Author: Doug Cornelius

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Compliance Bricks and Mortar for May 15

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.

Here are a few stories that I found interesting.

Firm Wants FINRA Award Nixed After ‘Inattentive’ Zoom Panel
By Dean Seal
Law360

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.

https://www.law360.com/securities/articles/1270795/firm-wants-finra-award-nixed-after-inattentive-zoom-panel?

Compliance and Coronavirus
by Jim Belin and John Petrovski
Compliance Podcast Network

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. 

http://fcpacompliancereport.com/2020/05/compliance-coronavirus-jim-belin-john-petrovski-reopening-economy/

FBI serves warrant on senator in investigation of stock sales linked to coronavirus
by DEL QUENTIN WILBER, JENNIFER HABERKORN
Los Angeles Times

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.

https://www.latimes.com/politics/story/2020-05-13/fbi-serves-warrant-on-senator-stock-investigation

Tips to U.S. Securities and Exchange Commission have surged in recent weeks
Reuters

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.

https://uk.reuters.com/article/usa-sec-enforcement/tips-to-us-securities-and-exchange-commission-have-surged-in-recent-weeks-official-idUKL1N2CU2MJ

SEC Enforcement Chief Discusses How the Division Is Responding During the Pandemic
By Steven R. Peikin
The CLS Blue Sky Blog

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.

https://clsbluesky.law.columbia.edu/2020/05/13/sec-enforcement-chief-discusses-how-the-division-is-responding-during-the-pandemic/

Cost of Compliance: New decade, new challenges
by Sussannah Hammond & Mike Cowan
Thomson Reuters Regulatory Intelligence

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.

http://financial-risk-solutions.thomsonreuters.info/Cost-of-Compliance-2020

Are you getting the right Zoom?

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.

So you hit “buy.”

It seems lots of people are doing this. Enough that the SEC put a trading suspension in place for Zoom Technologies. It’s ticker symbol is ZOOM.

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

Sources:

A Stop to Rule-Making?

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.

Sources:

Weekend Book Reading: First

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.

I recently finished First: Sandra Day’Connor by Evan Thomas.

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.

More Filing Relief from the SEC

The SEC must have realized that its relief from Form ADV filing and Form PF filing deadlines was not providing much relief. The SEC issued a new order for the deadlines.

You still have to send the SEC a notice that your firm is relying on the Order, but you no longer have to say why you can’t file the forms on a timely basis and don’t have to provide an estimated date for delivery.

The SEC has not extended the deadline. It’s still only 45 days.

If you are relying on the Order, you still need to post a notice on your firm’s website.

I think most firm’s are not going to take advantage of the order. Nobody wants to tell the SEC that can’t meet a deadline, even in the case of a pandemic.

Sources:

SEC Exams During the Covid-19 Pandemic

The SEC’s Office of Compliance Inspections and Examinations issued a statement on operations and exams during the pandemic. OCIE is still operational and can still run exams. They will be off-site through correspondence, unless necessary to be on site. I assume this means that OCIE is focusing on firms suspected of fraud and is limiting routine exams.

I’ve also heard that OCIE is asking firms about their pandemic response as part of their business continuity plans. For many firms this pandemic is a test of their BCPs.

Some of the SEC questions:

Does the firm have: (i) a written Business Continuity Plan; (ii) a Pandemic Continuity of Operations Plan; and/or (iii) equivalent informal plans or guidance (collectively, “BCP”)?

If so: Briefly describe some of the aspects of the BCP that are particularly applicable to maintaining continuity of business operations when dealing with the COVID-19 pandemic (e.g., personnel working remotely).

Are there any business operations that cannot be performed remotely?

Is the firm prepared to have all of its personnel operate remotely for several weeks (e.g., 3+) or months, if required or appropriate? Are any personnel unable to operate remotely or unable to do so for several weeks or months?

Has the COVID-19 pandemic created hardships for the firm (e.g., financial, human resources, or otherwise)?

Sources:

Some Additional Relief From the SEC

The timing of the Coronavirus is coming at the time most private funds are working on audited financial statements.

Form ADV and Form PF

The first move was giving some extra time to file your Form ADV. It requires notifying the SEC and posting information on your website. Similar extensions are available for filing Form PF.

Custody

The SEC updated Question II.1 of the Custody Rule FAQ about inadvertently receiving client funds or securities. Given that many firms are unable to access mail and deliveries at their offices, The SEC has revised the guidance to set the date when the firm is considered to have received such securities on the date that they actually are able to access mail or deliveries at their office locations. The guidance requires investment advisers to return inadvertently received client funds and securities. Now the FAQ modifies that the “three business day” clock begins to run when you have access to office mail and deliveries. This relief is only available when the investment adviser’s personnel are unable to access mail or deliveries as a result of the investment adviser’s business continuity plan relating to COVID-19.

Form ADV – Office Locations

With many firms operating under business continuity and working from home, I’ve heard some concerns about office locations. If people are working from home on a longer basis does that become an office location that needs to be reported on Form ADV?

The SEC stepped up and answered the question. ” As long as the employees are temporarily teleworking as part of the firm’s business continuity plan due to such circumstances, staff would not recommend enforcement action if the firm does not update either Item 1.F of Part 1A or Section 1.F of Schedule D in order to list the temporary teleworking addresses.”

Audited Financial Statements

There is an older FAQ on delivery of audited financial statements under the custody rule for pooled investment vehicles. What happens if you’re not able to get your audited financial statements out within the 120 days mandated by the custody rule?

A: The Division would not recommend enforcement action for a violation of rule 206(4)-2 against an adviser that is relying on rule 206(4)-2(b)(4) and that reasonably believed that the pool’s audited financial statements would be distributed within the 120-day deadline, but failed to have them distributed in time under certain unforeseeable circumstances. (Question VI.g Modified March 5, 2010.)

I would put the Covid-19 into the category of unforeseeable circumstances. On the other hand, private fund documents typically contain a contractual obligation to deliver financial statements in a stated period of time.

Stay Healthy

I hope all the readers of Compliance Building are staying healthy. These are extraordinary times. Use common sense.

Sources:

Compliance Bricks and Mortar for March 20

I’m going to assume that most of the readers of Compliance Building are working remotely. I hope your firms’ business continuity processes are holding up and you’re keeping things together.

I have to admit that I’m getting a little crazy being stuck in the house and working from home so many days in a row. I’ve cut back on riding outside and am spending more time on Zwift in my basement. If you’re a Zwift rider, let me know and we can ride a virtual meetup.

If your looking for compliance-related stories to read, here are a few that caught my attention.

Coronavirus, Systemic Risk, and Lessons from 2008
by Kathryn Judge
The CLS Blue Sky Blog

Banks cannot be blamed for starting the current crisis, nor can financial regulators be expected to contain it.  It is, at bottom, a public health crisis, and  the top priority must be to contain the spread of Covid-19. Yet the pandemic will inevitably trigger widespread economic problems, and while congressionally authorized fiscal support will be the most important tool for minimizing them, the health of the financial system will also come into play. If the reforms of the last decade work, the financial system should be able to absorb this shock and continue to provide the support that the real economy will so desperately need to recover.  But if runs, losses, and uncertainty take over – and sadly, this seems more likely at this stage – the financial system could magnify, rather than soften, the economic impact of Covid-19.

https://clsbluesky.law.columbia.edu/2020/03/16/lessons-from-the-last-crisis/

A Horse Racing Scandal: Lessons Learned
by David D. Dodge
SCCE’s The Compliance & Ethics Blog

Following the announcements of the federal indictments on March 9, Kentucky Derby-winning trainer Graham Motion stated that, “If this doesn’t wake up as an industry, I don’t know what will… it’s our own fault. We let it happen. This shows we are incapable of policing our own sport and that’s a sad situation.” Motion went on to express hope that “the indictments will bring the sport to rock bottom where opposition to the Horseracing Integrity Act will evaporate and the sport will finally embrace national standards for medications and safety.”

https://complianceandethics.org/a-horse-racing-scandal-lessons-learned/

SEC Has Two ‘Suspected’ Coronavirus Cases, Agency Official Says
by Andrew Ramonas
Bloomberg

Two workers at the SEC’s Washington headquarters may have the new coronavirus, an agency official said in a court filing. The Securities and Exchange Commission’s Enforcement Division has implemented an emergency policy of “either requiring or strongly encouraging telework for its personnel, depending on their individual circumstances and each employee’s physical proximity to the workstations of two suspected COVID-19 cases,” David Mendel, an SEC assistant chief litigation counsel, said in a letter to U.S. District Judge Alvin Hellerstein in New York March 13.

https://news.bloomberglaw.com/securities-law/sec-has-two-suspected-coronavirus-cases-agency-official-says

COVID-19 and the Compliance Risks Related to Sales and Marketing Practices
by Jennifer Kennedy Park and Jonathan Kelly
NYU Law’s Compliance & Enforcement

Those businesses hardest hit in the initial stages of the crisis — e.g., cruise lines, airlines and hotels —  quickly face pressures that raise the risks of private litigation and government enforcement in connection with sales and marketing efforts.  For example, what assurances should sales representatives in response to inquiries about the chances of contracting the virus in connection with the use of a product or service?  What information should be provided about safety measures being taken?  Do sales commission and incentive programs exacerbate the risks of non-compliant responses, and should they be suspended? 

https://wp.nyu.edu/compliance_enforcement/2020/03/17/covid-19-and-the-compliance-risks-related-to-sales-and-marketing-practices/

Freshfields Discusses How Companies Can Switch to Virtual Annual Meetings After Proxy Filings
By Pamela L. Marcogliese, Elizabeth K. Bieber and Jillian Simons
The CLS Blue Sky Blog

In light of the novel coronavirus, COVID-19, companies are considering the advisability of holding in-person annual meetings.  Given the timing of the COVID-19 emergence, companies with December 31 fiscal year ends may be weighing a change to their meeting format after filing their proxy statements and with little time until their annual meeting date.

https://clsbluesky.law.columbia.edu/2020/03/16/freshfields-discusses-how-companies-can-switch-to-virtual-annual-meetings-after-proxy-filings/

Welcome to Watopia – Let’s Be Nice

With many newly-arriving Zwifters worldwide there are a few tips that I think all of us experienced Zwifters need to follow. Let’s cut these newbies a little slack and lend a teaching hand as these new riders find out how many meters the Tron bike actually requires, how to see the real race results on Zwift Power, and most importantly how to connect with the Zwift community more intimately. Whether that’s through group rides, races or just a social club environment, let’s make these folks feel welcome.

https://zwiftinsider.com/welcome-to-watopia-lets-be-nice/

Compliance in Time of Coronavirus

We are in extraordinary times. To me it feels like a combination of the days after 9-11 and the 2008 Lehman collapse. We are sheltered in place, fearful for our lives and the economy is grinding to a halt.

Our government came up short in its response to pandemic. (I try to keep this blog out of the political debate. This is not one of those times.) The administration was ill-equipped to handle the pandemic, ignored the problem, failed to take early action, and has consistently gotten the facts wrong. It’s initial response was tax cuts, which did not address the pandemic and was a poor tool to help those in economic distress. Things will stabilize, eventually.

The next problem will be be figuring out when to end things. We will need to release people from their isolation and tell everyone it’s okay to start meeting again. I fear that we will lack the leadership and trust in government to hit the restart button. Who will honestly tell us that it’s okay to go out?

That leaves us where we are now. Trying to keep our businesses running in this time of crisis. Holding thing together. Waiting for normal to return.

For registered investment advisers, the Securities and Exchange Commission has offered some relief. You can have some extra time to file your Form ADV. It requires notifying the SEC and posting information on your website. Similar extensions are available for filing Form PF. I hope things are better a month from now and firms won’t need that extension.

Sources:

Compliance Bricks and Mortar for March 13

These are some of the compliance-related stories that recently caught my attention. It’s a lot of Coronavirus, but not all of it.

New FINRA Guidance on Pandemic Risks
Matt Kelly
Radical Compliance

Another day, another gumdrop of guidance from financial regulators that’s worth reading for the whole compliance community. This time it’s FINRA, which published a bulletin Monday reminding broker-dealer firms about how to manage pandemic risk.
FINRA has Rule 4370 for broker-dealers, which requires them to draft and maintain a business continuity plan. That rule doesn’t cite pandemics per se, but does say the business continuity plan (BCP) should address “significant business disruption,” which coronavirus certainly is. 

http://www.radicalcompliance.com/2020/03/10/new-finra-guidance-pandemic-risks/

Coronavirus and securities compliance related considerations
Brian Dunlay
Federal Securities Law Source

On March 4, 2020, the Securities and Exchange Commission issued an Order granting conditional relief from certain filing obligations under the federal securities laws for reporting companies whose compliance may be delayed by the coronavirus disease (COVID-19). In the press release accompanying this unprecedented Order, SEC Chairman Jay Clayton noted, “The health and safety of all participants in our markets is of paramount importance. While timely public filing of Exchange Act reports is a cornerstone of well-functioning markets, we recognize that this situation may prevent certain issuers from compiling these reports within the required timeframe.”

https://www.fedseclaw.com/2020/03/articles/other-articles/coronavirus-and-securities-compliance-related-considerations/

COVID-19: Evaluating the Need for In-Person Fund Board Meetings and Other Considerations for U.S. Asset Managers
Lori L. Schneider and Marguerite W. Laurent
The National Law Review

In our recent experience, fund boards of directors, in consultation with fund advisers, have begun to consider alternative options to in-person board meetings in light of COVID-19 concerns. Some have decided to hold their meetings telephonically, while others have opted to permit those directors who would need to travel to the meeting to instead attend the meeting telephonically, with those who live in close proximity to the meeting location attending in person. Fund complexes likewise have been reviewing meeting agendas to determine whether any in-person approvals are required under the 1940 Act. To the extent they are, funds that determine to rely on the IDC Letter and/or IM Statement should have the board make a determination (presumably before or at the beginning of the meeting) regarding the unforeseen or emergency circumstances that make reliance on the no-action position appropriate.

https://www.natlawreview.com/article/covid-19-evaluating-need-person-fund-board-meetings-and-other-considerations-us

Pervasive Threat of Business Email Compromise Fraud
Jennifer Archie and Serrin Turner
Harvard Law School Forum on Corporate Governance

Business email compromise is a type of Internet-based fraud that typically targets employees with access to company finances—using methods such as social engineering and computer intrusions. The objective of the fraud is to trick the employee into making a wire transfer to a bank account thought to belong to a trusted partner, but that in fact is actually controlled by the fraudster. According to the FBI, between May 2018 and July 2019, there was a 100% increase in identified global exposed losses due to BEC. 

https://corpgov.law.harvard.edu/2020/03/09/pervasive-threat-of-business-email-compromise-fraud/

Practice Alert: Is every email another FCPA violation?
Bill Steinman
The FCPA Blog

In U.S. v. Coburn and Schwartz, Judge McNulty held that when it comes to charging defendants with violating the FCPA, the relevant question isn’t the number of bribes paid, but the number of calls made or emails sent. To reach this decision – one of first impression under the FCPA – Judge McNulty simply relied on the statute’s plain language. Chatty defendants beware: you can face a separate criminal count for each individual missive you send about the same overall bribery scheme.

https://fcpablog.com/2020/03/10/practice-alert-is-every-email-another-fcpa-violation/

BlackRock and the Curious Case of the Poultry Farmer
Paul Rissman
Harvard Law School Forum on Corporate Governance

Typically, an 11% vote is the end of the story, at least until the next annual meeting when the shareholder may try again. Yet, in this case something unusual happened. Later that same day, a Sanderson press release informed the public that it was going beyond the request of the resolution to issue a report fully compliant with all applicable environmental and social standards set by SASB. Notably, the press release explained that, after “recent extensive engagement with many of its largest stockholders, and in recognition of evolving investor expectations in regard to sustainability reporting,” Sanderson had reversed course.

https://corpgov.law.harvard.edu/2020/03/10/blackrock-and-the-curious-case-of-the-poultry-farmer/

The Latest Revisions to the California Consumer Privacy Act Regulations: Key Considerations for Private Fund Managers
Shulte Roth & Zabel

Although the California Consumer Privacy Act (“CCPA”) went into effect on Jan. 1, 2020, the California Attorney General’s regulations are not yet final, and likely will not go into effect until July 2020. Nonetheless, the most recent version of the proposed regulations, which were issued in February (“Proposed Regulations”), addresses some of the questions fund managers raised during initial compliance with the law.

https://www.srz.com/resources/the-latest-revisions-to-the-california-consumer-privacy-act.html

FinCEN Imposes Its First Penalty on a Bank Compliance Officer for $450,000 for Failing to Prevent AML Violations
NYU Law’s Compliance & Enforcement

On March 4, 2020, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a consent order assessing a $450,000 civil money penalty against Michael LaFontaine, a former Chief Operational Risk Officer at U.S. Bank NA (“U.S. Bank”), for his alleged failure to prevent Bank Secrecy Act/anti-money laundering (“BSA/AML”) violations that took place during his tenure.[1] This action—which follows U.S. Bank’s 2018 BSA/AML-related resolution with FinCEN, the U.S. Department of Justice (“DOJ”), the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve for a combined $613 million in financial penalties—marks the first time FinCEN has imposed a penalty on a bank compliance officer for his role in failing to prevent BSA/AML compliance program failures.

https://wp.nyu.edu/compliance_enforcement/2020/03/11/fincen-imposes-its-first-penalty-on-a-bank-compliance-officer-for-450000-for-failing-to-prevent-aml-violations/