Category: Compliance Programs

With the passing of Eddie Van Halen, I thought it appropriate to re-publish this great story about Van Halen and Compliance that I first wrote in 2009. [Spoiler alert] Those brown M&M’s served a real purpose.

You may have heard the story about Van Halen’s banning of brown M&M’s from its dressing room. I chalked it up to the pampered life of rock stars. (Especially, when compared to the more mundane life of a chief compliance officer.)

I just listened to the latest episode of  This American Life which revealed that the provision was not about pampering. It was about compliance.  Host Ira Glass talked with John Flansburgh (from the band They Might Be Giants) and he explained why the M&M clause was actually an ingenious business strategy. They recounted an except from David Lee Roth’s autobiography, Crazy from the Heat:

Van Halen was the first band to take huge productions into tertiary, third-level markets. We’d pull up with nine eighteen-wheeler trucks, full of gear, where the standard was three trucks, max. And there were many, many technical errors — whether it was the girders couldn’t support the weight, or the flooring would sink in, or the doors weren’t big enough to move the gear through.The contract rider read like a version of the Chinese Yellow Pages because there was so much equipment, and so many human beings to make it function. So just as a little test, in the technical aspect of the rider, it would say “Article 148: There will be fifteen amperage voltage sockets at twenty-foot spaces, evenly, providing nineteen amperes . . .” This kind of thing. And article number 126, in the middle of nowhere, was: “There will be no brown M&M’s in the backstage area, upon pain of forfeiture of the show, with full compensation.”

So, when I would walk backstage, if I saw a brown M&M in that bowl . . . well, line-check the entire production. Guaranteed you’re going to arrive at a technical error. They didn’t read the contract. Guaranteed you’d run into a problem. Sometimes it would threaten to just destroy the whole show. Something like, literally, life-threatening.

Van Halen used the candy as a warning flag for an indication that something may be wrong. I see some lessons to be learned.

Diamond Dave talking about those Brown M&Ms

References:

• This American Lie Episode 386: Fine Print
• NPR Music’s The Record: The Truth About Van Halen And Those Brown M&Ms by Jacob Ganz
• Van Halen’s Legendary M&M’s Rider from the Smoking Gun

The Office of Compliance Inspections and Examinations released a new risk alert last week on COVID-19 compliance risks for broker-dealers and investment advisers. OCIE broke the concerns into six categories:

1. protection of investors’ assets;
2. supervision of personnel;
3. practices relating to fees, expenses, and financial transactions;
4. investment fraud;
5. business continuity; and
6. the protection of investor and other sensitive information.

On first impression, that looks like a typical list of things that OCIE is concerned about and that fund managers should be concerned about, with or without trying to deal with COVID. OCIE did a good job of looking at these typical issues through the lens of disruptions caused by the COVID pandemic and fewer (or no) people in the office.

As for the protection of investor assets, OCIE wants firms to make sure someone is checking the mail for correspondence from investors. There has been a rise in phishing attacks, so firms should take additional steps to verify instructions from clients or investors.

Obviously, supervision has become more difficult as workers are now spread between the office and home. A lot of compliance comes from walking around the hallways.

As to fees, OCIE raises the issue that firms are facing financial pressure and may push fees to generate revenue.

There was a wave of fraud from companies purporting to have COVID cures and to be able to supple COVID fighting materials like PPE. Don’t sell them to your clients.

I assume most firms had some form of business continuity plan in place. I would guess that very few specifically addressed what to do during a pandemic. Office fires, people getting hit by a bus, power failures are all in the plan. Pandemics? Less likely.

Protecting personal information is just as important, regardless of where people are working. If you have someone working at home with PII, maybe they need a shredder for documents. Watch for phishing attacks. The usual.

Read all the details in the alert.

Sources:

• Select COVID-19 Compliance Risks and Considerations for Broker-Dealers and Investment Advisers

Read some great research by Regulatory Compliance Watch. Bill Myers wrote a story summarizing the Form ADV data for over 4500 private fund advisers. Of that, at least 2800 had more than one job at the firm.

Only 622 listed the title for their CCO as only compliance officer. The most common other hat was CFO, followed by general counsel.

Sources:

• Three-Fifths of Private Fund CCOs Wearing Multiple Hats

I’m sure many people are surprised at the decision from the Supreme Court that federal employment discrimination law protects gay and transgender employees. Title VII of the Civil Rights Act of 1964 prohibits employment discrimination “because of sex.”

Even if Congress did not have discrimination based on sexual orientation or transgender status in mind when it enacted the Civil Rights Act over a half century ago, the Supreme Court ruled that Title VII’s ban on discrimination protects gay, lesbian and transgender employees.

If you’ve been involved in discrimination training as part of your compliance program, you know that fewer than half of the states currently ban employment discrimination based on gender identity or sexual orientation. The Supreme Court decision is is a major victory for LGBT employees.

The decision is particularity remarkable given that President Trump has been able to appoint two justices during his term, giving the court what is usually a more conservative tilt, and seeming less likely to expand the interpretation of civil rights laws. President Trump’s first pick to the high court, Neil M. Gorsuch, is responsible for writing decision. I’m sure he’s quit surprised that his pick has written the most impactful ruling for gay rights since same-sex marriage was codified as a constitutional right in 2015.

Should the rule making process continue for regulations that are not related to COVID-19? At least 21 state attorneys general say “no.”

In a letter to the Acting Director of the federal Office of Management and Budget, the attorneys general want the federal bureaucracy to prioritize regulations that are responsive to the pandemic while generally freezing all new and pending regulations.

Against that backdrop, the letter urges the federal government to halt most non-COVID-related rulemaking processes. It also asks the Administration to consider reopening certain already-closed rule comment periods.

I think the request is likely to fall on deaf ears. The 21 states behind the request are more blue than red.

The halt to new rule-making is not unprecedented. The letter points out that President Trump put an nearly identical freeze in place when he took office.

Sources:

• March 31 Letter to Acting Director of OMB

The SEC’s Office of Compliance Inspections and Examinations issued a statement on operations and exams during the pandemic. OCIE is still operational and can still run exams. They will be off-site through correspondence, unless necessary to be on site. I assume this means that OCIE is focusing on firms suspected of fraud and is limiting routine exams.

I’ve also heard that OCIE is asking firms about their pandemic response as part of their business continuity plans. For many firms this pandemic is a test of their BCPs.

Some of the SEC questions:

Does the firm have: (i) a written Business Continuity Plan; (ii) a Pandemic Continuity of Operations Plan; and/or (iii) equivalent informal plans or guidance (collectively, “BCP”)?

If so: Briefly describe some of the aspects of the BCP that are particularly applicable to maintaining continuity of business operations when dealing with the COVID-19 pandemic (e.g., personnel working remotely).

Are there any business operations that cannot be performed remotely?

Is the firm prepared to have all of its personnel operate remotely for several weeks (e.g., 3+) or months, if required or appropriate? Are any personnel unable to operate remotely or unable to do so for several weeks or months?

Has the COVID-19 pandemic created hardships for the firm (e.g., financial, human resources, or otherwise)?

Sources:

• OCIE Statement on Operations and Exams – Health, Safety, Investor Protection and Continued Operations are our Priorities

We are in extraordinary times. To me it feels like a combination of the days after 9-11 and the 2008 Lehman collapse. We are sheltered in place, fearful for our lives and the economy is grinding to a halt.

Our government came up short in its response to pandemic. (I try to keep this blog out of the political debate. This is not one of those times.) The administration was ill-equipped to handle the pandemic, ignored the problem, failed to take early action, and has consistently gotten the facts wrong. It’s initial response was tax cuts, which did not address the pandemic and was a poor tool to help those in economic distress. Things will stabilize, eventually.

The next problem will be be figuring out when to end things. We will need to release people from their isolation and tell everyone it’s okay to start meeting again. I fear that we will lack the leadership and trust in government to hit the restart button. Who will honestly tell us that it’s okay to go out?

That leaves us where we are now. Trying to keep our businesses running in this time of crisis. Holding thing together. Waiting for normal to return.

For registered investment advisers, the Securities and Exchange Commission has offered some relief. You can have some extra time to file your Form ADV. It requires notifying the SEC and posting information on your website. Similar extensions are available for filing Form PF. I hope things are better a month from now and firms won’t need that extension.

Sources:

• Order for Relief Related to Investment Advisers Act
• SEC Coronavirus (COVID-19) Response

Massachusetts is showing no patience for the Regulation BI and is imposing its own fiduciary standard on investment advice in the Bay State. The standard goes into effect when published on March 6, with enforcement coming into play on September 1.

The standard in 950 CMR 12.207 will apply to any broker-dealer or agent in Massachusetts. The original proposal included investment advisers and investment adviser representatives. But according to the Adopting Release, the final regulation excluded them because they are already subject to a fiduciary standard.

For broker-dealers, the fiduciary standard extends past the recommendation requirement standard if the broker-dealer has discretionary authority over the account, has an agreement to monitor the account or receives ongoing compensation.

Sources:

• Adopting Release to Amendments to Standard of Conduct Applicable to Broker-Dealers and Agents – 950 MASS. CODE REGS. 12.200
• Proposed Regulation, as amended (redline) (PDF)