Compliance Compensation Survey

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The results of the 2014 IA Compliance Compensation Survey, sponsored by IA Watch and the National Society of Compliance Professionals, have been released. You can visit the IA Compliance Compensation Results website http://www.salary.iawatch.com/.

Use the results to benchmark and compare your compensation against peers in your area, plus the top 30 most populous metropolitan regions in the U.S., such as New York, Washington, D.C., Chicago, San Francisco and nationally.

According to the publisher, the survey reveals some interesting trends that run counter to expectations:

  • The number of years servicing the compliance industry does not necessarily correlate to higher wages.
  • The average compensation by assets under management (AUM) was higher for firms with $10-20 billion than firms with AUM greater than $100 billion.

Other Findings:

  • The compensation breakdown for individuals was 69% salary, 28% bonus, and 3% retirement/other. Bonuses are predominantly given based on either job or company performance and less than 10% are awarded a bonus for successfully completing a regulatory exam.
  • Only 50% of the firms surveyed increased their non-salary compliance budget, the remaining half had no change or a slight decrease.
  • Firms did not reallocate costs between outside counsel, consultants, subscriptions or training regardless if the budget was increasing, staying flat, or decreasing.
  • Overall, about two-thirds of the budget was spent on outside counsel and consultants, one-sixth on subscriptions, and one-fifth on training.

Sources:

Weekend Reading: Issues Related to State Voter Identification Laws

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The claim by advocates of voter identification laws is that the requirement is put in place to prevent voter fraud. The question is whether it is too burdensome to mandate a state-issued photo ID. The underlying subtext is that Republican controlled state legislatures are putting the voter ID laws in place because it will disproportionately affect likely Democratic voters.

The non-partisan Government Accountability Office studied the effect of photo ID laws and produced a report: Issues Related to State Voter Identification Laws (.pdf).

As part of its study, the GAO reviewed some existing studies. Five of these 10 studies found that ID requirements had no statistically significant effect on turnout; 4 studies found a decreases in turnout; and 1 found an increase in turnout that were statistically significant.

The GAO decided to run its own review of data and tried to find ways to compare the effect of voter turnout, controlling for issuing like hotly contested elections. The GAO used Kansas and Tennessee and benchmarked them to several other states that had not passed voter identification laws.

The GAO comes to the conclusion that voter turnout is reduced by 2-3 percent.

voter turnout effect

GAO found that turnout was reduced by larger amounts by age. Those between the ages of 18 and 23 than among registrants between the ages of 44 and 53 were less likely to vote. The turnout effect was 7.1% larger.

For those who had been registered less than 1 year the reduction was 5.2% greater than among registrants who had been registered 20 years or more.

For African-American registrants the reduction was 3.7% greater than among White, Asian-American, and Hispanic registrants.

Sources:

Other reports on the effects of Voter ID Requirements:

Compliance Bricks and Mortar for October 10

Arvika, Sweden. Gamla posten, brick wall

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

Yet Another Study Debunks ‘Revolving Door’ Worries by Bruce Carton in Compliance Week

Although I have followed the revolving door issue closely for many years, I have never seen any actual evidence that the “SEC lawyers will go easy on firms to get a future job” theory is, in fact, true. Not only is it contradicted by my own personal experience as an SEC attorney (as I discussed here back in 2009), but it is, more importantly, contradicted by no fewer than three academic studies completed in the past two years.

Whistleblowers Fight Over SEC Award by   in Dodd-Frank.com

In a case filed in the United States District Court for the Northern District of Illinois, Eastern Division, the plaintiff claims three persons collaborated to develop evidence for a whistleblower claim. The three allegedly planned to make the whistleblower submission in the name of a jointly owned entity. After reading Rule 21F-2, which states only natural persons, and not entities, may be whistleblowers, the three allegedly changed their plans and determined that the defendant would submit the claim and the three would share in the proceeds. The SEC ultimately awarded the defendant $14.7 million. The defendant allegedly reneged on the promise to share the award. The defendant allegedly settled with one of the other two, and the third commenced the action.

If the Word ‘How’ Is Trademarked, Does This Headline Need a ™? by Jonathan Mahler in the New York Times

The other thing that distinguishes this case from a typical trademark dispute is that it is thick with irony: One company is accusing another of stealing its platform for ethical behavior.

The Empire of Edge: How a doctor, a trader, and the billionaire Steven A. Cohen got entangled in a vast financial scandal by Patrick Radden Keefe in the New Yorker

The business model at S.A.C., though, was based not on instinct but on the aggressive accumulation of information and analysis. In fact, as federal agents pursued multiple overlapping investigations into insider trading at hedge funds, it began to appear that the culture at S.A.C. not only tolerated but encouraged the use of inside information. In the recent trial of Michael Steinberg, one of Cohen’s longtime portfolio managers, a witness named Jon Horvath, who had worked as a research analyst at S.A.C., recalled Steinberg telling him, “I can day-trade these stocks and make money by myself. I don’t need your help to do that. What I need you to do is go out and get me edgy, proprietary information.” Horvath took this to mean illegal, nonpublic information—and he felt that he’d be fired if he didn’t get it.

Lawsuit on SEC’s Political Contribution Rule Hits Some Snags

USDC for DC Meade_and_Prettyman_Courthouse

The New York Republican State Committee and the Tennessee Republican Party brought suit against the Securities and Exchange Commission challenging its political contributions rule for investment advisers, . The complaint seeks an injunction against the enforcement of the rule’s political contribution restrictions on contributions to federal candidates.

The US District Court for the District of Columbia dismissed the case. But not all is lost in Mudville. The decision hinged on whether the District Court or the Court of Appeals should have jurisdiction over the case.

The District Court found that the political contributions rule is an “order” for purposes of the Investment Advisers Act. That means the proper venue is the Court of Appeals. That means that the New York Republican State Committee and the Tennessee Republican Party merely have to refile the case in the Court of Appeals.

However, the District Court raised the issue of standing that may come to haunt the New York Republican State Committee and the Tennessee Republican Party. As political organizations, they are not directly affected by the rule. It’s really the candidates and the regulated advisers who are hurt by the rule. The party organizations failed to allege any specific facts that show a decline in contributions because of the political contributions rule.

The party organizations did point to State Senator Lee Zeldin, a candidate for the U.S. House of Representatives as an individual who was harmed by the rule.

I thought this would be a tough case to win on the merits. It may never get to the merits because of the jurisdiction and standing issues.

Sources:

The SEC Still Hates Intrastate Crowdfunding

Icon of Money in the Hand on Rusty Warning Sign.

One of the exemptions from registering a securities offering is if the offering is limited to one state. Some crowdfunding advocates latched onto this exemption and have been pushing for single state crowdfunding at the state legislatures. On April 10, 2014, the SEC issued a Compliance and Disclosure Interpretation on intrastate crowdfunding offerings. The interpretation was overly restrictive.

The SEC said at the time that you can’t use a third-party portal website for an intrastate securities offerings. “Use of the Internet would not be incompatible with a claim of exemption under Rule 147 if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state or territory.” In reading that, the SEC waved a big regulatory “NO” finger at using third party sites.

The SEC just retreated slightly from that position, but proved that the SEC does not understand how the internet works. In Question 141.05, published on October 2, the SEC seems to be a bit more lenient when it comes a company using its own website. The SEC acknowledges that a website advertises the company, but could also advertise a securities offering. “Although whether a particular communication is an “offer” of securities will depend on all of the facts and circumstances…”

If the company does make the existence of an investment opportunity available on an unrestricted website, that could be considered a violation of the intrastate exemption. The SEC offers up the solution that a company “could implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories. ”

The location of an IP address does not necessarily equate to your state of residence.  It may not even equate to where you at the moment you are accessing the internet. One of the great values of the internet is that is defies and defeats physical borders.

 The SEC’s solution is short-sighted and poorly thought out.

Sources:

More Findings on SEC Exams of Private Funds

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Andrew Bowden unloaded a truckload of information at the recent CFA Institute in Boston. Andrew Bowden is the Director of the U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations. His comments were based on audience questions, instead of a prepared speech. You can’t find it on the SEC website, but you can watch it at the CFA Institute’s website.

Of the 1,500 private fund advisers that registered because of Dodd-Frank, the SEC set out to examine roughly 25 percent of these firms by the end of 2014. According to Bowden, 370 firms have been examined, and OCIE is on track to reach 400 by the end of the year. Half of those are hedge fund managers and half are private equity fund managers.

Bowden noted his May speech on fees and expenses at private equity funds.

He said the deficiencies for hedge funds largely fell into three main categories: Custody, valuation, and marketing/advertising. On the positive side, he found hedge funds to be doing a generally good job on compliance. The marketplace of institutional investors demanded it.

(The contrarian in me will argue that SEC examiners merely better understand hedge funds than private equity funds.)

The custody-related deficiencies were mostly technical in nature. For example, the hedge fund may have an account that was not subject to an audit.

Regarding valuation, the SEC found that some firms were switching their valuation methodology from period to period to achieve the highest possible investment valuation.

For the marketing-related deficiencies, the SEC examinations discovered that most of failures were mostly technical failures under the SEC rules. Some of that can be chalked up to moving from pre-registration materials to post-registration requirements. In some cases, hypothetical and/or back-tested performance was being represented as actual performance, portability situations were being improperly documented and disclosed, and inappropriate benchmarks were being used. He focused that false claims of compliance with GIPS is a material misrepresentation. He also used the Bitran case as an example of false performance advertising.

Bowden also highlighted the SEC’s new national exam analytics tool, which allows its examiners to rapidly analyze trade data.

“Three years ago, an SEC examiner would go into a firm and ask to see its trade blotter for the past two weeks or month, put it into Excel, sort it into columns, and try to spot signs of cherry picking, front running and insider trading,” he said. “The quants developed a tool that allows examiners to see the trade blotter for three years as a standard practice and subject that to more than 50 tests.”

He also highlighted the never-before examined initiative. That has reached about a significant chunk of the 20% of the firms registered for 3 years that had never before been examined. He also noted that several regional offices are calling new firms as they register for an hour long call.

Sources:

Weekend Reading: Attachments

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For those compliance officers who do email surveillance, you should enjoy the premise of Attachments by Rainbow Rowell. Lincoln, the protagonist is responsible for email surveillance. He falls for one employee who is a repeat offender whose emails routinely get flagged for his review. He falls in love, but has no idea what she looks like.

I’ll admit that it was the premise that caught my attention. You have to wonder if those hours spent reviewing emails could lead to something else. Rowell takes that premise and has fun with it.

When Fundraising Becomes More Lucrative Than Running the Business

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Erick Mathe had a vision of creating a media empire. Well, maybe not an empire, more of a small keep. His plan was to broadcast over Low Power Television Service. Those are locally-oriented television broadcasts in small communities. Mr. Mathe had a line up of streaming music and infomercials. He just needed capital to get the business going.

It won’t surprise you that Mathe has been charged with fraud. There is an SEC complaint in Florida and a criminal indictment in Pennsylvania. Mathe has not responded to the charges so I have to rely on the government’s view of the facts. It looks like Mathe saw that raising the capital and taking a commission was more lucrative than running the television business.

Vision Broadcast Network had four stations lined up for delivery of its content and said that it had licenses for 70 more. It’s “Ask the Specialist” subsidiary was lined up to provide medical educational resources. That subsidiary was particularly useful because it put Mathe in contact with wealthy doctors who were potential investors.

What caught my eye was a registration filing that Vision Broadcast Network made in 2009 with the Securities and Exchange Commission. It looks like it had the good intention at that time to be a legitimate business.

In the filing, there is a Code of Ethics as an exhibit.

“Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one’s independent judgment to be subordinated. “

Mathe met Ashif Jiwa who persuaded him that he could help raise additional investment funds because he operated a hedge fund and acted as a financial adviser to the Prince of Dubai. Mathe paid Jiwa a commission on capital raised. At some point Mathe decided that he should also pay himself a commission for capital raised.

Perhaps that was the turning point. Mathe became more focused on raising capital than operating his business. According to the SEC complaint Mathe was misleading investors about revenue, capital commitments, and the success of the business.

He was ignoring his own code of ethics.

Sources:

Why I think the Accredited Investor Standard Should Not Change

rich accredited investor

The SEC Investor Advisory Committee is scheduled to vote on a reform plan from a subcommittee at its Oct. 9 meeting. That plan calls for the SEC to rethink the income and net-worth minimums used to define an “accredited investor.”

Much of the concern about private placements is about risk. They seem to be universally labeled as the most risky of investments. The accredited investor definition is categorized as the class of individuals who do not need the ’33 Act protections in order to be able to make an informed investment decision and protect their own interests. They get to pass the red velvet rope and buy securities through a private placement

It’s not that the ’33 Act protections remove risk. There are plenty of people who have lost money in the stock markets. Prices can fluctuate wildly, fraud exists, the markets get manipulated and we are all being fleeced by high-speed traders.

It’s too easy to label private placements as risky. They cover a broad swath of investments with different levels of risk. Public companies may raise capital through a private placement because its quicker, easier and less expensive than through a public offering. Hedge funds are sold through private placements, but they can be anywhere on the risk spectrum. Of course there are start-ups and crowdfunded firms that are the most risky of investments. This would be true if the capital were raised through a public offering or a private offering.

The risk is incredibly varied for private placements. So labeling them as risky investments is an incorrect categorization.

In my view, it’s not the risk of loss that is the main problem with private placements.

It’s the loss of liquidity.

Whether the investment ends up being a bad one or a wildly successful one, the investor will have limited ability to access that gain or loss and limited ability to time the realization of that gain or loss.

With an investment in the public markets, the investor can sell at any time. With a private placement, the investor may have no ability to sell.

The net worth prong of the accredited investor definition is key because it shows that the individual has other resources and is not reliant on the private placement. Excluding the primary residence was a good change for the definition. Someone who is house rich and cash poor is less likely to be able to deal with the liquidity problem.

Excluding retirement accounts is exactly the wrong thing to do with the net worth requirement. That money is already relatively illiquid. An investor can access it, but is subject to penalty. Retirement money is long term money that will not be subject to liquidity demands and can be invested over the long term.

The current income test is a useful measure of liquidity demands of an investor. A higher income indicates that the investor is more likely to be able to absorb the loss in liquidity from a private placement.

I’m all for expanding the definition to more individuals who can prove their financial sophistication. One recommendation from the sub-committee is to have a test for financial sophistication. That’s a great idea to expand the base, but I’m skeptical that there would be many people lining up to take the test.

Another recommendation is that private placement investments be limited to a portion of income or net worth. That is better aligned with the liquidity risk. However, it would impossible to verify and incredibly intrusive to implement.

That comes back to the compliance aspect. The more complicated the method for determining whether an investor is an accredited investor that harder it is for a company to use private placements or to open them to individuals. Removing the primary residence from the net worth definition was a good idea to address the liquidity risk, but it makes the confirmation more difficult.

The failure to ensure that all investors in a private placement are accredited investors can lead to very bad results. Complicating the definition will lead to a reduction in the usefulness of this fundraising regime.

Sources:

Weekend Reading: Predator

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Predator covers the story of the birth of the Predator drone and its effect on military and covert operations. Richard Whittle manages to weave through the military and aeronautic bureaucracy of the Predator as it is destined to become  the most successful military unmanned aircraft.

I was surprised to see the level of detail about the development of the aircraft. I would think that much of the information would be secret. Or that those involved would be quiet about its history. Whittle clearly was able to uncover a tremendous amount of detail. The story is rich, enjoyable to read, and compelling.

The Predator drone was ugly, slow and unreliable. The key to its success was its ability to stay in the air for an extended period of time. Manned craft are limited by human endurance. The Predator can have flight crews swapped while in flight.

Everything else was good old-fashion ingenuity to expand the use and conquer the problems with the plane’s technical limitations. One key was the ability to transmit video not only to the pilots, but to other military leaders. That level and length of surveillance was compelling for military leaders.

According to the author, the turning point for the Predator happened during the Bosnian War. Those were the first flights in combat, but limited to surveillance.

It was the war in Afghanistan that pushed the Predator into more action. That turning point was the idea of mounting a hellfire missile on the aircraft. The Predator could not only watch the enemy, but could take action.

The book is focused on the history of the Predator, not the legal and ethical implications of the Predator. Part of that history is the legal analysis of mounting a missile on the aircraft and who can authorize taking a shot. There was some concern that the Predator with a missile could be classified as a cruise missile and be subject to weapon treaties with Russia.

The book’s historical narrative ends in 2002. That leaves most of the ethical implications to the book’s epilogue. Is it ethical to fight a war by remote control, with uniformed Air Force pilots blowing up targets on the other side of the world from their safe, air-conditioned work stations? Are the attacks assassinations or merely defensive strikes in the War on Terror?

The ethical implications are felt by the pilots. They are not whisking over target at supersonic speeds delivering their payloads with little time to see the damage. A Predator pilot has the continuing transmission to watch as the aircraft lumbers along above the target looking at survivors and victims.

The publisher provided me with a free review copy of the book.