Compliance Bricks and Mortar – Page 23

Compliance Bricks and Mortar for May 30

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

Cybersecurity Crackdown in ThinkAdvisor

Think that your firm is too small or that your cyberdefenses are too strong to worry about digital attacks on your firm’s—and your clients’—data? The SEC and FINRA don’t think so. A reading of the regulators’ official announcements and the insights of those who know how they operate suggest that advisors run the risk not only of compromised data but of major fines as the regulators gear up to make examples of firms for cybersecurity shortcomings.

Lawyers as SEC Enforcement Targets, What a Fund Manager Needs to Know by Jay B. Gould in Pillsbury’s Investment Fund Law Blog

In a move that should place securities lawyers and their clients on notice, Commissioner Kara Stein of the Securities and Exchange Commission (“SEC”) recently indicated that lawyers may become targets of SEC enforcement actions when a registrant has been poorly advised by its attorney and the result of that advice ends up harming investors or violating regulatory standards. The SEC has the ability to sanction, fine and bar attorneys and accountants from practicing before the SEC pursuant to SEC Rules of Practice 102(e). As a practical matter, a bar pursuant to Rule102(e) precludes an attorney or an accountant from representing a regulated entity, such as an investment adviser or broker dealer, in any further dealings with the SEC or otherwise.

SEC judge bans money manager for misleading Morningstar, investors by Trevor Hunnicutt in InvestmentNews

The administrative law judge found that Max E. Zavanelli — a portfolio manager who has compared his success at investing to the legendary Fidelity Investments manager Peter Lynch — misrepresented and omitted important data in newspaper advertisements, its own newsletters and reports for Morningstar.

Godzilla versus Collateralized Debt Obligations by Erik Gerding in the Conglomerate

Fees, Expenses and the S.E.C.

money penny

Andrew Bowden threw a grenade at the private fund industry three weeks ago when he spoke at PEI’s Private Fund Compliance Forum. He said that the SEC found violations of law or material weaknesses in over 50% of the exams they had conducted of private equity funds when it came to fees and expenses.

Mr. Bowden pointed to two particular types of fees and expenses: monitoring fees and operating partners. Although both of these are customary in private equity deal and disclosed in PPMs and financial statements, the SEC does not like them. He lumped them together with fraudulent expenses in the Camelot case.

Two recent news stories are carrying on Bowden’s view of private equity.

Last week, the Wall Street Journal ran a story on how KKR failed to credit certain fees back to investors because the unit was not an affiliate: KKR Error Raises Question: What Cash Should Go to Investors? KKR is required to share with investors in its largest buyout fund 80% of any “consulting fees” collected by any KKR “affiliate.” The unit in question was owned by KKR’s management and not considered an affiliate. The article specifically tied back to Mr. Bowden’s speech.

On Sunday, Gretchen Morgenson penned an article in the New York Times about monitoring fees: The Deal’s Done. But Not the Fees. The article highlighted $30 million in monitoring fees paid to Goldman Sachs, Kohlberg Kravis Roberts and TPG Capital for their oversight of Biomet. The unpaid fees under the 10-year monitoring contract became due on the sale to Zimmer Holdings. This article also specifically mentions Mr. Bowden’s speech.

In my view, it’s not that the fees are illegal or “fraudulent, manipulative or deceptive” under Section 206. It’s a matter of disclosure to investors and internal procedure. Investors deserve a right to know the fees they are paying, either directly through the fees by the fund, or indirectly by the fees paid by the portfolio company to the fund manager. Perhaps in some fund documents the fees can be laid out in more detail. Fund managers should have internal procedures for how fees are implemented and checked to make sure they comply with the fund documents.

Personally, I think Mr. Bowden is lumping a lot of customary fees and expenses into his 50% bucket. I’m offended that he is including the case of fraud, like the Camelot case, in with instances of fees that the SEC merely does not like.

References:

The Deal’s Done. But Not the Fees by Gretchen Morgenson in the New York Times
KKR Error Raises Question: What Cash Should Go to Investors? by Mark Maremont in the Wall Street Journal
View from the SEC
Private Fund Theft Through Diligence Payments
PEI’s Private Fund Compliance Forum 2014

Compliance Bricks and Mortar for May 23

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

SEC Enforcement Director: What Empowered Compliance Looks Like by Jaclyn Jaeger in Compliance Week

“Companies that have done well in avoiding significant regulatory issues typically have prioritized legal and compliance issues and developed a strong culture of compliance across their business lines,” said Ceresney. “I’ve found you can predict a lot about the likelihood of an enforcement action by asking a few simple questions about the role of the company’s legal and compliance requirements:

Are legal and compliance personnel included in critical meetings?
Are their views sought and followed?
Do legal and compliance officers report to the CEO, and have significant visibility to the board?
Are legal and compliance departments viewed as important partners in the business, and not simply as support functions, or a cost center?

SEC officials seek clarity on compliance officers’ liability by Sarah N. Lynch

At separate conferences, Securities and Exchange Commission members Kara Stein and Daniel Gallagher called for the agency to provide more clarity, noting many officers fear they will become the subject of an enforcement action.

Financial Literacy by Alex Tabarrok in Marginal Revolution

Only about a third of Americans answer all three questions correctly (and that figure is inflated somewhat due to guessing). The Germans and Swiss do significantly better (~50% all 3 correct) on very similar questions but many other countries do much worse. In New Zealand only 24% answer all 3 questions correctly and in Russia it’s less than 5%.

Second Circuit Reverses SEC Market Timing Verdict by Thomas O. Gorman in SEC Actions

The Second Circuit reversed a jury verdict in favor of the SEC in a market timing case, concluding that there was no evidence to support it. Specifically, the Court found that the “SEC ultimately succumbs to its strategic choice at trial to pursue a theory of scienter or nothing. Its entire jury presentation was premised on the idea that [Defendant] O’Meally violated Section 17(a) through intentional conduct. The SEC’s summation relied solely on intent and recklessness; theories rejected by the jury. And as to negligence, the SEC never introduced testimony or any other evidence on the appropriate standard of care against which a jury could measure O’Meally’s conduct.” This was “fatal” to its case. SEC v. O’Meally, No.. 13-213 (2nd Cir. Decided May 19, 2014).

What Kills You and Your Investments by Barry Ritholtz in Bloomberg View

You don’t understand risk.

I don’t mean you, in your professional capacity. I mean you, the human being whose brain is desperately trying to keep you alive. An endless procession of mortal threats are trying to end your particular genomic variation, forcing your brain to respond first and think later.
…

Let’s look at some of the world’s top predators as an example of risk in the modern world.

…

Image is from GatesNotes: The Deadliest Animal in the World

Compliance Bricks and Mortar for May 9

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

Image of Brick production in Songea, Tanzania is by Egbert

SEC Says Dodd-Frank’s Statute of Limitations Doesn’t Apply to It by Ernest Badway in Securities Compliance Sentinel

According to the SEC, the Dodd-Frank Act does not require the SEC to bring an enforcement action within 180 days of issuing a Wells Notice. See http://www.sec.gov/litigation/opinions/2014/ia-3829.pdf.

Although the Dodd-Frank Act amended the Securities and Exchange Act of 1934 Section 4E(a)(1) to require the SEC to bring the action within 180 days, the SEC said it was not applicable since Congress never said what the consequences if it failed to do so. The SEC claims to be relying upon precedent from other admiminstrative agencies.

Money Laundering 101 by Kortney Nordrum in SCCE’s Compliance and Ethics Blog

AML (Anti-Money Laundering) and BSA (Bank Secrecy Act) laws are absolutely my favorite regulations. No other regulation can provide the feeling of accomplishment when money-laundering violations are found and reported. The same goes for anti-terrorist funding reports. You feel you made a difference that is valued by law enforcement and government. However, no matter what your business line is, money laundering can influence your bottom line. That said, here is a brief overview on how and what should happen when detecting and deterring money-laundering.

Hitting the Ground Running – Your First 100 Days as a New CCO by Tom Fox

In the March-April issue of the Red Flag Group’s Compliance Insider magazine, the issue of what you can do to help yourself to succeed in a new role was explored in an article entitled “The First 90 Days in Compliance”. The article uses the book The First 90 Days by author Michael Watkins as a starting point to provide “systematic methods you can employ to both lessen the likelihood of failure and reach the break-even point faster.”

CFPB Seeks to Overhaul Rules for Bank Privacy Notices by Joe Mont in Compliance Week

The Consumer Financial Protection Bureau has proposed a rule that would streamline the requirements for privacy notices issued by financial institutions, allowing them to be posted online instead of the current practice of delivering them individually to customers.

Compliance Bricks and Mortar for May 2

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

Kara Stein Takes On Mary Jo White in the Corporate Crime Reporter

In a 3 to 2 decision last week, Mary Jo White joined the SEC majority and overturned the automatic disqualification of the Royal Bank of Scotland from eligibility as a Well-Known Seasoned Issuer (WKSI)…
And out of left field comes a new SEC commissioner, one Kara Stein, to take on White and the SEC majority.

CCOs On the Hook: FinCEN Seeking Fine Against Moneygram CCO by Michael Volkov in Corruption, Crime & Compliance

Chief Compliance Officers should take notice – the Treasury Department’s Financial Crimes Enforcement Network is proposing to fine Moneygram’s Chief Compliance Officer for Moneygram’s failure to police transactions for illicit activity. The CCO faces a potential fine of up to $5 million.

SEC Enters into First Non-Prosecution Agreement with an Individual by David Smyth in Cady Bar the Door

One of the main questions I get from potential insider trading defendants is some variation of Well, what are we looking at here? That is, if the SEC is able to prove its case, what could the consequences be? Unfortunately, the answer is usually that it depends on a lot of things.

Stock Promoter Charged with Fraud in Florida Real Estate Venture by Mark Astaria in the Securities Law Blog

The SEC’s complaint filed in U.S. District Court in the Southern District of Florida alleges that Robert J. Vitale defrauded investors in a Florida real estate venture, sold unregistered securities, and acted as an unregistered broker-dealer. Vitale and his firm Realty Acquisitions & Trust Inc. raised at least $8.7 million from investors, including many senior citizens. Vitale allegedly told investors their funds were “100% protected” when they were not, and he claimed to be a financial expert with a business degree from Notre Dame when he never attended college after graduating from Notre Dame High School in West Haven, Conn.

What Yoda Knows by Mary Abraham in Above and Beyond KM

“The fear of loss is a path to the Dark Side.” This insight of Yoda’s can be read as a warning about many of our information management (or, more properly, information mismanagement) practices. The fear of loss of critical data or documents can lead to over-zealous security measures that hobble the reasonable flow of information inside and outside an organization. It also can lead to information hoarding by individuals or the desperate creation by KM personnel of ad hoc databases and document collections.

Compliance Bricks and Mortar for April 18

bricks curvy

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

Quantity does not equal quality: Expanding ‘disclosure events’ on BrokerCheck a bad idea: Brokerage industry is only one in which professionals as deemed guilty until proven innocent by S. Lawrence Polk in Investment News

Under the current version of Form U4, brokers and their firms are required to disclose any written customer complaint, no matter how frivolous, as long as it somehow relates to a sales practice issue, even if the broker is not named in the complaint. The broker that is the subject of the complaint has it reported on his or her CRD and can remove the disclosure only by going through an expensive and time consuming expungement action, in which the broker bears the burden of proving the complaint is false.

In other words, the broker is deemed guilty until he or she proves his or her innocence. No other profession has a reporting system where the mere filing of a complaint, even if it is later withdrawn, remains part of the public record for years afterward.

Massachusetts Regulators Allege TelexFREE Is $1 Billion Ponzi Scheme by Jordan D. Maglich in Ponzitracker

Massachusetts securities regulators have initiated civil proceedings accusing a Massachusetts and Nevada company of operating a massive pyramid andPonzi scheme targeting Brazilian-Americans that, through the promises of guaranteed annual returns exceeding 200%, raised more than $90 million from Massachusetts residents alone and nearly $1 billion worldwide. TelexFREE, Inc., a Massachusetts corporation, and TelexFREE, LLC, a Nevada limited liability company (collectively, “TelexFREE”), were accused of violations of the Massachusetts Uniform Securities Act by engaging in the fraudulent offering and sale of unregistered securities. The Massachusetts Enforcement Section of the Massachusetts Securities Division is seeking, in relevant part, a permanent cease-and-desist order, an accounting, restitution to victims, and disgorgement of profits and ill-gotten gains.

Was the Conflict Minerals Ruling a “Win” for SEC Rulemaking? by Dave Lynn in CorporateCounsel.net

With this outcome, the rule writers at the SEC are no doubt breathing a sigh of relief, as they still have a relatively full plate of Dodd-Frank Act and JOBS Act mandated rulemakings that continue to percolate. After a string of high profile losses in this Court and the U.S. District Court for the District of Columbia, this outcome is probably the best that the SEC and the Staff could have hoped for and may serve to pave the way for moving forward with the rest of the rulemaking agenda.

The High Cost of Procrastination by Dan Ariely

This is what procrastination is all about. When we think about our life in general we see the benefits of getting our work done on time, saving for retirement, eating better and other good habits. Yet when we face the decision about right now, we get tempted and too often follow our immediate desires and not what it is good for us in the long-term.

Compliance Bricks and Mortar for April 11

Charles Ponzi’s former home up for sale by Erin Ailworth

For the first time, the butter-colored stucco house with the slate roof and second-story balustrades, is going on the broader real estate market, available to anyone willing to take a run at the $3.3 million asking price. All previous sales have been private.

One of the biggest selling points, of course, is Ponzi’s one-time ownership — although he occupied the property for only about six weeks in 1920 before he was arrested on charges of mail fraud. The home has only changed hands three times since Ponzi bought the house from the previous owner, paying him initially with one of his company’s worthless securities.

Introducing Cybersecurity Docket!

Cybersecurity Docket, the “Global Cybersecurity and Incident Response Report,” seeks to be the most comprehensive and timely source of news and commentary on the exploding fields of cybersecurity, data breach and incident response. Continuously updated throughout the day, Cybersecurity Docket delivers important news and developments as they occur – not days or weeks later. Lawyers, executives, compliance officers, consultants, regulators and other professionals throughout the cybersecurity industry rely on Cybersecurity Docket as their “one-stop” way to quickly and easily stay informed.

Answering the questions high-frequency trading raises by Brian Schreiner in Investment News

There has been a media firestorm over high-frequency trading since Michael Lewis appeared on “60 Minutes” on March 30 to discuss his new book Flash Boys. But HFT is nothing new. It has been around since at least 1999 when stock exchanges became fully electronic. HFT is a complex and nuanced issue, which requires more than a cursory overview to gain an informed opinion.

Trust Hero: Brad Katsuyama, on CBS 60 Minutes by Charles H. Green in Trust Matters

Of course, it is anything but crazy. As Michael Lewis says, “When someone walks in the door who is actually trustworthy, he has enormous power. And this is about trying to restore trust to the financial markets.”

Exactly. As anyone who’s been reading this blog for years knows, trust sells. Trust scales. Trust creates value. Trust is an enormous competitive advantage.

Do Compliance Professionals Have to Be Lawyers? by Michael Volkov in Corruption, Crime & Compliance

As compliance professionals enjoy the rise of their profession, lawyers are sensing a decline in importance. I am hearing from compliance professionals a new and disturbing trend – companies are requiring compliance professionals to be trained attorneys.

Compliance Bricks and Mortar for April 4

bricks 15

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

Small Banks Look to Sell as Rules Bite by Michael Rappaport in the Wall Street Journal

In a period when low interest rates are squeezing small banks, the costs of adhering to new regulations are taking a toll. Executives from at least a half-dozen small banks that have agreed to be acquired in recent months said the increasing regulatory burden was a factor in their decisions.

Just How Binding Are SEC Statements In An Adopting Release? by Keith Paul Bishop in California Corporate and Securities Law

The really important question is what is the legal effect, if any, of preambles to rules? One might argue that since a preamble is not subject to notice and comment, it is not legally binding under the Administrative Procedure Act (5 U.S.C. § 551 et seq.). However, the Ninth Circuit Court of Appeals held earlier this week that an administrative law judge could consider the regulatory preamble. Peabody Coal Co. v. Dir., Office of Workers’ Comp. Programs, 2014 U.S. App. LEXIS 5996 (9th Cir. Apr. 1, 2014).

Paul Ryan’s Plan for the SEC: Slash & Burn by Broc Romanek in TheCorporateCounsel.net

Not sure why Rep. Paul Ryan chose the SEC as an example of a federal agency with “duplication, hidden subsidies, and large bureaucracies” in his budget plan released yesterday, but he did. This is the 4th year in a row that Ryan has proposed a plan – but the first time he has focused on the SEC specifically. Remember that the SEC is not only deficit neutral and doesn’t count against the new-fangled Congressional budget caps, but is an independent agency that brings in more money to the US Treasury than it costs. Ryan’s proposal doesn’t specify exactly how much he would cut from the SEC (rather there are budget cuts for a group of agencies as a whole on pages 38-39).

Michael Lewis’s flawed new book by Felix Salmon

I’m halfway through the new Michael Lewis book – the one that has been turned into not only a breathless 60 Minutes segment but also a long excerpt in the New York Times Magazine. Like all Michael Lewis books, it’s written with great clarity and fluency: you’re not going to have any trouble turning the pages. And, like all Michael Lewis books, it’s at heart a narrative about a person — in this case, Brad Katsuyama, the founder of a small new stock exchange called IEX.

Dear Virginia: Do better by Jessica Tillipman in The FCPA Blog

Last summer, I wrote a series for the FCPA Blog about Virginia’s “Shamefully Inadequate Ethics Laws” (see here, here and here). I was not alone in criticizing what has been deemed one of the least effective ethics regimes in the country.

Compliance Bricks and Mortar for March 28

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

Encouraging Communication of Employee Concerns by Michael Volkov in Corruption, Crime & Compliance

One of the hardest issues for compliance professionals is encouraging employees to raise concerns about ethics and compliance issues. It has become even more difficult when the government establishes whistleblower programs offering financial rewards for employees to tell the government about the problems. Employee surveys provide important and interesting information. A recent survey by CEB (here) found that only five percent of employee concerns are reported on a company’s hotline system.

Insights From LRN’s 2013 Ethics & Compliance Leadership Survey Report

“Program effectiveness” is a term ethics and compliance (E&C) professionals frequently use as they strive to understand whether or not their companies’ investment and effort are paying off. Those who manage E&C programs generally collect and report whatever is immediately measurable, such as number of helpline calls or code violations, and while this information is helpful, it doesn’t tell us which programs are particularly effective or what those programs have in common. Every year, LRN conducts a survey of our client partners across the globe to get a pulse of which ethics and compliance tools work and which don’t work as well – and why.

If You Invested Less Than $925,000 With Bernard Madoff, You’re Now Even by Jordan D. Maglich in Ponzitracker

In an announcement from the court-appointed trustee overseeing recovery for victims of Bernard Madoff’s massive Ponzi scheme, a proposed fourth distribution of approximately $350 million will resolve all claims from victims with an allowed claim of $925,000 or less. The trustee, Irving Picard, sought court approval to make a total distribution of approximately $349 million, which will bring the total amount distributed to Madoff victims at nearly $6 billion to date. With an average payment of approximately $323,000, the proposed distribution will also fully satisfy nearly 52% of the 2,189 accounts for which a claim was submitted.

The Destruction of Arthur Andersen and the Use of DPAs in FCPA Enforcement by Tom Fox in the FCPA Compliance and Ethics Blog

The debate over the efficiencies of Deferred Prosecution Agreements (DPAs) continued this week with additional criticism of their use. I have argued that DPAs are in a corporation’s interest because they can bring certainty to the conclusion of an enforcement action and allow it to make remedial changes and move forward. However yesterday I came across an article by Larry Katzen, a former partner at Arthur Andersen and author of “And You Thought Accountants were Boring – My Life Inside Arthur Andersen.” Katzen’s piece is entitled “A Business World Massacre – What Can Happen  When Government Needs a Scapegoat” and it details the destruction of the firm after it’s guilty verdict surrounding the Enron scandal.

Compliance Bricks and Mortar for March 21

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Welcome to Spring.

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

Two Thoughts about Dewey LeBoeuf and Parallel Proceedings by David Smyth in Cady Bar the Door

In a devastating New York Times story over the weekend, James Stewart zeroed in on that last sentence. Client relations manager? Who? Apparently it wasn’t obvious to “longtime Dewey insiders”who Zachary Warren even is.

Warren graduated from Stanford in 2006, and applied to be a Dewey paralegal. “Instead, he was offered a $40,000-a-year job helping partners collect client debts.

NEWSFLASH: Common sense prevails again! Prosecutors give credit for compliance programs in Norway too. in the Bribery Act .com

Today Barry spoke at the Oslo Compliance Forumorganized by Wiersholm, Norway’s largest law firm which itself has a history of advising and representing clients on anti-corruption compliance and investigations. I spoke at length to Jan Fougner, Marit Berger Rosland and Georg Engebretsen – they know what they’re talking about and have been involved in some big cases – so if you have a problem in Norway, call them. I would in a heartbeat.

SEC Discourages Incentivizing Whistleblowers to Keep Complaints In-House by Christopher M. Varano in Fox Rothschild’s Securities Compliance Sentinel

What’s good for the goose is apparently not so good for the gander, as the SEC warns in-house attorneys against whistleblower contracts.

The Cost of Compliance by Michael Volkov in Corruption, Crime & Compliance

The title for this posting is a little ambiguous. What is the “cost” of compliance? Is it the cost of implementing an “effective” compliance program? Or is the “cost” to the company of an “ineffective” compliance program. Let’s just say it is both.