Category: Compliance Bricks and Mortar

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

Cybercriminals Have Your Business In Their Crosshairs And Your Employees Are In Cahoots With Them by Ivy Walker

So how are your employees in cahoots with cyber attackers? Because the number one way hackers gain access to small business networks is when someone on that network clicks a link or an attachment in a malicious email. Once inside your network, the attackers can do things like steal or encrypt your data.

https://www.forbes.com/sites/ivywalker/2019/01/31/cybercriminals-have-your-business-their-crosshairs-and-your-employees-are-in-cahoots-with-them/#4e8a88fd1953

Retaliation Against CCOs: Three Tales by Matt Kelly

We hear those stories from time to time: a compliance officer reports some concern to management (otherwise known as doing your job), and management responds by punishing the compliance officer rather than considering the issue itself. Lately I’ve seen a string of such cases in the news, so in the interest of defending this noble profession, let’s take a look at them.

http://www.radicalcompliance.com/2019/02/04/retaliation-ccos-three-tales/

Crypto-Exchange Says It Can’t Pay Investors Because Its C.E.O. Died, and He Had the Passwords by Karen Zriack

A Canadian cryptocurrency exchange said it could not repay at least $250 million to clients after its chief executive died suddenly while visiting India. The company, Quadriga CX, said in court filings that the C.E.O., Gerald W. Cotten, was the only person who knew the security keys and passwords needed to access the funds.

https://www.nytimes.com/2019/02/05/business/quadriga-cx-gerald-cotten.html

Cleary Gottlieb Reviews 2018 Cybersecurity and Data Privacy Developments by Pam Marcogliese, Rahul Mukhi, Katherine Carroll, Alexis Collins and Emmanuel Ronco

In 2018, data privacy and cyber breaches made headlines throughout the year.  Major companies continued to suffer data breaches, highlighting the risks and potential costs of cyber incidents across industries.  At the same time, a growing and overlapping thicket of data security and privacy regulations—within the U.S., European Union, Latin America, and elsewhere—continued to increase compliance costs and regulatory risks.  This memo surveys some of the key cybersecurity and data privacy developments of 2018, including the major data breaches and cyber-attacks, regulatory and legislative actions, and notable settlements and court decisions.

http://clsbluesky.law.columbia.edu/2019/02/06/cleary-gottlieb-reviews-2018-cybersecurity-and-data-privacy-developments/

NFL to Hire Director, Compliance by David D. Dodge

The NFL’s move to provide guidance to its teams’ compliance programs resembles in some respects the NBA’s recent directive to its member teams.  NBA Commissioner Adam Silver recommended that each team take steps similar to those taken by one of its teams, the Dallas Mavericks, in building an effective compliance program – all with an eye towards each team having its own effective compliance program.

http://complianceandethics.org/nfl-to-hire-director-compliance/

Requisition Title: Director, Compliance

NFL Compliance partners with Security and Internal Audit and other League functions to identify and manage risk — legal, financial, and reputational.  NFL Compliance is responsible for ensuring effective policies and procedures mitigate these risks, that NFL staff understand these policies and procedures, and to provide guidance and serve as a resource to staff.  NFL Compliance monitors for adherence to league policies and procedures and reviews potential situations of non-compliance.  Managing risks relating to third-party vendors is also an important feature of the League’s compliance program.  NFL Compliance supports all League offices, including international, and provides guidance to NFL teams.
 
The Director will assist the Vice President of Compliance in promoting a corporate culture where employees meet the NFL’s core values, acting with integrity and following the highest ethical standards. 

https://nfl.taleo.net/careersection/nfl_ex/jobdetail.ftl;jsessionid=qM7DMYVY7Fkp0WWw5AnwH6xeAKeRCm_4-g_XCpxIIdT3Xcbr0cLR!-682138332

These are a few of the compliance related stories that recently caught my attention.

Why The SEC Shutdown Must End (Now) by John Reed Stark

It is not surprising that the SEC has only filed one civil action in federal court since the shutdown began, which was a parallel action brought alongside the U.S. Attorney’s Office for the District of New Jersey. (The matter involved charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading.)

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When Is a Crypto Asset a “Security,” and Why Does That Matter? (Part I)
When Is a Crypto Asset a “Security,” and Why Does That Matter? (Part II)
by Joseph H. Nesler

In our January 17 blog, “When Is a Crypto Asset a “Security,” and Why Does That Matter? (Part I),” the Crypto Law Corner explained that SEC-registered investment advisers must apply the so-called “Howeytest,” on a case–by-case basis, to determine whether a particular crypto asset is a security, and suggested that applying the Howey test can prove daunting to SEC-registered investment advisers in the event they are required to determine whether particular crypto assets are “securities.”  
Why is the Howey test daunting? 
Although the three-part “Howey test” may sound simple and straightforward, it is anything but.

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BigLaw associate was duped into transferring over $2.5M to fraudster’s account, decision reveals
by Debra Cassens Weiss

An associate at Dentons Canada was duped into transferring more than $2.5 million into a fraudster’s account, according to an opinion by an Ontario judge in an insurance coverage dispute.
The Dec. 11 decision by Judge Carole J. Brown said the Vancouver-based associate sent the money from a property sale to a Hong Kong bank account after he received emails asking him to do so, report the American Lawyer and the Law Times. The emails appeared to have been sent by a mortgage company representative and two bank officials where the mortgager had an account.

Should some parts of a compliance program be kept secret?
By Richard L. Cassin

Internal controls, for example, share some DNA with corporate security systems. The controls must be there, according to the FCPA and securities laws, so that management knows where all the company’s assets are, who’s handling them, and for what purpose. That’s a way to stop the company assets from being used to pay bribes.
But from a corporate security perspective, the internal controls are there to stop people from stealing from the company, or using the assets to commit fraud or other crimes. Internal controls, then, are something like the security system around a bank vault.

Circuit Court Rejects SEC Claims on Howey Security Test
by T. Gorman

Partnership interests such as those involved here may be securities within the meaning of Howey. Typically, however, interests in general partnerships fail the test – investors have sufficient authority and powers negating the need for the protections of the securities laws. Limited partners are different. Their authority is limited. Without significant power they become more like a shareholder and their interest may be viewed as a security.
The line between the two types of partnerships when considering the question of if a security is involved can be assessed by considering three factors set forth in Williamson v Tucker, 645 F. 2d 404 (5^th Cir. 1981). Under that test a partner is dependent “solely” on the efforts of a third party manager when: 1) an agreement among the parties leaves so little power in the hands of the partner that the person essentially becomes a limited partner; or 2) the partner is so inexperienced that he is incapable of intelligently exercising his authority; or 3) the partner is so dependent on some unique entrepreneurial or managerial ability of the promoter that he cannot replace the person or exercise any meaningful partnership or venture powers.

Five ‘stupid’ ideas about trust in business
By Barbara Brooks Kimmel and Charles H. Green

Do these flawed views of trust merit actually being called “stupid”? You be the judge.

1. Trust is synonymous with “check-the-box”sustainability practices or “greening” your organization.

2. Blockchain is a road to trust.

3. Loading up corporate communications with trust words du jour elevates brand or organizational trust

4. Elevating data security is a pathway to trust

5. Trust can be chemically induced.

Why Aren’t Hedge Funds Required to Fight Money Laundering?
By Heather Vogell

Yet one major part of the financial system has remained stubbornly exempt, despite experts’ repeated warnings that it is vulnerable to criminal manipulation. Investment companies such as hedge funds and private equity firms have escaped multiple efforts to subject them to rules meant to combat money laundering.
The latest attempt, which began in 2015, appears to have ground to a halt, according to sources familiar with the process.

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

SEC Brings Enforcement Action for Failure to Verify Accredited Investor Status 
by Steve Quinlivan

The SEC alleged CoinAlpha did not have pre-existing substantive relationships with nine of the fund’s investors and engaged in a general solicitation of public interest in the securities offering through CoinAlpha’s website, which was generally accessible without password protection. Additionally, CoinAlpha engaged in general solicitation through blog postings, and media interviews and digital asset and blockchain conferences, accessible both via live attendance and through the Internet. Despite collecting accredited investor questionnaires and representations from investors certifying to their accredited investor status, Respondent did not take reasonable steps to verify that investors in the Fund were accredited investors.

Debevoise & Plimpton Discusses Custody of Digital Assets
by Kenneth J. Berman, Byungkwon Lim and Gary E. Murphy 

Significant uncertainties remain, however, in applying existing laws, regulations and practices to these digital assets. One area of significant concern is custody. Without a way to safely store and hold digital assets, institutional investors are often reluctant to make—and, in some cases, may be legally precluded from making—investments in this space.
Custody generally refers to the holding and control of an asset. What does it mean to have or retain custody of a digital asset? What practical concerns do investors in digital assets have regarding the custody and safeguarding of such assets? What legal obligations are imposed in the custody of digital assets? Do current methods of custody adequately address these legal and practical concerns?
This paper focuses on these and related questions, with a particular emphasis on the custody requirements imposed on registered investment advisers under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”). [More…]

Cyber risk measurement and the holistic cybersecurity approach
by Jim Boehm, Peter Merrath, Thomas Poppensieker, Rolf Riemenschnitter, and Tobias Stähle

A holistic approach proceeds from an accurate overview of the risk landscape—a governing principle that first of all requires accurate risk reporting. The goal is to empower organizations to focus their defenses on the most likely and most threatening cyber risk scenarios, achieving a balance between effective resilience and efficient operations. Tight controls are applied only to the most crucial assets. The holistic approach lays out a path to root-cause mitigation in four phases 

SEC Names Danae M. Serrano Acting Ethics Counsel and Designated Agency Ethics Official

Ms. Serrano joined the SEC in 2010 as an Assistant Ethics Counsel, and has served as the Deputy Ethics Counsel and Alternate Designated Agency Ethics Official since 2013. Ms. Serrano also served as the Agency’s Acting Chief Compliance Officer until August 2018.
“Danae is widely respected by her colleagues throughout the Commission for her steady and thoughtful ethics counsel,” said Chairman Jay Clayton. “I know that Danae and her team are committed to maintaining the highest ethical standards at the SEC, and I want to thank her for taking on this important role in support of the Commission and our dedicated staff.”
“I am grateful for this opportunity to lead the talented and dedicated staff in the Office of the Ethics Counsel, and for the Chairman’s support of the SEC’s robust ethics and compliance programs,” said Ms. Serrano.
Before joining the SEC, Ms. Serrano served as an attorney in the General Counsel’s Office of the Pension Benefit Guaranty Corporation (PBGC), where she advised on government ethics and administrative law matters. Prior to PBGC, Ms. Serrano served as an attorney and ethics official in the United States Air Force, Office of the General Counsel. Ms. Serrano received her law degree from the University of Connecticut School of Law, where she was an Executive Editor of the Connecticut Insurance Law Journal. She received her B.A. in History from Yale University.

SEC faces lawsuit over ‘gag orders’ in enforcement settlements
by Joe Mont

The Cato Institute, a libertarian think tank, is suing the Securities and Exchange Commission in federal court to challenge its decades-old policy of imposing “gag orders” on settling defendants in civil enforcement actions. As a routine condition of settling civil or administrative actions, defendants agree to a promise that they will never publicly contest, challenge, or deny any of the allegations the SEC has made against them—even after the case has been settled and the underlying lawsuit or administrative proceeding dismissed.

Five things to do NOW to deal with Sexual Harassment Compliance Challenges
by Kristy Grant-Hart

The public, regulator, and shareholder expectations for companies are sky-high when it comes to preventing and responding to sexual harassment.  What can you do to protect your company in 2019?  Start with these five actions… [More…]

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

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The Shift from Active to Passive Investing: Potential Risks to Financial Stability? by Patrick McCabe, Board of Governors of the Federal Reserve System

In our working paper, we examine four channels by which the active-to-passive shift may affect financial stability: (1) effects on liquidity transformation and redemption risk for investment funds; (2) growth of passive products with strategies that amplify asset-price volatility; (3) increased asset-management industry concentration; and (4) effects of indexing on the prices, volatility, and comovement of financial assets.[More…]

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Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst

We focus on understanding the structural incentive problems that motivate index fund managers to under-invest in stewardship and defer to corporate managers, thereby impeding their ability to deliver on their governance promise. We stress that in some cases, fiduciary norms, or a desire to do the right thing, could lead well-meaning index fund managers to take actions that differ from those suggested by a pure incentive analysis. Furthermore, index fund managers also have incentives to be perceived as responsible stewards by their beneficial investors and by the public—and thus, to avoid actions that would make salient their under-investing in stewardship and deferring to corporate managers. These factors could well constrain the force of the problems that we investigate. However, these structural problems should be expected to have significant effects; the evidence we present in Part ‎III demonstrates that this is, in fact, the case. [More…]

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Dissecting the Conundrum of Investing in Hedge Funds Despite High Fees and Mediocre Returns by Cary Martin Shelby

October 2018 ended with the hedge fund industry suffering its worst monthly decline since September 2011, according to the HFRI Fund Weighted Composite Index. Some commentators are predicting that 2018 will end with the hedge fund industry experiencing its worst annual performance since the failure of Lehman in 2008. This news comes on the heels of a disastrous decade for hedge fund performance. In the years following the financial crisis of 2007-2009, the S&P 500 consistently outperformed the hedge fund industry. Even Warren Buffet famously predicted that a basket of hedge funds would underperform the S&P 500 over a 10-year period from 2007-2017. He in fact won that bet as his basket of hedge funds earned 2.2 percent over that period while the S&P 500 earned 7.1 percent. [More…]

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Two Celebrities Charged With Unlawfully Touting Coin Offerings

The SEC’s orders found that Mayweather failed to disclose promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc., and that Khaled failed to disclose a $50,000 payment from Centra Tech, which he touted on his social media accounts as a “Game changer.” Mayweather’s promotions included a message to his Twitter followers that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…”[More…]

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The Whistleblowers by Tamar Frankel in Verdict

A whistleblower may face conflicted commitments and loyalties. As a good citizen, he or she is committed to following the law. Yet he or she is also committed to the workplace and to its leaders’ directives and success. The institutions and their leaders’ actions and directions may conflict with the whistleblower’s interpretation of the law. Unfortunately, such conflicts may not be unique. [more…]

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Why don’t we trust whistleblowers? by Kelly Richmond Pope

In my TED Talk, I explore the dilemma faced by many whistleblowers; speak up and help the problem or speak up and be forever scrutinized. [More…]

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These are some of the compliance-related stories that recently caught my attention. Little bits to grow your building knowledge base.

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Steve Cohen Will Pay Extra for Compliance Tips by Matt Levine

How did this happen, you might well ask. There are some obvious answers. For one thing, a culture of compliance at Point72 really might be a delicate bud that needs to be carefully nurtured with constant cheerleading and incentive programs. 1 For another, I mean, it’s not impossible that Steve Cohen spends an hour a day thinking up ways to annoy everyone, is it? [More…]

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A Tribute to the Fantastic Four: Part I- Four Questions for Goldman Sachs by Tom Fox

The Fantastic Four introduce four questions that Goldman Sachs will have to answer around its role in the 1MDB scandal. While the company has tried to separate itself from its former partner Tim Leissner and former Managing Directors Roger Ng and Andrea Vella; given Leissner’s remarks about company culture and the company’s expectations at his guilty plea hearing this past summer. [More…]

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New Company Policy: Don’t pay bribes by Richard L. Cassin

Could a company ever replace a 50-page anti-corruption policy with three words: Don’t pay bribes?

Would supervisors, managers, and executives take ownership of a three-word policy? [More…]

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NAVEX Global Research Demonstrates Correlation Between Business Performance and Hotline System by Michael Volkov

In an interesting new report (here), NAVEX Global enlisted Professor Kyle Welch from George Washington University’s Business School to analyze years of NAVEX Global’s hotline data.  Professor Welch was given access to over ten years (2004 to 2017) of NAVEX Global’s hotline data …. The study shows a correlation between increased use of internal hotline reporting systems and improved business performance.  The benefits to a company increase with use of the hotline reporting system. [More…]

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Time Limits and SEC Enforcement Actions by Thomas O. Gordon in SEC Actions

In Kokesh the Supreme Court held that the statute of limitations applies to disgorgement in SEC enforcement actions. Accordingly, if the agency fails to initiate its action in a timely fashion requests for disgorgement may be time barred. No such time limit applies, however, once the case is brought. To the contrary, the action may continue for years. The point is well illustrated by a case the Commission recently partially settled which traces to 2009. [More…]

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How Co-investments continue to evolve by Lisa Fu in PERE

Meanwhile, managers are also reevaluating how some investors take part in co-investments. A manager may agree to let investors commit to a co-investment opportunity without taking part in the main fund, according to a fourth panelist. His own firm brought on third-party investors for co-investments based on their unique capabilities to help grow a particular platform, he said. However, because of the increasing demand for co-investments and the fact that such opportunities are “too valuable” to offer to investors without receiving a fund commitment in exchange, he believes there will be a trend toward limiting co-investment opportunities to investors in the primary vehicle. The one exception would be an investor that possesses a unique attribute that can help execute on an investment plan, he said. [More…]

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Highlighting the “SEC” in cybersecurity: Continued regulatory focus on preparedness and response by Jennifer Achilles and Jim Barbuto

The SEC appears to be focused on the importance of well-designed policies and procedures and training. Two elements of compliance that the Report emphasizes are the importance of procedures to authorize wire transfers (including the requirement for multiple levels of approval and verifying changes in counterparties) and the need for continued training of employees to familiarize them with common cyberattack strategies. These focal points serve as useful action items for companies to evaluate their own risk profiles. Although the SEC refrained from suing the companies mentioned in the Report, the attention paid to internal controls and cybersecurity in particular is a shot across the bow that the SEC will not be as generous in the future. [More…]

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Sentences upheld in double jeopardy dispute by R. Jason Howard, J.D.

On the heels of the Supreme Court holding in Kokesh v. SEC that disgorgement, “as it applied in SEC enforcement proceedings, operates as a penalty,” the Sixth Circuit, in a criminal sentencing appeal, held that SEC civil disgorgement is not a criminal punishment (U.S. v. Dyer, November 13, 2018, Suhrheinrich, R.). [More…]

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

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Time to Renew Registrations for RIAs and BDs; SEC Allows Mutual Fund Boards to Rely on CCOs, and NFA kicks out Members for Failure to Pay Dues: Regulatory Update for November 1, 2018
by Hardin Compliance Consulting LLC

Annual Renewal Program for IARD System: Get out your checkbooks!  It is time for the annual renewal of investment adviser (IA) firms and their IA representatives’ (IARs) registrations with jurisdictions/states. Preliminary renewal statements for the IARD system will be available November 12, 2018, and the deadline for the receipt of preliminary statement payment is December 17, 2018. [More…]

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A Simple Way to Explain the Difference Between Legal and Compliance by Ricardo Pellafone in SCCE’s Compliance and Ethics blog

So, here’s an analogy that we think gets the job done: the next time someone asks you to explain the difference between legal and compliance, put it in terms of safety and insurance.

Preventing liability versus preventing fire. [More…]

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Compliance officers as entrepreneurs? by Jeff Kaplan in Conflict of Interest Blog

In a paper recently published by Boston University School of Law – The Law Office (LO) and Compliance Officer (CO): Status, Function, Liabilities, and Relationship  – Emerita Professor Tamar Frankel of that school quotes a former SEC official (John Walsh, then Chief Counsel, Office of Compliance Inspections and Examinations) as noting the following:

[C]ompliance officers have the characteristics of entrepreneurs. They have the “what next” mentality. They are excited about change and interested in the unknown; perhaps because the unknown is where their opportunities lie. They are not afraid of what they do not know and are eager to learn. With continuous learning come recognizing problems and ideas for solutions. They focus on creating and implementing new ways of doing things. Often, they are more interested in the future than in the present or the past, particularly if the future promises better methods and results. This process and the ideas it brings, are the exciting for entrepreneurs. In this respect COs are similar to entrepreneurs. [More…]

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Insider Trading: Are Insolvent Firms Different? by Andrew Verstein

One difference is the level of regulation of trading in the residual claims of the firm. In solvent firms, the residual claims are equity securities, and equity securities are subject to the full ambit of trading restrictions. In insolvent firms, non-equity claims such as trade credit or bank loans typically constitute the residual claims. These non-equity residual claims are subject to less stringent regulation precisely because they are not equity and they may not even be securities. [More…]

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The Fonzie…er ah…Ponzi Scheme by Jennifer L. Abernathy, Esq., CAMS in SCCE’s Compliance and Ethics blog

Not only did the internet produce one definition for a Fonzie scheme – it actually produced two! The first consists of defrauding a restaurant owner from earning money from a jukebox by playing songs on it for free. The second involves dating more than one girl in the same night. [More…]

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

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‘I had a moral duty’: whistleblowers on why they spoke up by Teri Pengilley, Christopher Thomond , Murdo MacLeod, Sarah Lee and words by Caitlin Disken in The Guardian

To mark the 25th anniversary of the whistleblowing charity Protect (formerly known as Public Concern at Work) – we focus on 12 people who have taken great personal risk to expose everything from warmongers to tax dodgers and sexual and physical abuse. [More…]

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Manhattan USAO Charges Former Accounting Professor with Fraud by T. Gorman in SEC Actions

When making investments many think seeing is believing. That often means asking for the key documents and carefully examining them. If it is in the documents then it must be true. If the papers are furnished by a reputable professional such as a former professor who is an accountant at a known firm, the belief can be bolstered. Thus the investors in an intellectual property firm obtained and reviewed the key documents. They invested millions of dollars. The documents were fraudulent. Their funds were misappropriated. U.S. v. Henning (S.D.N.Y. Oct. 9, 2018). [More…]

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Insider Trading Laws Haven’t Kept Up With the Crooks opinion in the New York Times by Preet Bharara and Robert J. Jackson Jr.

Insider trading cases are of special significance. They are a manifestation of America’s basic bargain: that the well-connected should not have unfair advantages over the everyday citizen. When regulators and prosecutors make a commitment to punish insider trading, it sends a message that you don’t need special access to make an honest buck. Fighting insider trading is a refusal to accept a rigged system. [More…]

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Insider Trading and the Myth of Market Confidence by John P. Anderson in CLS Blue Sky Blog

There are, however, at least two reasons for questioning the validity of the link between market-confidence and the regulation of insider trading. First, insofar as it relies on a socio-psychological claim—that most investors believe insider trading is economically harmful or morally wrong—it is subject to the problem of false consciousness (i.e., the psychological claim could be true though the shared belief is demonstrably false).

Second, even if the problem of false consciousness is set aside, the market-confidence argument’s empirical claim (that a shared public perception that insider trading is prevalent will send most market participants to the sidelines) must be proven; it cannot be simply assumed. Empirical evidence for the market-confidence claim is, however, notoriously weak. And still more concerning, it is difficult to imagine what strong empirical evidence for the claim would even look like. [More…]

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Ten Questions the SEC Probably Has for Google by John Reed Stark

Google also mentioned that up to 500,000 Google+ users potentially had their personal data exposed. In addition, Google reported that up to 438 applications may have used the defective Google+ API, which makes estimations of impacted individuals difficult to ascertain. …

What a mess. Let the onslaught of scrutiny begin, which in my opinion will undoubtedly include an investigation by the U.S. Securities and Exchange Commission (SEC), the federal regulator tasked with policing the disclosures to shareholders by public companies like Google.  [More…]

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Dear Intermediaries: Don’t manufacture your own red flags by Bill Steinman in the FCPA Blog

I see it time and time again — third parties that would otherwise pass muster under a client’s due diligence process create their own red flags.

They push back on a local registration requirement. They ask that payments be rendered from an offshore account. They fail to disclose adverse media that actually has a reasonable explanation. The diligence process then grinds to a halt as the client scrutinizes the issue. [More…]

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

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The Knowledge Transfer Equation by V. Mary Abraham

But how do we transfer knowledge effectively? The answer Davenport & Prusak offer may not be exactly what you were looking for:

“The short answer, and the best one, is: hire smart people and let them talk to one another.” [More…]

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Regulatory Changes and the Cost of Capital for Banks by Anna Kovner, Peter Van Tassel, and Brandon Zborowski in Liberty Street Economics

Measuring the cost of capital requires a model because expected (as opposed to realized) stock returns are not observed empirically. In this blog post, we use the Capital Asset Pricing Model (CAPM) to estimate the cost of capital. The CAPM provides a benchmark estimate of expected stock returns from an equilibrium model that is often used by market participants. Our staff report provides additional cost of capital estimates from related multifactor models.  [More…]

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How the S.E.C. Is Trying to Push Traditional Corporate Governance Upon Tesla by Peter J. Henning in DealBook

The S.E.C. may be doing the dirty work for Tesla’s directors by getting Mr. Musk to move the company toward a more traditional management structure so that he is not the focal point of its operations. Whether or not it succeeds, it will be worth watching. [More…]

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N.Y. Appellate Court: Coverage Precluded for Disgorgement “Penalty” by Kevin LaCroix in the D&O Diary

In the latest development in nearly decade-long legal battle, a New York intermediate appellate court has held in light of the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC that amounts Bear Stearns paid under an SEC disgorgement order represent a “penalty” for which coverage is precluded under the bank’s insurance policy. This ruling, which overturned a trial court order holding that the disgorgement amount was covered, represents a substantial reversal of fortune for the claimants in this long-running and high-profile insurance coverage dispute. While further proceedings in the case seem likely, the ruling nevertheless represents a setback for policyholders seeking to establish insurance coverage for disgorgement amounts. The intermediate appellate court’s September 20, 2018 opinion can be found here. [More…]

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The Long and Short of It: Do Public and Private Firms Invest Differently? (.pdf) by Naomi Feldman, Laura Kawano, Elena Patel, Nirupama Rao, Michael Stevens, and Jesse Edgerton

Using data from U.S. corporate tax returns, which provide a sample representative of the universe of U.S. corporations, we investigate the differential investment propensities of public and private firms. Re-weighting the data to generate observationally comparable sets of public and private firms, we find robust evidence that public firms invest more overall, particularly in R&D. Exploiting within-firm variation in public status, we find that firms dedicate more of their investment to R&D following IPO, and reduce these investments upon going private. Our findings suggest that public stock markets facilitate greater investment, on average, particularly in risky, uncollateralized investments [More…]

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Och-Ziff Case Teaches Another Costly Lesson About Hiding Bad News by Sue Reisinger in Corporate Counsel

Och-Ziff Capital Management Group, one of the world’s largest hedge funds, agreed Tuesday to pay nearly $29 million to settle a class action suit accusing the company of not disclosing a material fact—an African bribery investigation carried out by federal prosecutors from 2014 to 2016. [More…]

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

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Today’s compliance is more than due diligence and red flags by Alison Taylor in the FCPA Blog

Every year for the past decade, BSR has surveyed sustainability leaders at our global member companies on the State of Sustainable Business, in a collaboration with Globescan. To mark our 10th year and reflect the shifting global agenda, we have updated the list of corporate sustainability priorities we track: ethics/ integrity and diversity/ inclusion just appeared on our list for the first time. [More…]

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Getting Seriously Public About Non-Compliant Expenses by Kristy Grant-Hart

Most fraud and anti-bribery enforcement actions which involve gifts and hospitality include lavish elements. Reports of managers stealing from the company to take luxury trips, buy themselves luxury gifts, or throw themselves lavish parties is the stuff of many articles and court cases. But the trend in companies is turning toward the punishment of smaller indiscretions, and the compliance profession should celebrate this shift. [More…]

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How Tech Informs Compliance by Tom Fox

I asked [Thomas Sehested, co-founder and Chief Executive Officer of GAN Integrity Inc.] what a compliance professional might consider to focusing on initially from a tech standpoint. Interestingly, he noted that even with the wide range of company sizes and industry foci, “you want to look at what you do on a day to day basis and automate that so that you, as a compliance professional, can focus on what you’re good at and that’s making the strategic decisions about how your company should handle compliance. It should not be about chasing people down and making sure that they filled out their questionnaires and trainings.” [More…]

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SEC Cybersecurity Requirements for Registered Investment Advisors (RIAs) By Pat Cleary

The post goes into excruciating detail as to what you need in order to roll out a fairly decent cybersecurity program that attempts to meet all SEC cybersecurity requirements. I do not recommend sitting down and reading this in one sitting. Take every section like a chapter and cross-reference it with your existing cybersecurity policy. If you don’t have a policy yet, go ahead and build out a cybersecurity manual, one section at a time, using this post and the NIST Framework as a guide. (If you are in a hurry, you can read this post first.) [More…]

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Giving Cops The Finger Is Protected Speech, Says Another Federal Court by Tim Cushing

Another federal court has given its official approval of flipping the bird to cops. This isn’t to say it’s a wise idea, just a Constitutional one. Extending the middle finger is protected speech.  [More…]

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

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SEC Enforcement & Venue: A Question of Fairness by T. Gorman  in SECActions

ow is the time for the Commission to step-up and be a leader in the effort to instill a new fairness in the administrative enforcement process. That begins with a recognition that not every case can effectively be adjudicated in an administrative forum. Some cases, for example, may require extensive discovery by those charged; some cases may need the rigors of the rules of evidence; and some cases may be fact intensive, requiring a jury to hear the case. Others may require securities expertise from the trier of fact of the type possessed by ALJs. One size does not fit all. [More…]

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Lawmakers urge SEC to retool Reg BI by Anne Sherry, J.D. in Jim Hamilton’s World of Securities Regulation

The ranking members of four House and Senate committees are leading a call for the SEC to revise Regulation Best Interest, asserting that the proposed rule does not quite satisfy the agency’s Congressional mandate and that it falls short of protecting investors. In the letter to SEC Chairman Jay Clayton, the lawmakers urge the SEC to amend the proposal before it is finalized, even if it means re-proposing the rulemaking. [More…]

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Did Deregulation End the “Quiet Period” of Low-Risk Banking? by Paul G. Mahoney in the CLS Blue Sky Blog

But I remain convinced that I’m right on the big picture: It’s a Wonderful Life-style banking (taking demand deposits paying 0 percent and savings deposits paying 2.5 percent, making mortgage loans paying 5.5 percent, pocketing the difference and going home at 3:00) existed because it was a wonderful economy. It was inevitable that banking would become different, and riskier, once that environment changed. The details might have come out differently, but change and additional risk were unavoidable. [More…]

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Cycling, Courtesy and the Compliance Profession by Tom Fox in FCPA Compliance & Ethics

Once upon a time I had a burgeoning cycling career. That ended when I was taken out by a Hummer on a training ride (Final score Hummer 1 – Tom 0). However, I still cycle regularly and enjoy watching the Tour de France and hearing about Doug Corneilus’s annual PanMass ride. I also still enjoy the occasional non-drug related cycling story. When you couple the above with a story from one of my favorite sportswriters, Jason Gay from the Wall Street Journal, you can see my interest when Gay’s piece yesterday was entitled “She Just Rode 184 MPH on a Bicycle. Really.” In my cycling career it was possible for me to reach up to 40 mph on flat ground and higher going down hills, although by that time I was usually too mortified to look at my odometer to see the speed I had achieved. Yet here was Denise Mueller-Korenek, a 47-year-old,who broke the all-time land speed record for bicycles, literally hitting 184 mph. [More…]

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