Conference Notes – Page 8 – Compliance Building

Chief Compliance Officer and General Counsel Supervisory Responsibility and Liability Brian L. Rubin, Partner

ACA Compliance sponsored this webinar on Thursday. Brian L. Rubin, Partner, Sutherland Asbill & Brennan LLP was the presenter. These are my notes.

Section 203(e) of the Advisers Act:

If an investment adviser fails to reasonably supervise an employee or any other person subject to the adviser’s supervision, and that person violates the federal securities laws, then the SEC may take action against such investment adviser

In the Matter of Pegasus Investment Management, LLC, Peter Bortel, and Douglas Saksa (.pdf) (June 15, 2011) Pegasus VP Peter Bortel, under the supervision of President and CCO Douglas Saksa, allegedly did not disclose the arrangement to their fund investors and retained retained broker rebates for Pegasus, rather than passing it along to the investors. The SEC stated that Saksa failed to reasonably supervise Bortel within the meaning of Section 203(e)(6)

Direct Liability

CCO has direct liability for:

–Aiding and abetting, and causing firm violations such as:

•Responding to regulatory inquiries
•Responding to deficiency letters
•Adopt/implement policies and procedures
•Failing to file

– Permitting unregistered individuals to act

As an example the they cited In the Matter of the Buckingham Research Group, Inc., Buckingham Capital Management, Inc., and Lloyd R. Karp (.pdf) (November 17, 2010). The CCO allegedly represented in deficiency letter response that certain corrective action would occur (new policies/monitoring). The SEC claimed CCO was liable because he was responsible for establishing and administering the policies at issue and he “was aware of the compliance weaknesses and failures and either failed to act or failed to correct them”

Are you a supervisor?

Some factors are whether you have the ability to hire, fire, discipline, affect compensation. You would have the requisite degree of “responsibility, ability or authority” to “affect” the conduct of the employee whose behavior is at issue.

You can still be held liable as the SEC if you are overruled by superiors. (Scary!!)

In the Matter of Theodore W. Urban (.pdf), Adm. Proc. File No. 3-13655, Initial Decision (Sept. 8, 2010) Urban was General Counsel and headed Compliance, HR and Int. Audit. Urban had no authority to hire or fire employees outside of these departments, but he served on the board of directors and the firm’s credit and risk committee as a full voting member. SEC alleged that Urban was bad rep’s supervisor because of the role he played in monitoring bad rep’s actions. SEC also alleged that Urban failed to follow up on numerous red flags and took inadequate action regarding other red flags. As General Counsel, his opinions on legal/compliance matters were “viewed as authoritative and his recommendations were generally followed” by all business units.

The Administrative Law Judge found that Urban was a bad rep’s supervisor, but he had not failed to supervise because he performed his supervisory responsibilities “in a cautious, objective, thorough and reasonable manner”. The decision has been appealed to the SEC. So this ruling may change.

Combination/Separation of Legal and Compliance Functions

Some advantages to combining the roles:

Federal Sentencing Guidelines call for adoption of a compliance program overseen by senior personnel
Compliance is represented at senior management level
GC is actively involved in strategic business decisions, offering exposure to potential compliance issues
May be better positioned to push the firm toward appropriate actions/conclusions
Direct or tangential experience with regulations
“Noisy Withdrawal” trigger
Reduced headcount
GC is generally consulted on key compliance matters by senior management

Why separate the roles?

Respects the differing goals of legal versus compliance (legal protects the firm; compliance prevents and detects violations
Allows firms to acquire necessary skill set in each area
Avoids misplaced privilege claims
Creates necessary bandwidth to execute each role fully
Allows each person to serve appropriate stakeholders
Avoids conflicts at the board level/recusals
Compliance gets same standing as legal in organization charts

Reporting

How about the CCO Reporting to GC?

Centralizes legal and compliance in a single functional area. There is overlap.
Matters identified can be more quickly resolved due to combination of functions
GC may be in a good position to muster resources or provide a platform
Gives clout to the compliance function. To the extent legal has clout.

How about an Independent CCO

Highest degree of independence
Decisions to report matters up to senior management or to regulators not subject to approval by GC
CCO does not have to go outside reporting structure to raise matters to senior management
GC does not need to create time to supervise the CCO
Consistent with ICA 38a-1 and FINRA Rule 3130

As a case study, they used the Wunderlich case.

Avoiding Supervisory Responsibility

Document with written supervisory policies and procedures
Identify the direct supervisors of all employees
Specifically state that compliance personnel are limited to offering advice and recommendations and do not have the responsibility, ability or authority to affect the conduct of employees outside of their departments
Where misconduct is addressed, document which business-line supervisor is handling the issue and how
Make it clear that the role on committees and boards is only advisory in nature

Want to Attend Interact 2011?

I’m not going to be able to make it to Interact 2011 this year, but the event organizers have offered some conference passes for me to dole out to readers of Compliance Building. (You will have to get there on your own and pay for accommodations.)

If you are interested in attending, leave a comment below or send an email to the contest line at [email protected].

[button link=”mailto:[email protected]?subject=I want to go to Interact 2011″ color=”red”]Enter the Contest[/button]
The entry deadline is March 30, 2011. I’ll randomly pick a winner from the entries I receive by the deadline. If you are the winner, I’ll contact you for your mailing address.

Last year, I attended Interact 2010, learned a great deal, did some great networking and had a great time.

About Interact 2011

Todayʼs corporate environment demands that every department adopt the “Do More with Less” mantra. In enterprise legal operations that means General Counsel need to effectively balance a growing portfolio of litigation, strict regulatory enforcement, growing risks and heavy penalties while being held to the same operating standards and performance metrics as any other core business unit.

Chief Compliance Officers are similarly affected. Complicating a new array of regulations has been hiring freezes, layoffs, and budget cuts. The result has been predictable: More work for compliance officers and their staff with fewer resources available. The demand for greater business agility, efficiency, and effectiveness in legal and compliance operations drives decision-makers from the nationʼs leading enterprise to uncover new strategies and technologies at Interact 2011.

Each year, legal and compliance decision-makers attend Interact to discuss key issues, build career-enhancing networks, and discover best-in-class products and services to improve success.

Agenda:

Monday, May 16, 2011

Innovations in Legal & Compliance Technologies

Legal Keynote Session

Promise and Peril: Considerations When Moving to the Cloud

Roundtable 2

Is E-Billing Obsolete in an Age of AFAs?

Effective Project Management for your Outside Counsel Engagements

Private Equity Tax and Compliance Practices 2010

Today I am attending the Private Equity Tax and Compliance Practices 2010 conference. This afternoon, I’m joining Karen Hansen of Flag Capital Management on the CCO Roundtable.

Many private equity companies have escaped from having to register with the SEC and avoid the regulatory load of registration and compliance. The current draft of the financial reform bill has removed the exemption from registration that many private equity firms have enjoyed.

An earlier session by Jerome Boynton of Promus Capital will tackle investment adviser registration. Nick Prokos of ACA Consulting will discuss building a compliance office.

Karen and I will have a Q&A on how to tackle the regulatory puzzle.

Compliance Bits and Pieces – Compliance Week Edition

If you stuck around for my blog posts on Compliance Week 2010, I figured I would end the week with other attendee’s coverage:

Lanny Breuer at Compliance Week by Tom Fox on FCPA Compliance and Ethics Blog

He stated that tools which had been previously used to combat organized crime would now be employed in the fight against white collar crime, including both wiretaps and sting operations as were used against the gun manufacturing industry in the operations which culminated in the arrests of 22 individuals in Las Vegas in January of this year. He also discussed that many foreign governments had entered into collaboration agreements to facilitate cross-border investigations and enforcement actions.

Barney Less Than Frank About Auditor Reform by Francine McKenna in Going Concern

To the question about fears of going after the accounting firms, Rep. Frank rambled on about McCarthyism, the Inquisition and not spending time looking back – that’s what courts and prosecutors are for. I suspect the industry’s lobbyists and their campaign contributions have whispered in his ear. Employees of KPMG, PwC and Deloitte are among his top 25 contributors in 2009-2010 period. In the 2008 election year, all of the Big 4 made it to Rep. Frank’s top 20 contributors list.

SEC Commissioner Aguilar Says Still a Long Way to Go by Jaclyn Jaeger in Compliance Week‘s The Filing Cabinet

The SEC’s current way of doing things is not tough enough, SEC Commissioner Louis Aguilar told an audience of compliance and risk officers during Compliance Week’s annual conference in Washington D.C. this week. While problems in the market are “seamlessly connected, regulatory oversight is piecemeal,” he said.

JetBlue on Why CEO/Chair Split Works for Them by Melissa Klein Aguilar in Compliance Week‘s The Filing Cabinet

JetBlue Airways not only split the posts, but its board chairman, Joel Peterson, hails from outside of the airline industry—an approach he notes that not many companies have taken.

Observers Share Tips, Views On Navigating Social Media by Melissa Klein Aguilar in Compliance Week‘s The Filing Cabinet

Companies wrestling with how to navigate the rapidly changing social media landscape got some advice from executives whose companies have already taken the plunge. During a panel discussion at Compliance Week’s annual conference in Washington D.C., executives from Best Buy, Johnson & Johnson and The Travelers Companies shared their own experiences and tips for using social media tools such as Twitter and Facebook and crafting a corporate social media policy.

Grindler Touts Importance of Compliance, But Doubts Linger by Chris Matthews in Main Justice

“I want to emphasize… that having an effective compliance program will be taken under consideration when you have to talk to the government about a criminal violation,” Grindler said at the annual Compliance Week conference in Washington, D.C.

Fraud Chief: Effective Compliance Programs Can Prevent Monitors by Christopher M. Matthews in Main Justice

Criminal Fraud Section Chief Denis McInerney said Monday that an effective compliance program can prevent companies facing deferred and non-prosecution agreements from having to install an expensive compliance monitor. “If you have already established an excellent compliance program, then it will be less likely that we’ll install a compliance monitor, which can come at some cost to the company,” McInerney said.

Breuer: FCPA Facilitating Payments Worth Discussing by Christopher M. Matthews in Main Justice

Assistant Attorney General Lanny Breuer indicated Wednesday that the Justice Department was open to revisiting its exemption for “facilitating payments” under the Foreign Corrupt Practices Act. “That’s worth discussing,” Breuer, head of the DOJ’s Criminal Division, said during his remarks at the annual Compliance Week conference in Washington, D.C. “Facilitation payments — obviously this area is dynamic — so I don’t rule that out. I’m not currently aware of any real movement to make that change here. I think as other countries laws evolve and mature… I suspect over time, we too will be modifying our law.”

Creating a GRC Strategy Roadmap by Jaclyn Jaeger in Compliance Week‘s The Filing Cabinet

To build a successful enterprise governance, risk, and compliance program, companies need a solid roadmap that aligns people, processes, and information.David Walter, RSA director for Archer eGRC Solutions, discussed ways in which companies can achieve that, during a recent seminar at Compliance Week’s annual conference in Washington, D.C., this week.

Live Blogging from Compliance Week 2010 by Gordon Burnes for Open pages

Shelley Parratt of the SEC’s Corporation Finance Division gave the afternoon keynote on Day 2 of Compliance Week 2010. She spoke about the Commission’s program of enhanced disclosure.

Live Blogging from Compliance Week 2010 by Gordon Burnes for Open pages

US Rep and House Financial Services Committee Chair Barney Frank gave the opening keynote at Compliance Week 2010, day 2. As usual, he was witty and insightful. His remarks covered the conceptual underpinnings of financial services regulatory reform. He then took questions from the group.

Derivatives Spinoff Proposal ‘Goes Too Far,’ Says Frank Wall Street Journal

A key House Democrat signaled Tuesday that a controversial derivatives provision in the Senate’s financial-regulation bill could be stripped out during negotiations when the two chambers hammer out compromise legislation that could be signed into law by July 4.

Barney Frank Speaks Frankly About Financial Reform by Jaclyn Jaeger in Compliance Week‘s The Filing Cabinet

Now that the healthcare reform bill has been passed, legislators can begin to focus on another equally important issue: financial reform. “It’s very important for the financial industry that we get some stability,” Barney Frank, chair of the House Financial Services Committee, told an audience of compliance, risk, and audit executives during Compliance Week’s annual conference in Washington D.C. this week. It’s important to move quickly, he said, adding that the bill is very close to passage.

SEC Commissioner Aguilar Says Still a Long Way to Go by Jaclyn Jaeger in Compliance Week‘s The Filing Cabinet

The Securities and Exchange Commission still has a long way to go in its quest to understand the causes of the financial crisis and from deterring those who commit wrongdoing.

SEC Commish: Agency Needs to Get Tough on Miscreants Kara Scannel’s coverage from the Wall Street Journal’s Law Blog

If Securities and Exchange Commissioner Luis Aguilar has his way, corporate miscreants will face stronger sanctions.

Maximizing Privacy Effectiveness by Jaclyn Jaeger in Compliance Week‘s The Filing Cabinet

From internal investigations to data privacy issues to regulatory compliance, the overlap of privacy, security and compliance functions within an organization is inevitable. But where should privacy be housed in the organization to ensure effectiveness, and how should it interact with compliance, legal, and IT? These were only some of the questions answered during a panel at Compliance Week’s annual conference in Washington, D.C., this week

Update:

Parting Thoughts on Compliance Week 2010 by Compliance Week‘s Editor-in-Chief Matt Kelly

Well, the Compliance Week 2010 conference is now done and fading into history. The event was excellent, and credit belongs to all the attendees, speakers and helpers who altogether made our 2010 conference the largest and most successful we’ve ever had. Anyone who didn’t make it to Washington this year can see what you missed on our home page, but let me also share a few wrap-up thoughts here.

Winding Down From Compliance Week

My head is full of compliance goodness after spending 2.5 days at Compliance Week 2010. The Mayflower Hotel is a great place for a conference this size, with plenty of places to run into people.

Substance

The agenda was full of great substantive information from fellow compliance professionals. There were sessions on metrics, social media, corporate governance, ROI, organizational structures and communications. There were lots of closed door sessions that have not made their way into the blog, where compliance professionals could have more open discussions without the presence of media or vendors.

On top of that, we heard some great perspectives from top government officials, like Lanny Breur, Gary Grindler, Shelley Parratt, Barney Frank and Luis Aguilar.

Of course the best part of any conference is being able to interact with your peers. This was a great gathering of people in the compliance field.

Old Friends

For me, it was great to once again spend time face-to face with old friends like Scott Cohen, Matt Kelly, Bruce Carton, Francine McKenna, Melissa Klein Aguilar, Bill Piwonka, Carole Switzer, Kathleen Edmond, and Scott Giordano.

New Friends

One of the great things about have a blog, or micro-blogging on Twitter is being able to get in touch with people prior to meeting them in person and then staying in touch with them.

Here are some of the Twitterati I was finally able to meet face-to-face:

	Tom Fox @tfoxlaw http://tfoxlaw.com
	David Seide @davidSeide
	Scott Mitchell @mitchell360
	Doug Jacobson @tradelawnews
	Doug Chia @dougchia

Of course, I met more people who don’t blog or use Twitter. It’s just harder to keep those weak ties.

Behind the Scenes

Gina Imperato, Elizabeth Busch, Anne Frey-Mott, Beckie Jankiewicz and the rest of the Event Studio team did a great job of running the conference, getting the attendees where they need to go and making the speakers look good.

Next year

…..

Second City on the Stage at Compliance Week 2010 Conference

Get ready for a fun, interactive, high-energy conference closer from Second City Communications, the business solutions division of the world-famous comedy theatre. Using observations, ideas, and insights garnered from the entire three-day conference, Second City Communications will play back what they’ve heard, offering a real-time wrap-up of key conference takeaways, and providing a host of ideas you can bring back to your company.

Tom Yorton is the CEO of Second City Communications. He is the suit and probably the least funny person in the organization. (or so he claims.)

They supplied some of the Second City “talent” to help take a look at some tough issues. Lee Smart came back on the stage with two others, taking suggestions from the audience. The first was a funny skit laced with compliance buzzwords.

They played a video from my earlier session at the conference: Second City and Compliance. They then used those compliance challenges in an improv skit, with Lee and the talent back on stage.

Rule 1: Things are only funny when they are true.

Laughter comes from shared recognition. There is a different between making issues accessible as opposed making light of them. There are risks with comedy, but it’s riskier if not grounded in reality. Use humor to get to the truth. Comedic messages are better retained, noticed and shared.

Rule 2: Dialogues are better than monologues.

One way communication has a limited feedback loop. You want to give the audience a greater stake in the outcome. He also pointed out how the web and social learning make dialogues possible.

Rule 3: Foster an Open Environment.

Humor can make leaders and issues accessible. You can pop the tension bubble around legitimate challenges. Listen to understand, not just respond. You want to affirm and build on ideas.

Rule 4: Say it, and say it again.

You have to fight for attention. In a noisy environment, reinforcement and repetition is key. Think about a daily vitamin instead of an annual inoculation.

It was a highlight of the conference. If you want to see some more you can see the video below and other stuff at the Second City Communications website.

When you make people laugh, you make people think.

Video

During The Second City’s 50th Anniversary, The Wall Street Journal’s MarketWatch visited with Second City Communications to learn how we use improv techniques to train corporate workers :

U.S. DoJ Asst. Attorney General, Criminal Division, Lanny Breuer Speaks at Compliance Week

Lanny Breuer, selected by President Obama to head the Criminal Division of the Justice Department in January 2009, will discuss practical matters for companies dealing with the Justice Department, including topics such as cooperation, attorney-client privilege, and the importance of pre-existing compliance programs. Breuer will also discuss the Department’s increasing use of proactive law-enforcement strategies and tools, such as wiretaps, to combat financial fraud.

These are my notes, live from the keynote:

Prosecutions promote the rule of law, deter future bad behavior and punish wrong-doers. Compliance is largely the opposite of criminality.

He wants a new era in white collar crime prosecution.

The Obama administration is giving great attention to financial fraud and the establishment of the Financial Fraud Enforcement Task Force. Over 2 dozen state and federal agencies are part of the group. A companion is the deployment of additional resources. The budget has increased allowing the hiring of additional prosecutors and support.

They using more aggressive law enforcement techniques, including wire taps and undercover stings. They will continue to look toward innovative techniques and existing techniques used against organized crime and blue collar crime. (Is there a meaningful distinction anymore?)

He is looking to continue strengthening their partnership with the SEC.

Foreign bribery is a law enforcement challenge. Since 2004 the DOJ has filed 37 FCPA cases, with fines over $1.5 billion. Over 80 individuals have been charged under the FCPA. Aggressive enforcement is meant to deter others from engaging in bribery.

He cited the new UK Bribery Act and the need for a company to have “adequate procedures” to detect and prevent bribery.

There are benchmarks. The principles of federal prosecution of business entities are the OECD guidance on effective compliance are key standards. But you need to customize these to your company. Direct reporting lines are important. Testing effectiveness is important.

If you come forward, cooperate with the investigation and institute meaningful remediation, the DOJ is committed to giving you meaningful credit. But not amnesty.

He used the Siemens case as a benchmark for the value of cooperation and remediation. The Siemens fine was huge at over $400 million. However, the sentencing guidelines called for a fine of over $1.4 billion. (He didn’t mention whether taking federal contracting debarment off the table was part of the discussion with their cooperation credit.)

As for compliance monitors, he would want one in place when the corporation needs to implement or significantly redesign a compliance program. Largely, it sounds like a monitor would be more likely if there is still significant remediation to be done.

He then sat down with Compliance Week‘s Matt Kelly.

Complying with the FCPA is harder in some countries is harder than others (China versus Belgium)?

You don’t get a free pass. They expect a more robust compliance program when entering into markets where bribery is more common. They would want to see new tools to detect and try to prevent bribery.

Now that the UK Bribery Law has banned facilitating payments will they be prohibited under the FCPA?

It will take an act of Congress, but he is looking forward to the evolution of law in the area of bribery of government officials.

Interpreting “Tone at the Top”, does firing someone and not supplying legal fees a bad tone?

The DoJ has changed their position on this. The key is removing the person from authority at the company, at least temporarily. The company has to make some real changes.

What about consistency throughout the DOJ and US Attorney Offices?

All FCPA has come in through the fraud unit, so that helps ensure consistency in that area. (It sounds like he recognized some inconsistencies.)

Acting Deputy Attorney General Gary Grindler Speaks at Compliance Week 2010

Gary Grindler, the second-highest ranking official at the U.S. Justice Department, will talk about the department’s policy goals and initiatives to fight corporate fraud, including white-collar crime issues such as securities and commodities fraud, healthcare fraud, and the work of the Financial Fraud Enforcement Task Force.

These are my notes, live from the keynote:

Lots of the thoughts about the Department of Justice are about how to stay away from the Department of Justice.

The DOJ is taking some new steps related to discovery. They are designating attorneys in each office on discovery practices and in particular e-discovery.

There is a new financial fraud enforcement task force brought together. President Obama established the Financial Fraud Enforcement Task Force in November 2009 to hold accountable those who helped bring about the last financial crisis, and to prevent another crisis from happening. With more than 20 federal agencies, 94 US Attorneys Offices and state and local partners, it’s a broad coalition of law enforcement, investigatory and regulatory agencies assembled to combat financial fraud. It’s a broad definition of financial fraud: mortgage scams that target the elderly, Ponzi schemes that shock the world, tax fraud that steals money from our nation’s coffers, predatory lending that discriminates against vulnerable communities, credit card fraud that strikes broadly, and the list goes on.

The next focus is health care fraud. They assembled a Health Care Fraud Prevention & Enforcement Action Team. (Yes, HEAT.) The group has brought the heat, with a big record of success, convictions and fraud deterrence. They have returned over $13 billion to the Medicare Trust fund. In Miami alone, they reduced the amount of durable medical device expenditures in Miami by over $1.7 billion.

The next priority he mentioned was intellectual property crime.

Besides these, there are many other priorities. These three are just the ones he thought most relevant to this crowd.

He emphasized the importance of an effective compliance program. They can’t just be paper compliance programs. He also highlighted the recent changes to the US Sentencing Guidelines. One new aspect is that after an “event” the organization needs to evaluate its program and amend it to prevent that kind of event.

What about a company’s cut in a compliance program’s budget?

If a budget reduction is indicative of a lack of interest in compliance, then that’s bad. He seemed understanding that a reduction in revenue means there will be budget cuts across the company.

What does an inadequate compliance program look like?

No compliance program is at the far extreme. Indifference to a compliance program. Senior leadership not promoting the compliance program. They see this a lot in FCPA cases.

The 2010 OCEG GRC Achievement Awards Presentation

The Open Compliance and Ethics Group will recognize the great strides that many organizations have made in improving and integrating their approaches to governance, risk management, and compliance.

The winners were:

Best Buy – Ethics blog for employees
Capital One – GRC implementation
Carnival Corporation – Integrated approach to GRC Management
Direct TV- Embedding spreadsheet governance into everyday business
Tawuniya – Performance management through GRC
Visa – Global ERM Program & Roadmap

Carole Switzer announced the Peer Choice award winner, chosen by the Compliance Week attendees.

And the winner is . . . .

Visa!

UPDATE:

Organizational Structures That Work: Small-Company Edition

In contrast to our “large company” edition Monday morning, this session will explore how smaller public companies structure their compliance functions. The CCOs at PETCO, Schnitzer Steel, and VeriSign—each with under $5 billion in revenue—will outline, compare and contrast the structure of their compliance organization, focusing on their functions, reporting structure, organization, responsibilities, infrastructure and more.

Featuring:

PETCO Animal Supplies, Inc. Chief Compliance Officer, James B. Brigham
Schnitzer Steel Industries VP and Chief Compliance Officer, Callie Pappas
VeriSign VP Internal Audit, Mark Gosling
PricewaterhouseCoopers LLP Principal, Advisory Practice, U.S. Leader, Governance Risk & Compliance Services, Joseph C. Atkinson (moderator)

These are my notes, live from the session:

The advantages of compliance at a smaller company is that there are fewer silos and less redundancy. Fewer people have to do more things. Functions get combined that would be separated at a bigger company.

One new measurement was how long it took to complete and open compliance issue/complaint.

With smaller companies, the bigger question is whether to have a compliance program, not how to structure a compliance program. Once you go public you need a compliance program. The smaller the company, the less likely it is to be public.

The smaller the company, the more the compliance program is about the individual. You need to make yourself a necessity, not just the compliance program. You need to show that you bring value and profitability to the company.

One key is process improvement. You can get more involved in the business processes. Find ways to help improve them.

In a smaller company it is very important to have strong leadership supporting the compliance and ethics program. A smaller company is going to have fewer middle managers. You also have much more interaction between senior leaders and a larger group of all employees.

Being entrepreneurial is not in conflict with being compliant.

Materials: