketing materials.”
The SEC found that the marketing materials were misleading so the P&Ps were not followed. Is the SEC trying to say that a firm should not have language like that in its P&Ps? Or is just another charge the SEC can pile on when ti finds something it doesn’t like?
I hope you and your family are staying healthy during this pandemic. We are in a time of great distress. Our health and our economy are at risk. Our country is dividing itself over the correct response.
It’s been weeks since I’ve published a blog post. I’m trying to adapt to constantly working at home. The house is full of distractions. But it’s also full of family. My regular work routine is gone and I don’t know when it will come back.
Many firms are talking about how to get back in the office safely and what that might look like. Landlords are figuring out how to get buildings back to effective work spaces, how to deal with elevators and how to deal with commutes.
All of my bike rides have been cancelled or “re-imagined” into a different form. Disappointing, but clearly the right call for the health of riders and volunteers. I’ve only pedaled one short bike ride outside in the last month. Nonetheless, I’m 1100 miles ahead of my yearly biking distance goal. I’ve converted to indoor riding on my smart trainer and Zwift.
In all of this chaos and change in routines, my Compliance Building writing has fallen to the side. I’m hoping to get back to writing and back into a new routine. Let’s see if it works and how long it lasts.
The arbitrators were also “effectively advocating” for Dominick throughout the case, Wunderlich said, and when they were not “interrupting testimony, they would appear to be inattentive and failed to follow the proceedings.” This culminated with the final hearing, held virtually, in which one arbitrator continually looked at other screens, another blocked her screen for a period of time and, during closing arguments, the third simply walked away from the screen, the petition alleges.
Welcome to the newest addition to the Compliance Podcast Network, Compliance and Coronavirus. As the Voice of Compliance, I wanted to start a podcast which will help to bring both clarity and sanity to the compliance practitioner and compliance profession during this worldwide health and healthcare crisis. In this episode, I am joined by Jim Belin, as self-styled ‘contrarian investor’ and John Petrovski, a long time commercial real estate specialist in the lending arena. We take a deep dive into the reopening of the economies of the states in which we reside and where the economy may be going into 2012 and beyond.
Federal agents seized a cellphone belonging to a prominent Republican senator on Wednesday night as part of the Justice Department’s investigation into controversial stock trades he made as the novel coronavirus first struck the U.S., a law enforcement official said. Sen. Richard Burr of North Carolina, the chairman of the Senate Intelligence Committee, turned over his phone to agents after they served a search warrant on the lawmaker at his residence in the Washington area, the official said, speaking on condition of anonymity to discuss a law enforcement action.
The agency has received over 4,000 such tips since mid-March, representing a 35% increase over the same period a year ago, Steven Peikin, co-director of the SEC’s Enforcement Division, told attendees of a virtual conference.
We are all too familiar with the many ways in which the COVID-19 pandemic has transformed our personal and professional lives over these last several months.[1] We are confronting new and serious personal challenges, all the while endeavoring to continue our respective professional responsibilities. Like most of you, the SEC Staff have been teleworking since March. The disruption and changed work environment has had – and will continue to have – a substantial impact on the activities of the Division of Enforcement. But I am gratified to report that we have continued to execute on our important mission to protect investors, promote capital formation, and maintain fair and orderly markets. So this afternoon, I’d like to share with you how the Division of Enforcement is responding during this ongoing crisis. I’ll describe some of the work we are doing to detect and address COVID-19-related misconduct. Then I will turn to our regular docket of investigations and litigations. All of our regular enforcement responsibilities remain in place, and we are endeavoring to execute on them, though in many respects we have had to find new ways to do so. I’ll close with a brief discussion of where I see the Division going from here.
For 11 years our Thomson Reuters Regulatory Intelligence Cost of Compliance Report has given an unparalleled insight into the challenges facing risk and compliance officers in financial services firms around the world. This year a tightening of risk and compliance budgets, regulatory and cultural change and the possibility of increasing personal liability all provided evidence of a cyclical turn from the post-financial crisis years. It is too early to tell how COVID-19 will influence that inflexion over the long term, but already regulators are issuing a flurry of revisions to rules, and firms are asking for the postponement of various regulatory initiatives so they can focus on managing events. The report findings seek to help firms with planning and resourcing, while allowing them to benchmark their own approach. This year’s edition closed before the widespread impact of the COVID-19 pandemic had become apparent; thus, the report analyzes both the survey responses and, in an additional dedicated section, looks in more detail what better risk and compliance practice will look like in the face of continuing uncertainty.
I’m going to guess that many of you are using Zoom for some aspects of communicating personally or professionally? I think it’s great. Business meetings work better when you can see each other.
Personally, it’s been great to get together with my cycling teams over Zoom. We aren’t riding together outside. I’m not riding outside at all. We have done some Zoom and Zwift rides. Nothing better than watch each other struggle up virtual bike climbs.
Maybe you like it so much that you think you should buy some stock in the company. You type in “Zoom.” See a quote and description.
Zoom Technologies, Inc., through its subsidiaries manufactures, researches, develops and sells electronic communication products for the mobile phones, wireless communication circuitry, and related software products.
The problem is that you were really interested in Zoom Video Communications. It’s ticker symbol is ZM.
Zoom Technologies also hasn’t filed any public disclosures since 2015 but still has a market value of around $30 million. Zoom Video has a market value of over $30 billion.
Zoom Tech’s price doubled to $20 in late March as we all brought Zoom Video into our personal and professional lives. It’s clear that there were a lot of poorly research trades in the mix
Should the rule making process continue for regulations that are not related to COVID-19? At least 21 state attorneys general say “no.”
In a letter to the Acting Director of the federal Office of Management and Budget, the attorneys general want the federal bureaucracy to prioritize regulations that are responsive to the pandemic while generally freezing all new and pending regulations.
Against that backdrop, the letter urges the federal government to halt most non-COVID-related rulemaking processes. It also asks the Administration to consider reopening certain already-closed rule comment periods.
I think the request is likely to fall on deaf ears. The 21 states behind the request are more blue than red.
The halt to new rule-making is not unprecedented. The letter points out that President Trump put an nearly identical freeze in place when he took office.
Every day is starting to feel like a Saturday: A ton of work to do, but I don’t have to go into the office tomorrow. A lot of my free reading time is consumed with trying to understand what is going on with the current pandemic. When I’ve had enough of that, I’ve been attacking my to-read pile.
It’s a great biography of the first female US Supreme Court Justice. Born in El Paso and raised on a cattle ranch in Arizona, she grew up in a time when women didn’t usually have careers.
She left home at 16 to go to college and then law school at Stanford. Even though she graduated in the top of her class, law firms only offered her a job as a legal secretary. Eventually she landed an unpaid position as deputy county attorney and had to share space with a secretary.
Her rise to the highest court in America seems almost prescient with her ranch-honed determination, brilliant mind and nose for politics.
Upon reaching the Supreme Court in her biography, Mr. Thomas starts weaving important Supreme Court cases into the story. And practical items as well. The building didn’t have a women’s bathroom nearby for her when she arrived.
Mr. Thomas apparently had wide access to her personal journals, her husband’s diary and her family. He paints a detailed and insightful portrait of an extraordinary woman.
If you’re looking for a book to read while cooped up because of the coronavirus, I recommend this one. Unfortunately (but for good reason) my local bookstore is closed. You can still get it through Amazon. I listened to it as an audiobook through Audible.
