Author: Doug Cornelius

You can find out more about Doug on the About Doug page

Read SEC.gov on Your Phone

I had given up on trying to access the SEC’s online resources through my phone a long time ago. Frankly, it was hard to use with a full computer screen at times. It was nearly impossible to use on my phone’s small screen.

But the site has been evolving. Broc Romanek pointed out that the SEC’s home page is now mobile friendly. I looked around this morning while riding the train the work (a day off from bike-commuting). Most of the site works much better on a phone.

Of course that is great for consumers who are likely to be less frequent users and trying to get themselves some help. I might have moved the order of things around on the SEC’s home page to make it easier to make a complaint or research financial professionals. But the information is there and easy to find.

For industry users like me, it’s great to be able to find resources while out of the office. While on the SEC’s home page, I noticed that the SEC’s open meeting scheduled for today has been cancelled. There was a rumor circulating that the Commission was going to present updated guidance or a new rule on public company reporting requirements on data breaches. Clearly, that is not happening today.

If you were wondering, ComplianceBuilding.com is set up to be mobile-friendly. Let me know if it doesn’t work on your phone.

Compliance and the Olympics

I’m a  big fan of the Winter Olympics. I’ve been spending many hours watching coverage of curling, snowboarding, cross-county skiing and the biathalon, so far.

A story about compliance at the Olympics caught my attention.

Samsung, the big South Korean company, made a limited edition of its Galaxy Note 8 for the PyeongChang 2018 Olympic Games. It planned to deliver more than 4,000 units of the device to those involved in the PyeongChang Olympics, including the International Olympic Committee, the PyeongChang Organizing Committee, the Olympic athletes, and the Paralympic athletes.

One of the great celebration of the Koreans at the game is the inclusion of athletes from North Korea. Since you have read the news, you know that there are all kinds of sanctions against North Korea. You can also add in the four athletes from Iran who are competing and from a country subject to sanctions.

Word of the limitation reached the government of Iran and the South Korean ambassador was brought in. The Iranian prosecutor-general threatened to bring Samsung’s boss in Iran in for questioning. Little did I know, but Iran is apparently the biggest smartphone market in the Middle East., with an estimate that 48 million people in Iran own the devices.

The IOC intervened and gave Samsung the nod to allow the Iranian athletes to get the phones and bring them back to Iran.

Samsung also gave the North Koreans the phones. However, they must be returned to avoid the ban on shipping luxury goods to North Korea.

That market is substantially smaller. North Korea has about four million mobile-phone subscribers, which about one-sixth of the population. Those devices are lacking features, like an internet connection or the ability to call internationally.

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Compliance Bricks and Mortar for February 9

These are some of the compliance-related stories that recently caught my attention.

Asset Managers Show Less Concern About Compliance by Ben DiPietro

More than three-quarters of respondents said the reduced regulatory concern meant compliance issues are not as significant as they were in the past; 52% said they are more focused on reputational risk the last six months than regulatory risk. [More…]

How to Survive a Root Cause Analysis: Chapter 8 of The Worst-Case Scenario Survival Guide for Compliance Professionals by Tom Fox

For the first time, companies that sustain an FCPA violation are required to perform a root cause analysis and incorporate that information back into the compliance program. Learn how to survive. [More…]

Rabobank Unit to Forfeit $369 Million to Settle Money-Laundering Probe by Samuel Rubenfeld

The guilty plea comes about two months after George Martin, a former Rabobank vice president, entered into a deferred-prosecution agreement with the U.S. for his role in aiding and abetting the bank’s failure to maintain an effective compliance program. He agreed at the time, as part of his plea deal, to cooperate with the ongoing U.S. investigation. [More…]

Market regulators on crypto: We’re on it, but may need help by Ian McKendry

Testifying before the Senate Banking Committee, the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission said the two agencies are not ignoring the fast-growing cryptocurrency sector and they have some oversight powers. But they indicated that they might need more. [More…]

SEC Exam Priorities for 2018

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced its 2018 examination priorities. This year, the examination priorities are broken down into five categories:

  1. Compliance and risks in critical market infrastructure;
  2. Matters of importance to retail investors, including seniors and those saving for retirement;
  3. FINRA and MSRB;
  4. Cybersecurity; and
  5. Anti-money laundering programs.

The retail investor focus and the cybersecurity focus are carryovers from last year. MSRB was added to the FINRA focus. I expect cybersecurity will be on the list for the foreseeable future.

I think it’s interesting to see anti-money laundering on the list. The current rules are not explicitly applicable to many investment advisers and private fund managers. Those fall outside the definition of “covered financial institution.” Broker-dealers and mutual funds are “covered financial institutions.”

This was true in the latest AML customer due diligence released by FiinCEN in 2016. FinCEN released a proposed rule to include investment advisers in the general definition of “financial institution” in 2015. That proposed rule seems to have stalled out.

On top of that, the rules and regulations are not generated by the SEC. Regardless, it’s against the law to do financial transactions with people and companies on the sanctions list. At a minimum, advisers should be checking their investors and clients against those lists.

It will be interesting to see how that works it’s may into the examination process. perhaps part of it will be fact-finding for once again creating an explicit rule for investment advisers.

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The SEC is Open on March 31

That headline is incorrect. I can’t speak for the entire SEC, especially with Congressional funding in jeopardy between now and then.

However, The IARD system is operating on March 31. If you have to file your Form ADV, it is due to be filed by March 31.

Back in 2013, March 31 fell on a Sunday and the IARD system did not work on the weekends back then. According to the calendar, the IARD system is now operating every day.  So, for you procrastinators, you don’t get extra time over the weekend to finish your Form ADV.

If you are the listed contact, you should have received this email:

IARD Availability on March 31 for Form ADV Annual Updating Amendment Deadline

Please be advised that the Investment Adviser Registration Depository (IARD) system will be open on Saturday, March 31, 2018, from 8am-6pm Eastern Time.  On that date,advisers will be able to submit filings, including amendments to Form ADV.  If an adviser’s fiscal year ended on December 31, 2017, that adviser will be able to file its Form ADV Annual Updating Amendment on March 31, 2018, in order to meet the requirement to file within 90 days after the end of its fiscal year.  If you have questions, please email [email protected].

If you have not noticed, there have been some significant changes to Form ADV.  See the Changes to Form ADV. It’s going to take some extra time to complete the filing this year.

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Compliance Bricks and Mortar for Groundhog Day

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

Misplaced Regulatory Moves, Up Close by Matt Kelly in Radical Compliance

Like manna from heaven, every time you write about some grand plan from government, fate sends an example of how harebrained bureaucracy can be in practice. And so today we have an example of missing the point on deregulation, which some bureaucrat at the Federal Communications Commission clearly did.[More…]

Beware ICO Lawyers: As Regulatory Gatekeepers, You’re the Next SEC Target by John Reed Stark

Equally astonishing is that ICOs have grown largely outside of regulatory oversight and without the investor protections and disclosure requirements that apply to traditional investment offerings. In fact, ICOs provide a virtual “Driver’s Ed” film of possible securities law violations.   [More…]

Compliance and Creative Problem Solving by Tom Fox

One thing that compliance officers must never forget is that their customers are company employees. This means when an employee comes to you with a problem, they need you to fix it or to help them fix it. As the article noted, customers cared less about the actual outcome than about the process by which the employee tried to offer assistance. “It’s not about the solution—it’s about how you get there.” Once again, the Fair Process Doctrine raises its head not only in the corporate world but specifically in the compliance realm. [More…]

Ex-Morgan Stanley advisers used clients’ cash to fund wind farm project: feds

Two former Morgan Stanley advisers have agreed to plead guilty to US charges that they misused client funds to invest in a wind farm project they were involved with, federal prosecutors said on Wednesday.[More…]

BRING ON THE BIKOCALYPSE by Felix Salmon

Chinese cities have been overtaken by the chaos and clutter of dockless bikes. American cities should follow their lead.[More…]

The Department of Justice Threw Out the Use of Guidance Documents

President Trump has set de-regulation as one of his priorities. We saw this in his Executive Order that required the repeal of two regulations before enacting a new regulation. The Department of Justice is embracing this mandate.

Associate Attorney General Rachel Brand issued a memorandum  limiting the use of agency guidance documents in affirmative civil enforcement cases. This is an extension of November 15, 2017 memo from Attorney General Sessions that prohibits the DOJ from promulgating guidance documents that create rights or obligations that are binding on regulated parties.

The Brand Memo applies to affirmative civil enforcement cases.  I was not sure what those were. I found out that they are civil lawsuits on behalf of the United States is to recover government money lost to fraud or other misconduct or to impose penalties for violations of Federal health, safety, civil rights or environmental laws. This would include ADA lawsuits, environmental clean up lawsuits, as well as healthcare reimbursement fraud.

The November memo from the Attorney General was intended to attack guidance that gets implemented as a de facto regulation without going through the formal notice and comment rulemaking process.

Any guidance documents now have to follow five principles:

  1. Guidance has to disclaim any force of law, and avoid language suggesting that the public has obligations that go beyond those set forth in the applicable statutes or legislative rules.
  2. Guidance must clearly state that they are not final agency actions, have no legally binding effect on persons or entities outside the federal government, and may be rescinded or modified.
  3. Guidance should not be used to coerce persons into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or regulation.
  4. Guidance should not use mandatory language such as “shall,” “must,” “required,” or “requirement”, except when restating with citations to statutes or regulations.
  5. To the extent guidance set out voluntary standards, they should clearly state that compliance with those standards is voluntary and that noncompliance will not, in itself, result in any enforcement action.

This leaves me scratching my head on how this might affect guidance from the Securities and Exchange Commission that the compliance professionals rely on.

The Brand Memo clearly states that it applies to DOJ litigators in using other agencies’ guidance documents. Although, it limits itself to affirmative civil enforcement cases. I would have to assume that this may bleed over into the DOJ’s prosecution of cases referred from the SEC.

Guidance cuts both ways. Attorney General Sessions is clearly focused on guidance that imposes more obligations on regulated parties. But I think that is a simplistic way to look at things. Some of the guidance provides safeguards that help firms navigate uncertainty in the legislation and regulations.

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SEC Says “NO” to Cryptocurrency ETFs and Mutual Funds

When Bitcoin was rapidly increasing in value, there were lots of people looking to invest in that space. The SEC has repeatedly raised concerns about fund sponsors creating a fund or ETF focused on cryptocurrency. In a letter to the Investment Company Institute and Securities Industry and Financial Markets Association, the SEC said don’t even think about it.

Actually, it said you can think about it, but what about all of these issues. These issues are very compliance-related so I thought it was interesting to look at these compliance issues in light of this new asset class.

Valuation

Proper value of a fund assets is critical. For Bitcoin and various crypto-currencies there are multiple exchanges that are often far apart in the exchange rate. Bitcoin itself has little ascertainable value. Few merchants accept it as payment and few holders are willing to part with it, instead holding it as an investment. The value is determined as other currencies, based on the exchange rate into dollars. That exchange rate can vary significantly from provider to provider.

The SEC lays out out a long list of questions that would have to be addressed in a valuation policy.

Custody

This is the big problem. Most of the successful hacking of crypto-currency has been a a hack into the depositories/wallets that hold the crypto-currency. Investment advisers have regualtory custody requirements and ’40 Act funds have a stricter set of rules.

The SEC points out that it is not aware of any custodian providing custodial services for crypto-currencies.

The problem with custody is that you have to have the private crypto key as well as the record in the blockchain.

Arbitrage

For ETFs that trade during the day, you have problems with differing price movement at the different exchanges for crypto-currencies.

Market Manipulation

As I pointed out yesterday, cypto-currencies seem to targets for market manipulation. That also means that any derivatives from the crypto-currencies are also subject to market manipulation.

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Pump and Dump Cryptocurrency

Cryptocurrency is a lawless land.

Ten days ago, the Securities Exchange Commission and the Commodities and Futures Trading Commission issued a joint statement on virtual currency:

“When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”

Take a look at BigPump.org. Go ahead and take a look. I’ll wait.

“We do pumps…. Big pumps.”

Right there on a public website, the group advertises its strategy for pumping and dumping cryptocurrency. It came to my attention through an article by Paris Martineau:
Inside the Group Chats Where People Pump and Dump Cryptocurrency.

I was skeptical that a strategy that was so brazenly illegal would be so easy to spot. So being skeptical, I dug into the underlying information. There it was, publicly displaying a pump and dump scheme.

In their defense, they claim their pumping schemes are fair. Of course, there is also a note that premium pumps will be coming soon. I have to assume that those premium pumps are less fair to those outside the premium group.

It does not take much to find examples of pump and dump. Look at this chart for the Crave cryptocurrency.

Some people made a bunch of money by rallying interest in this cryptocurrency and selling at the top before the price.

That is not the way a price chart for any “currency” should look. It’s not the way chart should look for any investment.

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Weekend Reading: The Undoing Project

I have read most of the books of Michael Lewis. When The Undoing Project came out last year, I grabbed a copy to read right away.

Mr. Lewis picks the story of Israeli psychologists Daniel Kahneman and Amos Tversky who created the field of behavioral economics. Their work came to the attention of Mr. Lewis after Moneyball came out. Cass Sunstein and Richard Thaler pointed out in their review that Moneyball was really about behavioral economics and mentioned the work of Kahneman and Tversky. That reference lead Mr. Lewis to write this book.

It seems like the classic formula for Mr. Lewis: take a complicated topic and explain it using interesting people.

But when I started reading The Undoing Project, I kept putting it down. A year later, I finally decided to read it. (I needed to read a book about social science for the Book Riot Read Harder Challenge.)

I found this to be the least favorite of the Michael Lewis books I have read. I think the problem is that the book is much more of a biography than a concept study using people. It’s not that Kahneman and Tversky are uninteresting. I just didn’t find the lengthier biographical sections of the book to be compelling to read. Most of the first half of the book is biographical.

The book really shines when it focuses on the work of Kahneman and Tversky.

Kahneman and Tversky showed that in decision-making and judgment human beings did not behave as if they were statisticians. Instead our their judgments and decisions deviate in identifiable ways from theoretical models. Human errors are common and predictable.

It’s not that The Undoing Project is a bad book. I just that I had much higher expectations. A mediocre Michael Lewis book is still better than 90% of the books on my shelf.