Category: Compliance Bricks and Mortar

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

Machiavelli for Chief Compliance Officers by Tom Fox in the FCPA Compliance and Ethics Blog

Lesson No. 1 – Heed Selected Advice from Selected Advisors

While in medieval Florence, the Prince ruled as the supreme monarch, he still needed advisors. Today, we are called subject matter experts (SMEs).

Two dubious ethical achievements by Jeffrey Kaplan in the Conflict of Interest Blog

First, a lengthy New York Times piece two days ago offered a “comprehensive examination” of the dealings of David Sampson, chairman of the Port Authority of New York and New Jersey and also a partner in the Wolff & Sampson law firm, with NJ Governor Chris Christie and his administration, both inside the Port Authority and out,  and detailed  ”the extent to which their ambitions and successes became intertwined.” The story concludes: “Mr. Samson and his law firm benefited financially. Mr. Christie benefited politically. And each enhanced the other’s stature as their relationship deepened in ways that were not apparent at the time.”

The SEC Has Never Prevailed In An FCPA Enforcement Action When Put To Its Ultimate Burden Of Proof by the FCPA Professor

This recent Wall Street Journal article highlighted how the SEC’s win rate at trials has slipped.  According to the article:

“[The SEC has] won 55% of its trials since October [2013], a sharp drop after three consecutive years when it prevailed more than 75% of the time.”

There has never been an SEC Foreign Corrupt Practices Act trial, but the above percentages are downright stellar when one considers that the SEC has never prevailed in an FCPA enforcement action when put to its ultimate burden of proof.

A Closer Look at Warren Buffet’s Letter to Berkshire Shareholders by Kevin LaCroix in the D&O Diary

Notwithstanding these results, it would be a mistake just to focus on the company’s relative performance during a single 12-month reporting period. Obviously, it is inherent in the nature of annual reports that the company in question will be considered in an annual snapshot perspective. But if Berkshire is only considered on this annual reporting period basis, a much more meaningful message might be overlooked. Simply put, Berkshire Hathaway is an astonishing company, and it is becoming even more so all the time.

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

Are You a “Rat Trader?” by Bruce Carton in Compliance Week

Today I stumbled up on the following headline from the Chinese publication, Global Times: “Rat trader faces 5-10 years for insider dealing.” Rat trader?? It turns out that in China, at least, “rat trading” is the phrase used to describe what we would call “front-running” in the U.S.

Commitment to Compliance: the Compliance Committee by Tom Fox

One of the commitments I believe can enhance a compliance program is the creation of a compliance committee. As far back as in the 2005 Monsanto Corporation Deferred Prosecution Agreement (DPA) the compliance committee concept appears to have found favor with the Department of Justice (DOJ). In Appendix B to the DPA, Monsanto agreed to, among other things, “the establishment and maintenance of a committee to supervise the review of (I) the retention of any agent, consultant, or other representative for purposes of business development or lobbying in a foreign jurisdiction”, or a Compliance Committee. Later, this concept was used in the settlement of Halliburton’s shareholder action around its Foreign Corrupt Practices Act (FPCA) enforcement action.

SEC’s Newest Enforcement Weapon: Powerful Software in Money News

Officials expect Palantir’s platform to help the SEC find evidence of illegal activity more quickly and easily by linking trading records and personal contact information from paid databases with tips, complaints and referrals the agency has received, said the sources, who were not authorized to speak publicly about the matter.

A human-readable explorer for SEC filings in Flowing Data

Maris Jensen just made SEC filings readable by humans. The motivation:

But in the twenty years since, despite hundreds of millions invested in rounds of contracted EDGAR modernization efforts and interactive data false starts, the SEC’s EDGAR has remained almost untouched. In 2014, the SEC is quite literally doing less with SEC filings than their predecessors had planned for 1984. Data tagging is the red-headed stepchild of the Commission — out of hundreds of forms, only about a dozen are filed as structured data — and the first program to automate the selection of SEC filings for review, the Division of Economic and Risk Analysis (DERA)’s ‘Robocop’, has been ‘aspirational’ for years. The academics in the division responsible for the SEC’s interactive data initiatives write papers about information asymmetry, using EDGAR data they repurchase in usable form for millions each year, but do nothing to fix it. Companies are chastised for insufficient and inefficient disclosure, while the SEC fails to help retail investors navigate corporate disclosures at all.

How Grocery Bags Manipulate Your Mind by Carmen Nobel in HBS’ Working Knowledge

People who bring personal shopping bags to the grocery store to help the environment are more likely to buy organic items—but also to treat themselves to ice cream and cookies, according to new research by Uma R. Karmarkar and Bryan Bollinger. What’s the Quinoa-Häagen-Dazs connection?

Above is a photograph of outdoor curling in Central Park in New York City. I love this picture, so I thought I would share it. More 1890s curling photos.

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

SEC claims drunk lawyer had insider tipple By Kara Scannell in FT.com

The SEC sued Tibor Klein, a New York investment adviser, in September for allegedly buying securities of King Pharmaceuticals after learning from one of his clients that the drug company was in talks to be acquired by Pfizer. Mr Klein’s client and friend, Robert Schulman, a patent attorney at Washington law firm Hunton & Williams, allegedly became intoxicated after drinking several glasses of wine over dinner and “blurted out to Klein, ‘It would be nice to be King for a day,’” according to the SEC complaint filed in a Florida court.

Chasing Compliance: JPMorgan has paid out billions in penalties. Did it fix the problems? by Sue Reisinger in Corporate Counsel

A spokesman said bank officials would not comment for this story. But under pressure from regulators, the bank hired more than 3,000 employees last year to enhance its risk and compliance efforts. It also hired a new compliance chief and removed the compliance function from the purview of general counsel Stephen Cutler. In statements to shareholders and employees, chairman and chief executive Jamie Dimon expressed humiliation over bank mistakes. He said the bank spent over $1 billion in 2013 on reforms, and he vowed, “Our control agenda is now priority No. 1.”

Turning Blind Eye to Tippers No Protection From Charges by Patricia Hurtado in Bloomberg

U.S. prosecutors may bring charges for ignoring the source of illegal information used for trading, an appeals court ruled in its second decision in as many days widening the scope and penalties for insider cases

The Uneasy Connection Between Securities Disclosure and Job Creation by Ian K. Peck in the CLS Blue Sky Blog

The Jumpstart Our Business Startups Act (the “JOBS Act” or “the Act”) was signed into law in the spring of 2012, amidst the ongoing fallout from the 2008 financial crisis as well as a hotly-contested presidential election. Having received uncharacteristic bi-partisan support, the JOBS Act’s explicit goal is “To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies”. In order to accomplish this goal, the Act seeks to reduce the perceived regulatory burden that U.S. securities laws place on companies, mostly firms in the early stages of existence. This lessened burden focuses primarily on the amount and timing of required disclosure firms owe investors and potential investors.

Mark Cuban Visits D.C. to Speak About SEC Case, Enforcement Policy by Bruce Carton in Compliance Week

Cuban repeated a criticism that he also made from the courthouse steps in October following his victory at trial: that the securities laws, including the insider trading laws, are ineffective because the public often has no idea what is legal and what is illegal. How can a “Broken Windows” strategy work for the SEC, has asked, if people don’t even know what a broken window is in the securities law context?

Take Two Video: “The SEC’s Disclaimer” by Broc Romanek in The Corporate Counsel.net

Did you know that the disclaimer that SEC Staffers give when they speak is actually required by law? [Broc] recently learned that on my own even though I gave that disclaimer many times when I spoke in my capacity as a Staffer. Here is a 1-minute video about the disclaimer’s origins – [Broc] tried to inject some humor at the end:

Image of Brick work, Belconnen, Canberra is by Rebecca Dominguez
CC BY NC SA

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

New SEC investor advocate says he has investor-protection genes by Mark Schoeff Jr. in Investment News

Mr. Fleming will head an office that is responsible for ensuring that the concerns of retail investors are elevated at the commission, as well as at self-regulatory organizations such as the Financial Industry Regulatory Authority Inc. He will identify problems investors are having with financial firms and products and make recommendations on how rules and regulations can better protect them.

Are you keeping track of your compliance costs? by Jeff Kaplan in Conflicts of Interest Blog

Compliance costs come in various forms. Among the most prominent are salaries and related expenses for in-house personnel doing C&E work on a full- or part time basis (i.e., not just C&E officers but, to some extent, personnel in HR, Legal and Audit). Another category of out-of-pocket C&E costs are those incurred for external products/services, such as computer-based training, hotline providers, case management or other GRC software or C&E program assessments . Out of pocket costs, of course, are fairly easy to calculate – and are, I believe, often taken into account by government officials in weighing the efficacy of C&E programs. – See more at: http://conflictofinterestblog.com/2014/02/are-you-keeping-track-of-your-compliance-costs.html#sthash.ZWhofIfd.dpuf

On Beauty and Biking in Freakonomics

Sole author Erik Postma also asked the participants to rate the man’s masculinity and likeability, and asked whether the rater, if female, was on hormonal contraception. The results were clear. The most attractive men were also, unbeknownst to raters, the riders that performed best.

K&L Gates discusses Third Party Certification Procedure Designed to Comply with New SEC Rules Permitting General Solicitation in Reg D Private Offerings by Gary J. Kocher in CLS Blue Sky BLog

Consistent with this view, we have prepared the attached sample Status Certification Letter that is designed to allow an individual investor to approach one of his or her existing trusted advisors that is a Permitted Third Party Verifier (lawyer, CPA, etc.) to provide a certification of the underlying information on which the issuer may base its determination of the status of the investor. The form is designed so that a non-lawyer can easily check a box as to the level of income/net worth and type of information that has been reviewed within the scope of the rule. Because the certification can be made by an existing trusted advisor, the advisor may already be in possession of the information on which the certification is made, thereby reducing the burden on the investor. The form also clearly specifies that the Permitted Third Party Verifier assumes no liability for (i) the accuracy of the information provided by the investor or (ii) the ultimate determination as to whether the investor meets the requirements to be accredited.

Bad Apple: REITs fined $1.5 million for disclosure violations by Bruce Kelly in Investment News

The Apple REITs failed to value the REITs properly, disclose numerous related-party transactions and divulge executive compensation of four REITs, according to a SEC cease-and-desist order, which was a settlement between the SEC and the various respondents.

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

Five Golden Rules of What Works – The Internal Marketing of Compliance by Tom Fox

I am attending the ACI Foreign Corrupt Practices Act (FCPA) Boot Camp in Houston. … One of the presentations was on how to tell your compliance story. It presented several interesting aspects of how to not only communicate your internal compliance story but how to also market compliance within your organization. Céline Gearson, Chief Ethics and Compliance Officer at Cameron International, had an interesting perspective on how she internally markets her compliance function. She termed these as “The Five Golden Rules of What Works”.

1. Socialize, Socialize, Socialize
2. Communicate metrics and near misses
3. Create engagement and excitement
4. Become a marketing guru and IT expert
5. Embed your initiatives into business processes

Did Dennis Rodman violate the FCPA? By Richard L. Cassin in the FCPA Blog

Among the more than $10,000 in gifts Dennis Rodman delivered to North Korea dictator Kim Jong Un in Pyongyang this month were “hundreds of dollars’ worth of Irish Jameson whiskey, European crystal, an Italian suit, a fur coat, and an English Mulberry handbag for Kim’s wife, Ri Sol-ju,” the Daily Beast said Friday. The U.S. government is now investigating whether Rodman violated the law against importing luxury goods into North Korea.

Keep emergency plans updated, or face disastrous consequences from regulators in Investment News

Financial advisory firms need to think seriously about disaster planning and should be conducting annual tests of their preparedness plans if they want to stay out of hot water with regulators. Each year, registered investment advisers need to document the testing of their continuity plan, as well as any updates to these plans, Les Abromovitz, a senior consultant at National Compliance Services Inc., said at a pre-conference session at TD Ameritrade Institutional’s national conference in Orlando on Wednesday.

SEC’s turf threatened, Commissioner Michael Piwowar says by Dina ElBoghdady in the Washington Post

In one of his first public speeches since joining the SEC in August, Republican Commissioner Michael Piwowar said that the Financial Stability Oversight Council is “reaching into the SEC’s realm” and posing “an existential threat” to the agency and other regulators. The council, also known as the FSOC, was charged by Congress with heading off risks to the financial system. It consists of regulators from the Federal Reserve, the Federal Deposit Insurance Corp. and others — including the SEC. Each of the top regulators on the council has a voting member, and for the SEC, that’s been the commission’s chairman.

Clifford Chance Adopts Continuous Improvement Program by Ron Friedmann in Prism Legal

This week Clifford Chance, one of the largest law firms in the world, published a white paper called Applying Continuous Improvement to high-end legal services.  I view it as a potential turning point in BigLaw. A few other law firms, especially Seyfarth Shaw with SeyfarthLean, have promoted process improvement, a sibling of continuous improvement.  But Clifford Chance is a Magic Circle with much bigger throw weight than most firms.

Facebook debunks Princeton study in Flowing Data

Researchers at Princeton released a study that said that Facebook was on the way out, based primarily on Google search data. Naturally, Facebook didn’t appreciate it much and followed up with their own “study” that debunks the Princeton analysis, blasted with a healthy dose of sarcasm. They also showed that Princeton is on their way to zero-enrollment.

It’s been a busy week with guests in the house. I haven’t been able to publish any stories, but these are a few that caught my eye.

Finders Are Not Always Keepers! in the Word of Wisdom Blog from Latham & Watkins Capital Markets Group

Let’s start with the basics. Section 15(a) of the Exchange Act requires that persons engaged in “broker” or “dealer” activity must register with the SEC unless an exemption is available. In general, a “broker” is any person “engaged in the business of effecting transactions in securities for the account of others” and a “dealer” is any person “engaged in the business of buying and selling securities for such person’s own account.” Based on no-action guidance from the SEC Staff, activities that may be deemed (alone or in combination) to confer “broker” status include: …

Where are the Jobs in the Jobs Act? An Examination of the Uneasy Connection between Securities Disclosure and Job Creation by Ian K. Peck on SSRN:

The JOBS Act, passed in April 2012, is designed to produce American jobs through removing various regulatory barriers for small companies to access investor capital. As the regulations continue to be implemented, commentators have dissected the various ways in which the JOBS Act attempts to achieve this goal. One of the methods involves making the IPO process initially less burdensome, through scaling back financial and corporate governance disclosures. Crowdfunding, which will eventually permit companies to raise investor capital through an online “funding portal”, has garnered both deep criticism from regulators and praise from small business owners. Yet little attention has been paid to the notion that the very reason for disclosure reform is job creation. This matters because job creation has not historically played a direct role in the reform of securities disclosure statutes and regulations. This Article analyzes what role, if any, job creation should occupy in the reform of securities disclosure laws. After establishing the normative baseline for disclosure theory and reform, this Article highlights various unintended consequences of using job creation as a justification for reform and proposes a framework for understanding job creation-based disclosure reforms going forward.
(Pointed by Securities Law Prof Blog)

Odds Raised Slightly SEC Will Knock on Your Door This Year in fi360 Blog

In past years OCIE has typically focused on higher risk RIAs – those with custody or the larger complexes that pose more risk to the markets. The vast majority of adviser firms registered with the Commission, however, have 10 or fewer non-clerical employees. Over the next two years, OCIE plans to inspect 1,000 of these rarely or never-inspected RIA firms. In recent years, the SEC has inspected roughly 9 percent of all firms annually.

The fault lies not in our agencies, but in our Congresses by William Carleton

There’s nothing the SEC can do to make non-accredited crowdfunding under Title III of the JOBS Act cost-efficient. The essential problem is that Congress wrote a mini-registration law, rather than authorizing the agency to craft a crowdfunding exemption.

Image is from Vault of Roman Bath in Bath – England by Heinz-Josef Lücking
CC BY SA

It’s been a busy week at the office, but a few compliance-related stories caught my eye.

Compliance Networks as Knowledge Networks by Tom Fox

As compliance programs mature, they become less top down driven and more inculcated into the DNA of a company. The more doing business ethically and in compliance becomes part of the way your company does business, the better off you will be down the road. One of the methods that you can use is to set up a compliance network within your organization. I recently read an article in the Fall issue of the MIT Sloan Management Review, entitled “Designing Effective Knowledge Networks”, by Katrina Pugh and Laurence Prusak, in which they discussed knowledge network design as a mechanism to facilitate desired behaviors and outcomes. I found their ideas very useful in the compliance context.

What Can an Ethics Course Really Do? by Chris MacDonald

Typically, skepticism about ethics education is rooted in a mistaken view of what the goals of such education are. If you think that giving students a course in ethics is supposed to “make them into good people,” then of course you’re going to think it’s useless. An ethics professor can’t turn bad people into good ones, any more than she can turn water into wine. Luckily, that’s really not what’s needed, and so doing so it’s not the aim of any sane ethics course.

Gold dust for compliance officers by Richard L. Cassin

What’s the first thing compliance officers need to do? We’d say it’s convincing management and board members they need an effective compliance program. That’s not easy. It takes advocacy, and advocacy takes credibility.

Jury Gives SEC Split Verdict In Insider Trading – Front Running Trial by Thomas O. Gorman

The Commission was handed a split verdict in its insider trading – front running case against Siming Yang and his investment company, Prestige Trade Investments Limited by an Illinois jury yesterday. SEC v. Yang, Case No. 12-cv-02473 (N.D. Ill. Filed April 4, 2012). The jury found for the defendants and against the Commission on an insider trading claim but in favor of the SEC and against defendant Yang on a front running charge and two false filing claims.

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

SEC Enforcement Statistics: A Work in Progress? by Thomas O. Gorman in SEC Actions

The SEC released Enforcement Division statistics for government Fiscal Year 2013 along with a table and chart listing the number of actions filed each year as well as the amount of disgorgement and penalties ordered. The SEC Press Release states also states that in the last fiscal year the program obtained a record $3.4 billion in “monetary sanctions against wrong doers.” That amount is 22% higher than fiscal 2011 when the agency brought a record number of enforcement actions.

How These 5 Dirtbags Radically Advanced Your Digital Rights by David Kravets in Wired.com’s Threat Level

Bad facts make bad law, as the legal saw goes. But it cuts both ways: Sometimes bad people make good law. Consider the following exhibits: a cocaine dealer, a child pornographer, a purveyor of suspect penis-enlargement pills, and two accused hackers. The courtroom challenges they brought resulted in rulings that dramatically expanded your rights, from helping to keep your email and whereabouts private to reducing gadget searches at the U.S. border and limiting the legal definition of unlawful hacking.

Jan. 8 Webcast: SEC Enforcement – Key Developments in 2013 in Securities Docket

In this webcast analyzing key developments in SEC enforcement, our panel will discuss notable events from 2013 and emerging issues for 2014.

Hedge Fund Advisers’ Systemic Risk Disclosures in Bankruptcy by Wulf Kaal in The CLS Blue Sky Blog

The significant increase of hedge fund participation in the bankruptcy process, among other factors, resulted in an increased emphasis in the literature on the role of hedge funds in bankruptcy. Scholars, practitioners, and members of the federal bankruptcy bench voiced concern over hedge funds’ hidden agendas and offsetting positions, hedge funds’ attempts to manipulate the negotiation and reorganization process, and their seeking control of the debtor at the expense of other stakeholders. Because of their perceived detrimental impact on the bankruptcy process, some commentators have labeled distressed hedge fund investors as “vultures.” Others emphasize the liquidity provided by hedge funds and the corresponding enhancement of the restructuring process.