Category: Compliance Programs

Make Sure You Have the Right Ticker Symbol

tweeter

Perhaps you’ve heard the news that Twitter is going public. So you see that TWTR is already heading up fast so you but some. There is a trading frenzy. The stock is doubling in price, and then again, and again. Great offering. Just one problem. You bought stock in the defunct Tweeter Home Entertainment Group. It used to trade on the TWTR symbol.

When companies file for bankruptcy, the Financial Industry Regulatory Authority typically adds the letter Q to the existing ticker. That frees up the symbol for potential use by another company. So TWTR became TWTRQ when Tweeter filed for bankruptcy in 2007 (and again in 2008).

Apparently some investors were not paying close attention. The stock skyrocketed 684% on Friday. The price started at 0.018 and closed at 0.05 after rising as high as 0.15. Over 14 million shares had traded.

FINRA stepped in and stopped trading because the trading activity “demonstrated a widespread misunderstanding related to the possible initial public offering of an unrelated security, which … has caused a major disruption in the marketplace.”

Maybe it was just a data entry error that trigger the onslaught with others jumping on board. Maybe someone though Twitter would have to buy the ticker symbol from Tweeter so stockholders could see some value.

The question is why is the stock still hanging around. The company sold substantially all of its assets on July 31, 2007. There was brief and failed revival that blew up in December 2008.Presumably by now all of the AP And AR have run through the system.

I remember Tweeter as the special store to buy fancy and expensive audio equipment. All that hi-fi went away as the difference is sound quality diminished as digital took off. The iPod made the fatal blow.

Now the stock is just hanging around for shady traders and traders who get the wrong ticker symbol.

References:

How Good Is Your Business Continuity Plan?

compliance and hurricane sandy

The Securities and Exchange Commission wants it to be better.

In the aftermath of Hurricane Sandy, the Securities and Exchange Commission joined the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority in issuing a joint staff advisory on business continuity and disaster recovery planning.

The advisory follows a review by the regulators after Hurricane Sandy closed U.S. equity and options markets for two days in October 2012. Many firms had a hard time dealing with such a widespread area of severe impact.

When considering alternative locations (i.e., back-up data centers, back-up sites for operations, remote locations, etc.) firms should consider the implications of a region wide disruption. Firms are encouraged to consider geographic diversity when determining the physical location of alternative sites. An alternative site, particularly a system back-up location, in close proximity to the primary site may not sufficiently protect the firm from the effects of a region wide event. Firms should consider whether their primary site and alternative sites rely on the same critical utility services, such as electricity, transportation and telecommunications.

That is a somewhat achievable goal for big firms, but not one for smaller firms.

The alert ignores that reality of the physical location of people, their homes, and their families. It would be great to have a fully redundant backup site located a thousand miles away from the main location. But you’re not going to be able to quickly get people there in the event of such a widespread event.

Not only are businesses affected by a disaster, but so are homes. Many (most?) employees are not going to abandon their families, stuck with limited access to power, food, and other needs.

Of course, firms need a solid business continuity and disaster recovery plan. It should be tested and evaluated regularly. A firm needs to plan for small disruptions and big disruptions. Small disruptions are more likely and need to be well addressed.

It’s much harder to have a bullet-proof plan for an event like Sandy that disrupts power to huge parts of the urban center, knocks out power to a huge swath of residential areas, floods office buildings, floods thousands of homes, disrupts transportation, and does so over hundreds of miles.

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Action Against a Crowdfunding Platform

somoLend

SoMoLend – which stands for Social Mobile Local Lending – is a crowdfunding platform that allows small businesses to borrow money from a network of lender. The State of Ohio claims that SoMoLend failed to meet the regulatory hurdles currently in place for crowdfunding. It’s also claiming that SoMoLend acting fraudulently when seeking its own investment capital.

There are many entrepreneurs and wantapreneurs trying to jump on the crowdfunding bandwagon. For those willing to take the time to understand the securities laws, there are ways to enter the field. For some, the upcoming gate opening on general solicitation and advertising will allow them to jump on board. Others are looking to the Securities and Exchange Commission to issue rules on crowdfunding under the JOBS Act.

Just by looking at that web of requirements, the regulatory landscape for crowdfunding is complicated and currently in flux. That likely means that fraudsters are circling for easy targets and well intentioned businesses can easily make a mistake.

The State of Ohio says that SoMoLend made a mistake when working for lending sources and crossed the line when soliciting its own investors.

The Ohio action is not against the crowfunding aspect, it’s against the way SoMoLend raised its own capital and its business model. Ohio has an exemption from registration for securities offerings that comply with the SEC’s Regulation D. Until September 23, 2013 that means the securities can’t be offered through general solicitation and advertising. Ohio is claiming that SoMoLend violated that ban and therefore does not qualify for the exemption from registration under Ohio law.

On top of that violation, Ohio is also claiming fraud for SoMoLend using financial projections in investor pitches that depicted a more profitable company. The company projected millions in revenue and profits. Those projections lacked any meaningful disclosure about the assumptions that went into the projections and lacked cautionary risk factors for investors.

In a March 2013 article, SoMoLend claimed:

Since the beta site launched in May 2012, SoMoLend has facilitated some 100 small-business loans totaling nearly $3.5 million. Loans range from $500 to $1 million, with interest rates ranging from 3 to 22 percent and terms spanning six weeks to five years, depending on a business’s needs and creditworthiness. SoMoLend also charges a 4 percent transaction fee on funds borrowed.

Ohio claims the true amount of lending activity was 13 loans to 9 businesses for $94,000. According to the Ohio filing, the company has brought in only $3404 in revenue.

On top of that, SoMoLend met with the Ohio regulators who pointed out that the firm would need to be registered as broker-dealer if it was going to collect transaction-based fee for selling notes through the platform. That 4% transaction fee is effectively a commission on the sales of securities. You can compare that to Funder’s Club that took a different approach to crowdfunding by taking a promote on the back-end. Funder’s Club even obtained a No Action letter from the SEC validating its business model.

Finally, the state gets to the crowdfunding piece and alleges that some, or all, of the promissory notes offered through SoMoLend were not registered or exempt from registration. Ohio seems a bit sympathetic to the note issuers when it says SoMoLend “exposed approximately 200 small business issuer to potential liability”.

I decided to take a look at the platform. To start, I saw this warning:

If you are an accredited investor, we require you attest to your status prior to viewing borrowers on the platform.

I still have not gotten any more for verification and am still blocked from seeing any investment opportunities. I assume the business has come to grinding halt, even though the hearing on the order is not until October. SoMoLend’s CEO, Candace Klein recently resigned because of the regulatory action.

According to a story on Cincinnati.com:

Klein is a passionate entrepreneur who was honest about the company’s finances with investors and board members, but consistently lacked discipline and precision when discussing and presenting the company’s actual performance.

A combination of those missteps and the state’s apparent concerns about crowdfunding, lead to trouble.

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Use of Data Collected from Form PF

compliance and form pf

Many private funds struggled with getting Form PF filed. Many in fund compliance were dubious that the Securities and Exchange Commission would be able to do anything meaningful with the massive amount of data pushed through the form. Regardless, Section 404 of Dodd-Frank required the SEC to gather the data so the Financial Stability Oversight Council could assess systemic risk.

Section 404 also required an annual report on how the SEC has used the data collected in Form PF. The first report came out a short time ago.

In total, there are big numbers:

Types of Private Funds Advised by all Filers

  • 6,683 Hedge Funds ($4.061 trillion cumulative RAUM)
  • 5,928 Private Equity Funds ($1.603 trillion cumulative RAUM)
  • 2,922 Other Private Fund Type ($698 billion cumulative RAUM)
  • 1,121 Real Estate Funds ($299 billion cumulative RAUM)
  • 966 Securitized Asset Funds ($338 billion cumulative RAUM)
  • 329 Venture Capital Funds ($23billion cumulative RAUM)
  • 66 Liquidity Funds ($258 billion cumulative RAUM)

For a total of $7.280 trillion in Private Fund Regulatory Assets Under Management Reported by all Filers

The report goes on to imply that the SEC is still figuring out what to do with the data after it passes on the information to FSOC.

The mysterious Division of Economic and Risk Analysis is plugging some of the information into its black box of analytic tools.

More importantly for fund managers, the Office of Compliance Inspections and Examinations is using the information for pre-examination and research. Once selected for an exam, a fund manager should assume that the examiners have a copy of Form PF. OCIE is also working with a system to use Form PF to identify red flags that could trigger exams.

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Compliance, the Tour de France, and Doping

tour de france

One of the biggest challenges with any compliance program is proving effectiveness. It’s really hard to prove that you prevented a bad thing from happening. You may be able to detect bad things when they occur. But most policies and procedures cannot prove they capture 100% of the bad things. Cycling is a case in point.

The disgraced cyclist Lance Armstrong never failed one of this tests for doping. There were hundreds of tests and none of them proved he was cheating. It turns out the tests failed. Armstrong was doping. He was a liar. He cheated.

On Sunday, Chris Froome of Team Sky crossed the Champs Elysees as the winner of the 100th edition of the Tour de France. He dominated his contenders since the first mountain stage, finishing atop Ax-Trois-Domaines well ahead of his rivals.

Was he too dominant? Was he doping?

He passed the tests. Tests which are much more likely to detect illegal substances than years ago.

Froome is stuck in the position of trying to prove he is clean and did not break the rules. How to you prove that you didn’t break a rule?

Cycling fans, like me and Tom Fox, have been heartbroken to learn that some of our favorite riders were breaking the rules. That makes it hard to have 100% faith in Chris Froome.

It’s not a lack of faith in him; it’s a lack of faith in the testing system. Clearly, the testing regime failed to detect nearly a decade of cheaters. Armstrong’s titles did not fall to the next placed riders during those years, because nearly all of those who stood beside him on the podium were found to also be cheaters.

In looking at a compliance program, do you have faith that it is catching all the cheaters and deterring possible cheaters? Do the regulators and leaders of your firm have faith in your systems? Can you prove compliance? Or merely show that you haven’t caught anyone cheating?

 References:

LRN’s 2013 Ethics & Compliance Leadership Survey Report

lrn logo

LRN’s has published its 2013 Ethics & Compliance Leadership Survey Report. This sixth annual Ethics & Compliance Leadership Survey Report provides guidance and specific recommendations on critical risks and challenges. The report is based on a survey of more than 180 ethics and compliance leaders from across industries and geographies.

This year’s report has a new metric: the Program Effectiveness Index (PEI). The US Sentencing Guidelines, the UK Bribery Act, regulators, and law enforcement all talk about having an effective compliance program. LRN looks at three major roles to address the Program Effectiveness Index:

  1. a network of corporate controls
  2. facilitator of business operations in regulated contexts
  3. promotion of ethical conduct and culture

At first I was startled to see the Program Effectiveness Index measured on a scale from 0-1. I forgot about decimal points for a moment. In its survey, LRN reports an average PEI score of  0.71, with the scores distributed across a typical bell curve. The highest score was a 0.98 and the lowest was a 0.23.

The report highlights five attributes that distinguish the most effective ethics and compliance programs from the least:

  1. Celebration of acts of ethical leadership
  2. Adapting program to changing business needs
  3. Focus on employees as a key element of risk assessment
  4. Access to and support of senior management
  5. Management’s use of risk data in decision-making

The survey respondents consisted of 11% financial services and 10% insurance, with the rest covering a broad spectrum of industries. The report does not dovetail neatly with the needs of a private fund manager.  Of course it is always useful to see what others are doing with their programs, not just your peers.

Compliance Bricks and Mortar for May 31

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

Professional SEC Whistleblower Firm Seeks Investors to Finance Investigations by in Compliance Week

Now, it appears that the first generation of professional whistleblowers is upon us. The ABA Journal reports that Ted Siedle, a former SEC lawyer who is now an “industry watchdog,” is seeking to raise about $1.8 million from investors to create an “investment fund to cash in on the agency’s new whistleblower program.”

Examining Investment Advisers: The Challenge Continues by Elisse Walter in The CLS Blue Sky Blog

An excerpt of a speech that Commissioner Walter gave on April 16, 2013 at the 2013 NASAA Public Policy Conference in Washington, D.C.

As you are aware, the Dodd-Frank Act transferred oversight of mid-sized investment advisers from the SEC to the States. Investment advisers are an area of special concern to regulators because, among other reasons, advisers are fiduciaries charged with handling the investment assets for millions of middle-class Americans, including retirement funds, children’s college funds, and money for down payments on their homes — in a way, these assets are the vehicles to their dreams and hopes. Advisers are a critical part of the American economy, and are in a uniquely intimate position to do tremendous good — or tremendous damage — to clients and their families.

Whether my Aunt Millie trusts her assets to a small adviser with a shingle hung outside a red-brick Main Street office, or to an adviser to a large mutual fund headquartered in a steel and glass Wall Street high rise regulators need to be there. As Millie sits in an office, listening intently to her adviser and trying to understand, she’s relying on us.

But that’s been a challenge for regulators, and particularly for the SEC. The point of Dodd-Frank’s re-allocation of oversight, after all, was to increase examinations of investment advisers. The Commission just wasn’t able to do enough.

So, as it did in 1996 with NSMIA, Congress moved responsibility for many advisers to your agencies, which are now absorbing the additional responsibility. Believe me — I can empathize with the position that you are in. I’ll return to that a bit later, but for now I’d like to focus on how we’ve worked through the transition together.

Private Equity Endorses IPEV Valuation Guidelines

“The Private Equity Growth Capital Council (“PEGCC”) announced today that they have endorsed the International Private Equity and Venture Capital (“IPEV”) Valuation Guidelines from December 2012. The IPEV Valuation Guidelines are used globally as the framework for valuing private equity investments for financial reporting purposes. “The IPEV Valuation Guidelines have been endorsed worldwide by both private equity and growth capital firms and their limited partner investors,” said Steve Judge, President and CEO, PEGCC. “They are the recognized standard for valuing private equity portfolio companies and provide guidelines for preparers and users of financial statements as well as their auditors and accountants.”

Liberty Reserve Founder Indicted on $6 Billion Money-Laundering Charges By Kim Zetter in Wired.com’s Threat Level

The founder of digital currency system Liberty Reserve has been indicted in the United States along with six other people in a $6 billion money-laundering scheme, in what authorities are calling the largest international money-laundering case ever prosecuted, according to documents unsealed today. Dubbed the “financial hub of the cyber-crime world,” authorities say Liberty Reserve had more than 1 million users worldwide and processed more than 12 million transactions annually as the favored money-laundering service for carders, hackers and other cybercriminals in the digital underground who used it to transfer money around the world effortlessly and anonymously.

SEC Obtains Asset Freeze Against Front Running Equity Trader by Thomas O. Gorman in SEC Actions

The Commission’s revamped inspections program, which now utilizes a risk based approach and works more closely with the Enforcement Division,, continues to uncover wrongful conduct resulting in enforcement actions. This time the program discovered a front running trader who used his position for personal profit through secret trades in his wife’s account at the expense of the firm’s institutional clients. SEC v. Bergin, Civil Action No. 3:13 cv 1940 (N.D. Tx. Filed May 23, 2013).

SEC Warns About Exemptive Order Compliance

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The SEC’ Division of Investment Management issued new guidance to reminds firms to comply with conditions and representations in exemptive orders. The guidance suggests that firms “adopt and implement policies and procedures reasonably designed to ensure ongoing compliance with each representation and condition in any such order.”

The  guidance was triggered by June 2011 report from the SEC’s Office of Inspector General which noted noncompliance with exemptive order requirements and no-action letters. Besides this guidance, the Office of Compliance Inspections and Examinations’ 2013 examination priorities listed compliance with exemptive orders as an examination priority.

The SEC may allow a firm to engage in transactions that would otherwise be prohibited by securities laws by means of an exemptive orders. In order to receive this exemptive relief, a firm will make certain representations in its application and may agree to comply with certain conditions.

Based on its review of a sample of OCIE examination reports, the OIG determined in its 2011 report that many firms failed to comply with the representations and conditions of SEC exemptive orders and no-action letters they have received.
The OIG report found that the SEC divisions that issue relief do not have a process for confirming whether firms subsequently comply.

It’s a simple problem found in many organizations. One part of the SEC issues the exemptive relief and another conducts the inspections. The one conducting the inspections is probably not aware of the exemptive order or the need to comply with the provisions. It sounds like that is starting to change.

The OIG report made five recommendations intended to enhance the SEC’s oversight of exemptive order compliance.

(1) The Divisions of Investment Management, Trading and Markets, and Corporation Finance should develop processes for coordinating with OCIE regarding reviewing for compliance with conditions and representations in exemptive orders and no-action letters issued to regulated entities on a risk basis;

(2) The Divisions of Investment Management, Trading and Markets, and Corporation Finance, in coordination with the Office of Information Technology and OCIE, should develop and implement processes to consolidate, track, and analyze information regarding exemptive orders and no-action letters;

(3) The Divisions of Investment Management and Trading and Markets should, in their plans for implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act requirement that they establish their own examination staffs, develop procedures to coordinate their examinations with OCIE and include provisions to review for compliance with conditions and representations in exemptive orders and no-action letters on a risk basis;

(4) The Divisions of Investment Management and Trading and Markets should include compliance with the conditions and representations in significant exemptive orders and/or no-action letters issued to regulated entities as risk considerations in connection with their monitoring efforts; and

(5) OCIE should include compliance with conditions and representation in significant exemptive orders and no-action letters issued to regulated entities as risk considerations in connection with its compliance efforts.

Although the 2011 OIG report also include no-action letter, this 2013 guidance only mentions exemptive orders.

Sources:

Compliance Bricks and Mortar for May 3

bricks header 3

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

SAC to Begin Clawing Back Compensation in Insider Trading Cases by Peter Lattman in DealBook

On Thursday, Mr. Cohen sought to convince SAC investors and regulators that he takes compliance seriously. In a letter to his investors, Mr. Cohen announced a broad set of changes that would bolster the fund’s compliance practices, including clawing back the pay of employees who violate the law.

steve-cohen-insider-trading-case.i.0.steve-cohen-andre-carrilho

The Hunt for Steve Cohen By Bryan Burrough and Bethany McLean in Vanity Fair

With arrest after arrest in a massive, seven-year insider-trading investigation, U.S. Attorney Preet Bharara is getting closer to the biggest fish of them all: Steve Cohen, founder of SAC Capital, the $14 billion hedge fund, who some regard as the most successful stock picker of his time. C.E.O.’s have fallen, lives and companies have been upturned, but Cohen has thus far escaped. Bryan Burrough and Bethany McLean go deep inside Bharara’s probe—and SAC’s org chart—to reveal just how much blood is in Wall Street’s waters.

Prison For Illinois Men Who Hatched Comic Book Ponzi Scheme From Prison by Jordan D. Maglich in Ponzitracker

Three Illinois men are headed back to federal prison for masterminding a Ponzi scheme they concocted in prison that promised lucrative returns through the distribution of comic book rights.  Daniel Parrilli, 62, John Lauer, 48, and Christopher Anderson, 57, received 70-month, 31-month, and 95-month prison sentences, respectively, after previously pleading guilty to fraud charges.  The scheme raised more than $7 million from over 150 investors.

SEC Dings Investment Adviser for Custody Violations, Failure to Supervise by David Smyth and Elizabeth E. Spainhour in Cady Bar the Door

Readers of this space – and SEC observers generally – will recall a March 4 risk alert designed to warn investors about the ways U.S. investment advisers had recently been found to have violated the SEC’s asset custody rule.  The number and variety of violations were legion.  Advisers were not assuring themselves that clients were receiving quarterly account statements.  They weren’t subjecting themselves to surprise examinations designed to assure compliance with the rule.  The list went on, and the Commission’s Office of Compliance Inspections and Examinations closed with a polite reminder that “[a]dvisers may want to consider their policies and procedures and their compliance with the custody rule in light of the deficiencies noted in this Alert.”

How technology can improve your compliance process

PEI PFC Forum 2013

These are my notes from the Private Fund Compliance Forum 2013.

Jacqueline M. Giammarco, Esq., Chief Compliance Officer, Stone Point Capital
Stephen Pope, East Regional Sales Manager, Smarsh
Shawn Pride, Partner, Ernst & Young LLP
Arthur Zuckerman, Chief Operating Officer, Chief Compliance Officer & Partner, Avista Capital Partners

Think about how the technology can help your business processes, not just the compliance process. It’s better to leverage the business process and improve it.

A particular good starting point is investor on-boarding and automating the subscription process.

Employee trading is one area, particularly for private equity and real estate, that is a compliance nuisance. There is little risk in the fund managers operations. Technology can help eliminate the bureaucratic and time-sink processes mandated by the Adviser Act rules. Automating the process removes the stacks of paper from the office and means that the CCO and staff do not have to stare at all of the trades, just exceptions.

There was pitch for Compliance 11, not just for securities monitoring, but also for case management and tracking other compliance processes.

Vendors should be SSAE16 certified so they are taking the proper steps to protect your data.

Few attendees used technology to upload Form PF. One attendee said to was expensive and seemed to regret using it.

Don’t establish policies to monitor email and social media if you won’t have the time to actually monitor them.