Category: Compliance Programs

Stick The Landing

I saw this picture and it made think about compliance. At its most basic, the plane did land, the aviators did not die, and the aircraft carrier is still floating.

But it was a not a compliant landing.

The plane, the aircraft carrier, and the pilot are all damaged to some extent. That it was not fatal to any of them does mean it was good. Although, better than the alternative.

Compliance is not a success if merely sticks the landing. It needs to monitor the entire flight plan, to make sure things are on track for a good landing. You need reporting along the way and a judgment on the final result. Merely noting that something landed misses the point.

I don’t know what lead to this landing. Obviously, something went wrong. So perhaps this landing was a good result given the circumstances. Being able to walk away from a situation could be considered a success if things were really bad.

In the business world that more likely means that you ended up talking the lawyers instead of the compliance group. The lawyers figure out how to get you out of trouble. Compliance tries to keep you from getting into trouble. Both want you to stick the landing.

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I’m raising money for the Dana-Farber Cancer Institute by participating in the Pan-Mass Challenge. 100% of your donation is passed through to DFCI. I’m riding my bike for three days and 250+ miles. I appreciate the generous support I have received from so many of the readers of Compliance Building. You can donate through any of the links below.

Thank you,
Doug

Froome, Teamwork and Success

Professional cycling is not a mainstream sport in the U.S., so I would guess that few reading this story share my love of the Tour de France. (With the notable exception of Tom Fox.) The race has several different competitions going at the same time, with a confusing mix of skinny guys, tarted up with sponsors like a NASCAR racer. I became a fan two decades ago and continue to be enthralled by drama and athletic heroism on display.

On Sunday, Chris Froome was once again adorned with the “Maillot Jaune” on the Champs-Élysées as the overall winner of the 2017 Tour de France. This is his fourth win and puts him in the cycling pantheon as one of the greatest.

In his previous victories in 2013 and 2015, Mr. Froome dominated his rivals and was clearly the strongest overall contender. Last year, he seemed beatable, but still won. In 2017, Mr. Froome squeezed out his winning margin of 54 seconds on Rigoberto Uran and 2:20 on Romain Bardet during the two time trials in Dusseldorf and Marseille. He lost time to his rivals on the three mountain finishes. For one day he lost the yellow jersey to Fabio Aru in the Pyrenees when he was clearly out ridden and outwitted by his rivals. Mr. Froome completed the rare feat of winning the Tour de France without winning any of the individual stages.

Mr. Froome won this year because of teamwork. Team Sky was clearly the best team in the Tour de France. Rarely did we see Mr. Froome without teammates to support him, while his rivals were isolated on the road. In fact, his teammate Mikel Landa was only 1 second away from being on the podium in third place.

The results are a stark reminder of the importance of teamwork. It’s not good enough to be the best individual compliance officer. You need a team to win. You need the support of the compliance team around you. (Assuming you are big enough to have a team.) You need the support of the entire organization, working together, to make sure everyone works within the rules.

A typical Tour de France day will have a small breakaway of riders charge away from the main group of riders. The breakaway will be allowed to have the small wins along the stage while the main group conserves energy for the final victory. The leading riders will task their supporting riders with charging forward near the end to pass the breakaway and position them for victory.

Compliance is about teamwork and not the individual victory.

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I’ll being doing my own bike ride in a dozen days, although it will be far less of a feat than the Tour de France. On August 4 – 6, I will saddle up to ride with 6,200 other cyclists to raise money for life-saving cancer research and treatment at Dana-Farber Cancer Institute. 100% of your donation will go to cancer research and treatment at Dana-Farber Cancer Institute through its Jimmy Fund. I have made a personal commitment to raise $8000.00. I hope that as a reader of Compliance Building you will support my fundraising effort. You can donate through any of the following links:

Thank you,
Doug

 

Compliance Bricks and Mortar for June 30

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

SEC’s Clayton Vows to Do More Exams with Less Funding in AdvisorHub

SEC Chairman Jay Clayton testified to Congress on Tuesday morning that the agency will increase its examinations of investment advisers by 20% in the current fiscal year and nudge the numbers up a further 5% in fiscal 2018, despite requesting a slightly lower budget than in the current year. [More…]

My Retirement – Search for Successor by Roy Snell

I am retiring in March of 2020. At the outset, I would like to thank you for the opportunity to serve as CEO of this organization for the past 16 years. It has been a tremendous privilege to lead this organization and work with thousands of talented professionals.

In order to facilitate a smooth transition, we have a succession planning committee assisting in the process of finding a new CEO for SCCE and HCCA. [More…]

THE CCO AS A FUTURIST by Tom Fox in FCPA Compliance & Ethics

The Compliance Week 2017 Annual Conference opened this year with a Futurist, Dr. Brian David Johnson, who talked to the assembled group about where the compliance profession might be heading down the road. I thought about Dr. Johnson’s talk when I read an article in the most recent issue of the MIT Sloan Management Review by Amy Webb, entitled “The Flare and Focus of Successful Futurists”. One of the things that struck me was her opening line which reads, “Futurists are skilled at listening to and interpreting signals, which are harbingers of what’s to come. They look for early patterns — pre-trends, if you will — as the scattered points on the fringe converge and begin moving toward the mainstream.”[More…]

Supreme Court to Review Whether Dodd-Frank Anti-Retaliation Provisions Protect Internal Whistleblowers by Kevin LaCroix in The D&O Diary

[Y]ou might well have overlooked the fact that on Monday the Court also agreed to take up the question of whether or not the Dodd-Frank Act’s anti-retaliation provisions apply to and protect individuals who did not make a whistleblower report to the SEC. The lower courts have struggled with the question of whether or not the anti-retaliation protections extend to individuals who file internal reports within their own companies. A split on the issue has developed and now the U.S. Supreme Court will have the opportunity to address the question in the case of Digital Realty Trust v. Somers. The Court’s June 26, 2017 order granting Digital Realty Trust’s petition for a writ of certiorari can be found here. [More…]

Columbia professor Jackson leads field for SEC job by Sarah N. Lynch and Svea Herbst-Bayliss in Reuters

Columbia University law professor Robert Jackson is a leading contender for one of the two commissioner vacancies on the U.S. Securities and Exchange Commission, according to people familiar with the matter.If ultimately nominated by U.S. President Donald Trump and confirmed by the Senate, Jackson would fill a vacant spot reserved for a Democrat on the five-member panel. [More…]

If you enjoy Compliance Building, please join many of my other readers and donate to support my Pan-Mass Challenge bike ride to fight cancer. (Thank you to those who have already donated.) I’m pedaling from the New York border to Provincetown on August 4-6. 100% of your donation goes to the fight against cancer. You can read more and donate here: http://profile.pmc.org/DC0176

Comey and Compliance

The firing of FBI Director has set off a firestorm. Obviously, there is a great deal of partisan tilt to the action. I wanted to focus on the lesson we can see from a compliance perspective. It is an example of the need for independence of compliance and investigations.

President Trump fired someone who was investigating him or his circle of supporters for violations. The Attorney General recused himself from probe into Russia and President Trump because he was potentially involved. But the Attorney General recommended firing the person leading the probe into Russia and President Trump.

Perhaps, Director Comey was issuing subpoenas and continuing an investigation that would have been adverse to President Trump. That would be a problem, a cover-up.

Perhaps, President Trump legitimately thought Director Comey was unfit for his job. It would not be the first time a President has fired the FBI Director. President (Bill) Clinton fired  FBI Director William Sessions for serious ethical lapses.

The problem is that it looks like a cover-up. Without independence, the motives for firing or disciplining an employee for investigating his boss is always going to look suspicious. If it looks like a cover-up, many people are going to assume there is a cover-up.

It’s better to structure a compliance program so that it has some independence operationally. For a firm with a board of directors, the compliance program should have a way to report to the board of directors. Compliance officers should have alternative reporting structures in case they have to investigate a boss.

For an private fund adviser, there should be mechanisms for the CCO to report to a compliance committee instead of a single individual.

What you want to avoid is having to investigate your boss. That is an irreconcilable conflict. People are always going to question the end result. People are especially going to question why the investigator was fired in the middle of an investigation.

 

Broker Dealer Private Fund

It was four years ago that David Blass mentioned that the SEC was taking a closer look at broker-dealer requirements for private fund managers in two contexts: selling interests in the funds and earning fees from the fund for capital transactions.

Part of the problem is that the safe-harbors for selling your fund interests is much narrower than people expect:

  • the person limits the offering and selling of the issuer’s securities only to broker-dealers and other specified types of financial institutions; or
  • the person performs substantial duties for the issuer other than in connection with transactions in securities, was not a broker-dealer or an associated person of a broker-dealer within the preceding 12 months, and does not participate in selling an offering of securities for any issuer more than once every 12 months; or
  • the person limits activities to delivering written communication by means that do not involve oral solicitation by the associated person of a potential purchaser.

Mr. Blass indicated that the SEC might consider granting a new exemption for private funds. (Of course that is a new regulation and presumably, the SEC would want to revoke two other regulations before making a new one.)

A recent case before the SEC touched on this area. Gregory Smith provided insurance and retirement planning services. At one point he was a registered representative associated with a broker dealer, but was not when he started selling interests in Rampart Fund. Rampart was a private fund selling notes to fund a mezzanine debt program.

Mr. Smith sold $3.75 million worth of notes to 31 investors and received transaction based compensation.  His activities were outside of any of the three safe harbors.

The SEC barred him from the securities industry, and required disgorgement of the compensation for failing to register as a broker-dealer while selling private fund interests.

Of course this case feels different than in-house personnel selling private fund interests. I’m not sure the exemptions treat it differently. I believe many firms look to the “perform substantial duties for the issuer other than in connection with transactions in securities” safe harbor. For dedicated sales personnel, that argument may fall flat.

I suspect what put Mr. Smith in the cross-hairs of the SEC is that Rampart turned out to be a fraud. Mr. Smith raised almost half of the capital that ended up going to Rampart.

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The Overbooking Failure

Air travel has gotten has gotten less pleasant over the years. The TSA makes it unpleasant to get to the plane. Then the plane themselves have reduced passenger room. United took the unpleasantness to an even lower level when it forcibly removed a passenger from an overbooked flight.

“Flight 3411 from Chicago to Louisville was overbooked,” the spokesperson said. “After our team looked for volunteers, one customer refused to leave the aircraft voluntarily and law enforcement was asked to come to the gate.

“We apologize for the overbook situation. Further details on the removed customer should be directed to authorities.”

According to a passenger report:

Passengers were told at the gate that the flight was overbooked and United, offering $400 and a hotel stay, was looking for one volunteer to take another flight to Louisville at 3 p.m. Monday. Passengers were allowed to board the flight, Bridges said, and once the flight was filled those on the plane were told that four people needed to give up their seats to stand-by United employees that needed to be in Louisville on Monday for a flight. Passengers were told that the flight would not take off until the United crew had seats, Bridges said, and the offer was increased to $800, but no one volunteered.

Then, she said, a manager came aboard the plane and said a computer would select four people to be taken off the flight. One couple was selected first and left the airplane, she said, before the man in the video was confronted.

Overbooking happens. We are all used to hearing the announcements and the request for volunteers. That’s a weakness in the system. The airlines allow no-show passengers.

The failure in this instance appears to be of United’s own making since the space was needed for United’s own flight personnel.

Then it stepping into absurdity and brutality by viciously pulling a paying customer from his seat and dragging him down the airplane aisle in front of other passengers. Put the blame on both the security personnel and flight personnel for handing a situation in the worst way possible.

What should have been done differently? With a small snippet, it’s hard to tell. There are many things we don’t know from a single passenger statement and a blurry video. Obviously it should never have come to that point.

United should not have allowed passengers to board the plane. That was the proper checkpoint.

It’s hard to tell what the impact will be on United for the poor handling of this situation. I’m sure it will make some potential customers chose other airlines.

For me, it’s just another reminder of how unpleasant airline travel is. We’re driving on our next vacation to avoid this unpleasantness. I would not want a member of my family to be subjected to this treatment, nor would I want them to witness something like this.

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The Fearless Girl

The sculpture, titled “The Fearless Girl,” was made by Kristen Visbal and photographed by Federica Valabrega.

State Street Global Advisors conspired in the middle of the night to drop a statue in Bowling Green Park of a girl facing off against the famous Wall Street Charging Bull. It’s part of a campaign by SSGA to emphasize that companies with women in top positions perform better financially.

SSGA manages nearly $2.5 trillion for institutional investors, predominantly in index funds. It has the power to exert enormous influence if it chooses to do so.

“State Street Global Advisors is issuing new gender diversity guidance to the more than 3,500 companies we invest in across three major regions (US, UK and Australia), designed to increase the number of women on corporate boards. As one of the largest investment managers in the world and a significant shareholder we believe that board diversity enhances board quality and effectiveness as it brings together directors with different skills, backgrounds and expertise.”

SSGA is bringing the hammer:

“In the event that companies fail to take  action to increase the number of women on their boards, despite our best efforts to actively engage with them, we will use our proxy voting power to effect change — voting against the Chair of the board’s nominating and/or governance committee if necessary.”

One compliance concern is SSGA’s role as an investment adviser, and therefore a fiduciary. SEC rules give advisers great latitude to set its own proxy voting policy. See Rule 206(4)-6. I would assume from the press release that SSGA has implemented a new written proxy voting policy. I expect that we will see a new description of the policy in the Form ADV filing later this month.

SSGA pulled together research to show that having more women on boards is a better financial choice for companies. MSCI ESG Research’s research shows that companies in the MSCI World Index with strong female leadership generated a Return on Equity of 10.1% per year versus 7.4% for those without (as of September 9, 2015, measured on an equal-weighted basis)

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Can Compliance Be Cool?

John Glenn passed away at the end of 2016. He was a Senator, an astronaut, and distinguished pilot in the World War II and the Korean War. The picture below struck me as one of ultimate cool.

Astronaut John Glenn Relaxing on Deck

Mr. Glenn had just finished orbiting the Earth on February 20, 1962. Doing so in a tin can with less computing than your smart phone. He was the first American to orbit the Earth, the third American in space, and just the fifth human in space. Chunks of his Friendship 7 had been turned to flaming debris, flying past his window on the descent back to the surface, being sacrificed to keep his heat shield in place.

There he is in the picture above, Chuck’s on his feet, aviators, keeping the sun from his eyes and his collar popped, looking like nothing could bother him.

Post Dodd-Frank, compliance became cool. … Okay, maybe not cool, but better embraced. Organizations needed help to navigate the byzantine regulatory frameworks to ensure their organizations were in compliance with the thick rules coming rapid-fire from Washington. Compliance could prevent missteps and protecting their organizations from being turned into flaming debris by regulators and prosecutors.

The Trump Administration looks to be rolling back regulations and whatever “cool” compliance may have gathered could be smashed on the rocks of de-regulation. We still don’t know how far the administration and Congress may go in de-regulation.

The gains of the compliance profession are likely to erode and will never be as cool as John Glenn looks in that picture.

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Congress Disapproving The SEC Rule That Congress Made The SEC Make

Dodd-Frank made the Securities and Exchange Commission create a rule on the disclosure of payments by resource extraction issuers. The SEC finally got the rule out this fall. Now Congress is threatening to abolish the rule.

Section 1504 of the Dodd-Frank Act directed the Securities and Exchange Commission to

“issue final rules that require each resource extraction issuer to include in an annual report . . . information relating to any payment made by the resource extraction issuer, a subsidiary of the resource extraction issuer, or an entity under the control of the resource extraction issuer to a foreign government or the Federal Government for the purpose of the commercial development of oil, natural gas, or minerals..”

SEC finished the rule and finally adopted the Rules for Resource Extraction Issuers Under Dodd-Frank Act in September.

The strategy is not to pass a law removing section 1504. That would require getting the supermajority in the Senate to overcome the filibuster obstacle. That is hard and unlikely.

The plan is to use the Congressional Review Act to repeal the rule. That Act was part of Newt Gingrich’s Contract with America.

Under the law, Congress can stop a regulation passed within the last 60 legislative days. That counting is a bit fuzzy, but seems to stretch all the way back to the middle of June 2016.

I have little doubt that the rule will be rolled back. My question is whether this repeal counts towards the two repealed rules it takes to get a new one enacted under the Executive Order.

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The Trump Organization’s Compliance Program Begins

Last week, the Trump Organization kicked off its compliance program by making two appointments.

Bobby Burchfield will be independent ethics adviser. He’ll be responsible for signing off on transactions that could raise ethics or conflicts of interest concerns.

George Sorial will become chief compliance counsel.

In the January 11 press conference, Sheri Dillon announced:

[T]o ensure the Trump Organization continues to operate in accordance with the highest and legal ethics standards, an ethics adviser will be appointed to the management team. The written approval of the ethics adviser will be required for new deals, actions, and transactions that could potentially raise ethics or conflicts of interest concerns.

…

“Another step that President-elect Trump has taken is he created a new position at the Trump Organization: the position of chief compliance counsel, whose responsibility will be to ensure that the Trump businesses, again, are operating at the highest levels of integrity and not taking any actions that could be perceived as exploiting the office of the presidency.”

I admit that I was skeptical that the Trump Organization would even make the appointments to these two positions and I did not expect that it would happen this quickly. Of course, it would have been better to have a compliance program in place before the inauguration.

It would seem that the Trump Organization did not have an existing compliance program. The obvious person to deal with the compliance issues related to his political office would have been the compliance head.

Mr. Burchfield is a partner in the Washington office of King & Spalding and a well respected lawyer for the Republican party. He represented George W. Bush in the 2000 Florida recount. Mr. Burchfield previously challenged the McCain-Feingold Campaign Finance Law on behalf of the Republican National Committee. He was general counsel to George H.W. Bush’s 1992 reelection campaign. He is on the board of Crossroads GPS, the Republican advocacy group started by Karl Rove.

Mr. Sorial has worked at the company since 2007 and served most recently as executive vice president and counsel. He has had roles in Trump’s international development efforts, including the building of his golf course in Aberdeen, Scotland.

As I wrote last week, Mr. Trump is currently one of the most powerful men in the world and therefore the compliance program for his business empire is one of the most important in the world.

Mr Burchfield is very experienced lawyer who does tremendous work for his clients. I’m disappointed that the ethics advisor is such a partisan attorney for the Republican party.

As for Mr. Sorial, I will have to state my bias. Like him, I came from a real estate background. I also went to law school with him. However, he is stepping into an extremely difficult position with no background in compliance.

Hopefully, compliance professionals will learn more the compliance program so we can see how one is put in place to protect one of the most powerful people in the world. Obviously, the American people deserve to know more about the program to know whether the President is directly benefiting financially from his government actions.

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