The New Resource Guide to the FCPA

The Securities and Exchange Commission and the Department of Justice jointly released A Resource Guide to the U.S. Foreign Corrupt Practices Act (.pdf). The 120-page guide provides a detailed analysis of the U.S. Foreign Corrupt Practices Act and closely examines the SEC and DOJ approach to FCPA enforcement.

The guide addresses a wide variety of topics including who and what is covered by the FCPA’s anti-bribery and accounting provisions; the definition of a “foreign official”; what constitute proper and improper gifts, travel, and entertainment expenses; facilitating payments; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and the different types of civil and criminal resolutions available in the FCPA context. On these and other topics, the guide takes a multi-faceted approach toward setting forth the statute’s requirements and providing insights into SEC and DOJ enforcement practices. It uses hypotheticals, examples of enforcement actions and matters that the SEC and DOJ have declined to pursue, and summaries of applicable case law and DOJ opinion releases.

The Resource Guide is a  response to the Phase 3 review by the OECD Working Group on Bribery. That report from that review recommended that the US anti-bribery efforts could be enhanced by consolidating publicly available information on the application of the FCPA. This Resource Guide is that consolidation.

Compliance Bricks and Mortar for November 9

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

Fighting corruption with bumper stickers and public toilets: ambient accountability by Dieter Zinnbauer in Space for Transparency

Take for inspiration this passenger bill of rights, displayed literally right in your face at the backrest of the driver’s seat in New York taxis.

Imagine how much more effectively you can claim your rights and how much more hesitant a corrupt driver will be to try to take advantage of you, even if you are not from New York and have no idea how this place works.

Or think about how much easier it is for you to report unsanitary conditions in this public toilet at Seoul airport when you are presented with a sign like the below.

Convicted Ponzi Schemer Balks At Proposed 225-Year Prison Sentence by Jordan D. Maglich in PonziTracker

Durham’s trial was somewhat unique in that prosecutors unveiled wiretaps of Durham and others allegedly confirming their knowledge that they were engaging in criminal activities. The use of wiretap evidence is unique in that it is typically seen in instances of organized crime and violent offenses.

Another Guilty Plea in Madoff Probe by Reed Albergotti in the Wall Street Journal

Irwin Lipkin, 74 years old, is the ninth person to plead guilty to criminal charges in the government’s probe, which is approaching its fifth year…..

Mr. Lipkin, the firm’s former controller, allegedly helped oversee the growth of Mr. Madoff’s company from a two-man operation in 1964 to a business with billions under management, according to a lawsuit filed in November 2010 by Irving Picard, the trustee seeking to recover assets on behalf of Mr. Madoff’s victims.

Mr. Lipkin pleaded guilty to making false statements in regulatory filings and conspiracy to commit securities fraud and other crimes. He faces up to 10 years in prison on the two counts. Sentencing is set for March 22.

Committee created by Dodd-Frank at odds with JOBS Act startup financing reforms by William Carleton

Dodd-Frank impacted the startup and emerging company ecosystem at its angel-financing source, as it amended the accredited investor definition to provide that the $1 million individual net worth threshold should exclude the value of the investor’s principal residence. (It could have been worse, but angels got organized and stopped the more draconian proposals.)

Now, another Dodd-Frank provision, seemingly not pertinent to angel or venture capital investing, looks like it could have an impact on the innovation economy.

This other provision is Section 911 of Dodd-Frank, which establishes an “Investor Advisory Committee,” the purpose of which is to: …

Translating the Election Results Into Compliance Change by Matt Kelly in Compliance Week

Well, thank the lord we don’t have to go through that again for another few years.

As we all sift through election results this morning, tip your hat to the Democrats, who won big last night, and spare some sympathy to Republicans, who must feel like they were hit by a truck. And let’s spend a bit of time pondering what this will all mean for compliance executives in the next year, stuck on that perch between corporate behavior and public policy.

 

Warren Back in Washington

The last time Washington saw Elizabeth Warren, she was thrown out of town for her strong advocacy of the Consumer Financial Protection Bureau. The Dodd–Frank Wall Street Reform and Consumer Protection Act established the CFPB. Warren is credited with creating the CFPB, tirelesslessy lobbying for its inclusion in Dodd-Frank, and worked on implementation of the bureau as a Special Assistant to the President in anticipation of taking over as director. However, Warren was seen as overly aggressive in pursuing regulations, and was not nominated for the position.

Last night, she grabbed a Massachusetts Senate seat away from Scott Brown and will be returning to Washington as a US Senator.

The next test will be her Senate assignment. Will Senate leaders dare to give her a seat on the Senate Banking Committee? Will she be the one grilling the head of the Consumer Financial Protection Bureau?

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Vote (and Report)

I’m not going to say that your vote counts. For the presidential election, your vote counts more if you live in Florida or Ohio. Your vote in a solidly red or blue state like Massachusetts or Texas counts less. However, there are likely plenty of other competitive races on your ballot, besides the presidential election.

Regardless of the outcome, I think we will all be thankful that the political advertising will disappear until the next election cycle.

For investment advisers and private fund managers, you need to remember to keep track of political campaign contributions to comply with Rule 206(4)-5.

Another Danger of Overstating Assets

The Securities Division of the Massachusetts’ Secretary of State’s office filed an administrative complaint against CCR Wealth Management. The complaint seeks to deny CCR Wealth Management registration as an investment adviser.

The secretary of state’s office said inspectors became suspicious when they noticed that CCR had reported static denominations over a period of time, even as its number of accounts fluctuated. According to the complaint, between 2007 and 2011, CCR reported exactly $25 million under management, even as its number of accounts fell from 350 to 250.

That $25 million number is the threshold between registration with the Securities and Exchange Commission and state level registration. With the transition from federal to state, a new set of eyes will be looking at the Form ADV filings and may have a different take on things.

What surprises me most about the story is that the Secretary of State noticed the issue and was able to act on it. I suppose we should credit an astute examiner in Massachusetts who compared the prior filings to the new state filing. I assume that person is overworked with a flood of new filings coming in this year.

It’s not clear what happened or that CCR did anything wrong. The company focuses on wealth management and estate planning. The SEC did impose a new and better defined method for calculating assets under management. The prior filings may have included items that are no longer included.

I find it strange that Massachusetts is seeking to prohibit CCR’s registration with the state. That seems like the nuclear option for something may merely be a misunderstanding rather than an intentional misdeed.

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Compliance Bricks and Mortar for November 2

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

21-Month Sentence Just One of the Consequences of Former Deloitte Partner’s Insider Trading by Bruce Carton in Compliance Week

A big part of the SEC and DOJ’s enforcement of the insider trading laws is to bring cases that will deter others from violating the insider trading laws in the future. Although the recently-concluded case against Thomas P. Flanagan ended with a lighter prison sentence than it could have, the full slate of consequences for Flanagan should be sufficient to make the next audit partner who is considering trading on a client’s non-public information think twice.

Hold Your JOBS Act Horses by Jay Gould in Pillsbury’s Investment Fund Law Blog

When can private fund managers start posting performance numbers on their websites and sponsoring the Super Bowl?  Not yet, according to Senator Carl Levin (D-MI) in letters dated October 5,2012 and October 12, 2012, (the “Levin Letters”) rebuking the SEC for having missed the point of the legislation in the SEC rulemaking process.  As you recall, on August 29, 2012, the SEC proposed rules pursuant to Section 201 of the Jumpstart our Business Startups Act (“JOBS Act”) that, if adopted in final form, would allow private issuers, including private funds, to generally solicit and advertise as long as the investors are all “accredited investors.”

Fighting corruption with bumper stickers and public toilets: ambient accountability by Dieter Zinnbauer in Space for Transparency

One of our most simple ways of doing this is to make them more aware of their rights: in the very place where those rights are most likely to be abused.Take for inspiration this passenger bill of rights, displayed literally right in your face at the backrest of the driver’s seat in New York taxis. Imagine how much more effectively you can claim your rights and how much more hesitant a corrupt driver will be to try to take advantage of you, even if you are not from New York and have no idea how this place works.

Avon Warns of Further Firings Amid FCPA Probe by Samuel Rubenfield in WSJ.com’s Corruption Currents

Avon Products Inc. said it may have to fire more people as it continues its internal probe into allegations of foreign bribery….Many top Avon executives, including a group vice president and a vice chairman, have resigned or been fired in the past few years amid the bribery probe.

Principles-Based Compliance Isn’t Supposed to Be Easy by Matt Kelly in Compliance Week

That compliance executive is correct: the right to be forgotten is entirely impractical in modern business, and contradicts many other rules we already place on businesses for good reason, such as maintaining records to enforce contracts, audit finances, or protect public security. If compliance officers ever wanted to point to a regulation that shows no understanding of business, the right to be forgotten would be a great one.

The Thirteen Dirty Secrets That A Fraudster Does Not Want You To Know? by Joshua Horn in Securities Compliance Sentinel

The late great comedian, George Carlin, was made famous by his routine, “The Seven Dirty Words You Can Never Say On Televisions”. Likewise, fraudsters do not want compliance personnel to ever mention the 13 common dirty traits that may uncover a fraud.

Two Actions Against Investment Advisers by Thomas O. Gorman in SEC Actions

The Commission filed two settled administrative proceedings this week against investment advisers. Each centered on the disclosures made to clients. One involved advertisements while the other involved the fees charged.

Since the early 1990s the advertisements for the bond program have claimed that it has had “no down years” since it’s the inception….In 2005 BTS learned that about half of its clients would have had a down year in 2004 with losses of up to 3.3% following the buy/sell signals. The fact that a significant percentage of its clients likely would have had results which materially varied from the “no down year” claim made the advertisements false and misleading, violating Advisers Act Section 206(4), according to the Order.

The second named as Respondents Tilden Louchs & Woodnorth, LLC, Woodnorth, LLC, LaSalle St. Securities, LLC and Ralph Loucks….Beginning in late October 2007, and continuing until early 2012, Tilden charged client commissions that exceeded the fees it paid LaSalle to execute trades. The higher commissions represented undisclosed compensation for Tilden and Mr. Loucks. Under this arrangement clients paid on average $143.77 per trade, according to the Order. At the same time Tilden paid LaSalle an average of $37.47 to execute the trades. The excess went to Tilden. The arrangement was not disclosed. To the contrary, the Forms ADV told clients they were getting a discount. Tilden had over $186,000 in undisclosed compensation, shared by Mr. Loucks. The Order alleges violations of Advisers Act Section 206(2) and 207.

Exchange got black eye from going dark: Arthur Levitt in Investment News

“People look to the New York Stock Exchange (NYX) as being the symbol of American capitalism, and to see the exchange go down for two days without an adequate backup plan is very, very unfortunate,” Levitt said on a Bloomberg Radio interview. “To see the New York Stock Exchange crippled is a body blow that will really shake the image of that institution for a long time to come.”

Sandy and Disaster Preparedness

Disaster recovery is an important, though not explicitly mandatory, component of compliance program. The Securities and Exchange Commission alludes to this in the release for the compliance rule. It’s also a key part of personal plan. I’m learning that first hand.

My family is spending its third day without power. Fun and exciting at first, it has become troublesome. A shower by candlelight is much less romantic when doing so to get ready for work. Fortunately, it’s warm in Boston so the lack of heat is not a problem.

There are many worse off than me and we escaped unscathed, other than the little wire connecting our house to the world. My hearts go out to those battling much worse damage.

Adoption and the FCPA

The latest Opinion Procedure Release from the Department of Justice comes from a group of non-profit adoption agencies. Based on the stories I’ve heard from friends who have adopted from overseas, I’m not surprised that adoption agencies are concerned about the Foreign Corrupt Practices Act. Opinion Release No. 12-02 is focused on an event hosted by the agencies and not the actual adoption practices. This is the second opinion release focused on adoption agencies.

Nineteen adoption agencies want to host 18 officials involved in the adoption process. The event sounds like a typical business/entertainment gathering:

  • Business class airfare on international portions and coach airfare for domestic portions of flights;
  •  Two or three nights hotel stay at a business-class hotel;
  • Meals; and
  • Transportation.

To minimize the concerns of concerns of corruption, the agencies put a few protections in place:

  1. Entertainment events will be of nominal value
  2. The agencies will not pick the attendees, but leave it up to the government agency.
  3. Souvenirs will have a business logo and be of nominal value.
  4. No stipend or spending money.

This sounds familiar because the Department of Justice dealt with very similar issues last year in Release 11-01. This year’s request sounds like there will be a bit more entertainment involved, but nothing extravagant.

The fact pattern does reflect anything new. I think it’s how most businesses would treat the situation. I suppose that’s helpful. But it also reflects a paranoia about the FCPA. It’s not a violation for merely giving something of value to a foreign official, there needs to be corrupt intent for a violation of the bribery sections of the FCPA. Obviously, a company should be anxious when a government official is involved and there should be heightened scrutiny. There was nothing about this release that has not been covered in other releases.

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Compliance Bricks and Mortar for October 26

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

Enforcement Actions Against Advisors Nearly Doubled: NASAA by Melanie Waddell in AdvisorOne

Enforcement actions taken against investment advisory firms by state securities regulators nearly doubled to 399 in 2011—accounting for 15% of all enforcement actions handled by state securities regulators, according to the North American Securities Administrators Association’s (NASAA) annual enforcement report.

The Flaws of Whistleblower Hotlines and Rewards by Matt Kelly in Compliance Week

So the real headache of the SEC’s whistleblower program isn’t that it will threaten “your industry” and put you out of a job; it’s that SEC whistleblower rewards threaten your focus and distract you from doing your job as you think best. Compliance officers have plenty of risks and misconduct to manage already, and the SEC’s whistleblower program pours accelerant onto that already flammable situation. I recall one compliance executive at a real estate firm who received a complaint about possible misconduct in China. “Within 36 hours, I was on the ground in Beijing and stayed there for a week,” that person told me. “It was a wild goose chase, as far as we could tell. Nothing there.”

The Mummy and Using Challenges to Improve Compliance Cultures by Tom Fox

So the compliance angle here? It’s the difference between two companies in their responses to compliance challenges. Exhibit A is Goldman Sachs and their continuing PR nightmare named Greg Smith. Smith exploded onto the ethics scene with his very public resignation from Goldman Sachs and Op-Ed piece in the New York Times (NYT) in March. The NYT piece castigated Goldman Sachs both internally for their drive towards the all mighty dollar (horror) and their external relationships with their clients, for basically the same reason (horror, horror). This week Smith has made the rounds of several shows including a prominent feature on 60 Minutes to plug his recently released book entitled, “Why I Left Goldman Sachs.”

The SEC’s New Focus on Performance Reporting: What Private Fund Managers Need to Know

During this complimentary webcast, hosts Justin Guthrie and Coley McKinstry will give an industry update, discuss specific case studies where ACA has recently assisted private fund managers, and how managers can reduce their risk when presenting performance.

• Industry Update:

o Presence Examinations
o Investor Led Transparency Push
o Implications of SEC Aberrational Performance Inquiry
o Form PF Performance Reporting Requirements
o Implications of SEC Registration

• Case Studies on Performance Reporting:

o Recordkeeping Requirements
o Hypothetical Track-records
o Investor vs. Fund Level Performance
o Side Pockets
o Model vs. Actual Fees
o Private Equity and Real Estate Considerations
• Overview of a Performance Audit

After their presentation, Justin and Coley will take questions and comments from attendees. To register, click here.

The Long Road Back: Business Roundtable and the Future of SEC Rulemaking by Jill E. Fisch, Institute for Law and Economics, University of Pennsylvania Law School

The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. The DC Circuit’s 2011 Business Roundtable decision is one of the most serious, particularly in light of the heavy rulemaking obligations imposed on the SEC by Dodd-Frank and the JOBS Act. The effectiveness of the SEC in future rulemaking and the ability of its rules to survive legal challenge are currently under scrutiny.

This article critically evaluates the Business Roundtable decision in the context of the applicable statutory and structural constraints on SEC rulemaking. Toward that end, the essay questions the extent to which deficiencies in the SEC’s rulemaking process can accurately be ascribed to inadequate economic analysis, arguing instead that existing constraints impede the SEC’s formulation of regulatory policy, and that this failure was at the heart of Rule 14a-11.

Bad rules make bad law, and Rule 14a-11 was a bad rule. This essay argues that the flaws in SEC rule-making are quite different, however, than those identified by the DC Circuit. Moreover, in the case of Rule 14a-11, Congress played a critical role by explicitly authorizing the SEC to adopt a proxy access rule. By substituting its own policy judgment for that of Congress, the DC Circuit threatens not just the ability of administrative agencies to formulate regulatory policy, but the ability of Congress to direct agency policymaking.

Unauthorized Board Meeting

For its latest mission, Improve Everywhere staged an unauthorized boardroom meeting in the office chair department of a Staples. The chairs in this particular office supply store were already arranged in a boardroom configuration, making it easy for us to hold a surprise meeting. Actor Will Hines gave a presentation to the board, using a whiteboard and an easel he had bought from the store just minutes prior. Minutes into the meeting, the board was asked to leave by a confused store manager.