Boomerang – Michael Lewis Looks at the New Third World

Michael Lewis packages his stories on the effects of the global financial crisis in Iceland, Greece, Ireland, Germany, and California into one book: Boomerang. If you had ready the stories when they were published in Vanity Fair, then you’ve ready the book. If you missed some (or all) of those stories then this book is great viewpoint on how five countries got themselves into trouble with excessive debt.

I had already read the first four articles when they appeared in Vanity Fair, but I had not yet gotten to the article on California. In fairness, Boomerang was a given to me as a gift so I did not come out of pocket to put it on my bookshelf. I enjoyed revisiting the four stories and the new California story.

They each seemed to work better in the collection than standing on their own. Since each story is relatively short, they lack the depth and understanding I’m used to getting in one of Michael Lewis’ books. Collectively, there is bit more depth as you can see how the five different countries got into trouble in different ways by becoming over-leveraged.

It’s a Michael Lewis book, so that means it’s easy to read and smart. He has a gift for taking complicated subjects and using individuals to highlight how his theories work in the real world.

My gripe is not with the book, but with Vanity Fair who sponsored Lewis in writing the five stories, each of which has appeared in the magazine. I purchased a subscription to Vanity Fair just because of these Lewis articles. I thought I was choosing to upgrade the freemium model.  I was willing to pay more for the superior experience of reading the article in the magazine instead of online. However, the publisher would put them on the website (for free) before the magazine ended up in my mailbox. One premium of getting access to the content first, was actually the opposite. I was getting the content later than if I had chosen not to pay for it. It’s not like the magazine is ad-free.

So why I would I renew my subscription?

Salute a Veteran


U.S. President Woodrow Wilson first proclaimed an Armistice Day for November 11, 1919.

“To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…”

The United States Congress passed a resolution seven years later on June 4, 1926, requesting the President issue another proclamation to observe November 11 with appropriate ceremonies. An Act approved May 13, 1938, made the 11th of November in each year a legal holiday:

“a day to be dedicated to the cause of world peace and to be thereafter celebrated and known as ‘Armistice Day’.”

Congress amended this act on November 8, 1954, replacing “Armistice” with Veterans, and it has been known as Veterans Day since.

My thoughts go out to Marine Corps Sergeant Jason Cohen, currently serving his last few weeks in active service.

Massachusetts Revises Proposed Private Fund Adviser Exemption

From my discussions, many real estate fund managers are still not sure if they are subject to registration under the Investment Advisers Act. The definition of “private fund” can exclude many real estate funds depending on the structure of their investments. I think the result is that you end up under the federal level of registration and in the state level of regulation. Many states are still trying to get their regulations to mesh better with the changes coming from Dodd-Frank.

One of those is my home state of Massachusetts. Back in April the Massachusetts Securities Division proposed changes to 950 CMR 12. 00 et. seq. that would alter the definition of institutional buyer found at 950 CMR 12.205(1)(a)(6) and proposed an exemption for certain “private fund” advisers. A public hearing was held on June 23, 2011. In light of the comments and the SEC’s changes in the regulatory framework since the original proposal, the Securities Division has amended the proposed regulations and is now seeking additional comment.

A public hearing is scheduled for December 6. That’s going to be a tight time frame for advisors that are trying navigate through the new regulatory framework and face a mid-February filing deadline.

Currently, Massachusetts has an exemption from registration for advisers who only clients are “institutional buyers.”

An investing entity whose only investors are accredited investors as defined in Rule 501(a) under the Securities Act of 1933 (17 CFR 230.501(a)) each of whom has invested a minimum of $50,000.

For a private fund manager, this was a great exemption since their investors would need to be accredited investors. As long they kept capital commitments at a minimum of $50, 000 they could usually take advantage of this exemption.

The proposed regulations would phase out the use of the institutional buyer exemption for new funds. The regulations would also create an exemption for private fund advisers that is better aligned with the federal exemptions.

The regulations probably will not help real estate fund advisers who are looking at state-level exemptions to avoid registration.

Sources:

Form ADV, Valuations, and Timing for New Registrations

With hundreds (thousands?) of private fund managers set to register with the Securities and Exchange Commission next quarter, the new form ADV is on the IARD system and ready for you to start uploading information.

I noticed the first problem.

Question 5 asks you to “determine your regulatory assets under management based on the current market value of the assets as determined within 90 days prior to the date of filing this Form ADV.” I expect most private fund managers to wait until the filing deadline in the middle of February. That means third quarter valuations, presumably accurate as of September 30, will be older than 90 days. For private equity firms with very illiquid assets like interests in real estate and private companies, they are unlikely to have valuations as of December 31 finalized by the middle of February. Even if they do have final valuations, they probably have not yet disclosed the final valuations to the investors in their funds.

With a normal end of March annual filing deadline for Form ADV, this is less likely to be a problem. But initial registrants need to file 45 days ahead of that deadline to meet the SEC’s 45 approval period.

Perhaps I’m missing something, but I’m wondering if anyone else has thought about this issue and how they are handling it. One option is to use the third quarter valuations and be worried about getting a negative SEC response. Another is to get valuations finalized and disclosed earlier than usual.

I’d appreciate any of your thoughts on this. You can leave a comment or send an email to [email protected]

SEC Says it is Bringing Charges Against Wall Street

You’ve probably heard the charges made by politicians and activists that the Securities and Exchange Commission is ineffective and not bringing charges against those who caused the 2008 financial crisis.

“YOU’RE WRONG!” says the SEC.

The SEC has begun publishing “Enforcement Actions Addressing Misconduct That Led to or Arose From the Financial Crisis.”

Key Statistics (through Oct. 19, 2011)

Number of Entities and Individuals Charged 81
Number of CEOs, CFOs, and Other Senior Corporate Officers Charged 39
Number of Individuals Who Have Received Officer and Director bars, Industry Bars, or Commission Suspensions 24
Penalties Ordered > $1.2 billion
Disgorgement and Prejudgment Interest Ordered > $393 million
Additional Monetary Relief Obtained for Harmed Investors $355 million*
Total Penalties, Disgorgement, and Other Monetary Relief $1.97 billion

* In settlements with Evergreen, J.P. Morgan, State Street, and TD Ameritrade

In the prism of the enormous losses of  the 2008 financial crisis this may not seem by much. I think most people, though rightly upset, will have a hard time finding criminal conduct among those activities subject to the jurisdiction of the SEC. Sure, the proliferation of CDOs in 2007 can be seen as suspect. But criminal?

Sources:

Compliance Bits and Pieces for November 4

Here are some compliance-related stories that recently caught my attention:

How Trustworthy Are You? from the Trusted Advisor

A summary infographic on five questions from the Trust Quotient self-assessment

Investigation Nation: SEC Employees and Inspector General Play Cat-and-Mouse by Bruce Carton in Compliance Week’s Enforcement Action

A group called Citizens for Responsibility and Ethics in Washington (CREW) has asked the SEC Inspector General to launch an investigation into whether SEC employees are using private email accounts and cell phones to avoid having their communications reviewed in SEC Inspector General investigations.

To Err Is Human . . . and Punishable by the SEC by Russell G. Ryan in CFO

Even as the SEC pleads for more resources from Congress to keep up with existing responsibilities and the mind-boggling array of new regulatory burdens dumped upon it by last year’s Dodd-Frank financial reform act, the agency reportedly intends to expand its enforcement reach. The regulator will apparently pursue not only its signature cases against deliberate and reckless fraudsters, but also cases against people who make merely negligent mistakes. Apparently, as the SEC has progressed with its investigations relating to the financial meltdown, it has found many examples of negligence and bad judgment, but fewer instances of deliberate fraud than most people assume.

The Seven Deadly Sins for a Compliance Program by Tom Fox

1. Putting the Code of Conduct on your Shelf
2. Ignoring your Company’s Culture
3. Worshiping at the Altar of Highest Grade Point Average
4. Letting the Money Talk
5. The Parent Trap – Do as I say, not as I do
6. Ethics in the Corner
7. Shooting or Ignoring the Messenger

When Prediction Markets Go Bad in Saturday Morning Breakfast Cereal

For some R Rated Humor

FCPA as a Strike Breaker

united steel workers logo

The United Steelworkers sent a request to investigate to the U.S. Justice Department. The union believes Freeport-McMoRan has violated the Foreign Corrupt Practices Act by engaging the bribery of security forces in Indonesia.  The Jakarta Post said national police chief Gen. Timur Pradopo admitted his personnel had received ‘meal money’ to guard the company’s gold and copper mine in Grasberg, West Papua. The union is arguing that those payments to police from Freeport-McMoRan’s local subsidiary constitute bribes. Production at the mine has been crippled and infrastructure sabotaged by protesters. Seven people have been killed in clashes between workers and police and mysterious hit and run attacks.

According to the Jakarta Post a diplomatic cable leaked by Wikileaks also revealed that Freeport paid the Indonesian Military (TNI) and the Police to secure mining activities in the restive province.

A spokeperson for PT Freeport Indonesia said funds given to security personnel guarding project sites in Papua are allowed under the Voluntary Principles on Security and Human Rights, a set of guidelines created by the United States and Britain in 2000 for the extractive industry dealing with security issues. “The support for the government-provided security includes in-kind assistance and monetary allowances to mitigate living costs and the hardship elements of a remote posting assignment to our mining area in Papua,” the statement said.

A member of the Indonesian Forum for the Voluntary Principles for Security and Human Rights, Agus Widjojo, said that security officers should not directly receive “meal money” without reporting it to the Finance Ministry. “It may be true that police officers face particularly tough situations in Papua. But it does not mean they can receive the money directly from Freeport without reporting it to the state’s finance agency,” he said.

Back in 2006, the New York City Comptroller asked the SEC to look into Freeport-McMoRan for knowingly made “false or misleading” statements about payments to the Indonesian military. In a letters to the agency, the comptroller, William Thompson Jr. said he believed the company might have violated the Foreign Corrupt Practices Act.

Could it be a bribe to pay the police to do their job? The United Steelworkers take the position that Indonesian security personnel are being paid to act in the defense of the interests of Freeport-McMoRan in
conflict with their duty to protect Indonesian people.

At the very least, it’s an interesting strategy by the union to help workers in another country.

Sources:

Form PF and Private Funds

IN addition to filing Form ADV with the SEC when they register with the Securities and Exchange Commission, private fund managers will also need to start filing Form PF next year. The amount of information required by Form PF is tiered. Advisers managing less than $150 million in private funds are not required to file, as these firms are not likely to generate systemic risk within the financial industry. Smaller private fund advisers must file Form PF only once a year within 120 days of the end of the fiscal year, and report only basic information regarding the private funds they advise. This includes limited information regarding size, leverage, investor types and concentration, liquidity, and fund performance. Smaller advisers managing hedge funds must also report information about fund strategy, counterparty credit risk, and use of trading and clearing mechanisms. Larger private fund advisers must provide more detailed information than private fund advisers. For example, large hedge fund advisers managing more than $1.5 billion (this threshold was raised from $1 billion in the proposed rule) need to file additional information on Form PF. Large private equity advisers with $2 billion in assets under management (this threshold was raised from $1 billion in the proposed rule) also must submit additional information on Form PF. Altogether, the seven types of private fund defined in Form PF are: (1) hedge fund; (2) liquidity fund; (3) private equity fund; (4) real estate fund; (5) securitized asset fund; (6) venture capital fund; and (7) other private fund. For real estate private equity funds, the FORM PF defines “private equity fund” as any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund or venture capital fund and does not provide investors with redemption rights in the ordinary course. So real estate funds should only have to make the shorter annual report. Regarding timeframes, smaller private fund advisers and smaller private equity fund advisers only need to file Form PF once per year. Larger hedge fund advisers must file Form PF quarterly and have 60 days after each quarter ends to submit the form. (This is longer than the originally proposed 15 days.) Most private fund advisers will be required to begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after December 15, 2012. However, three categories of advisers must begin filing Form PF following the end of their first fiscal year or fiscal quarter, as applicable, to end on or after June 15, 2012:

  • Advisers with at least $5 billion in assets under management attributable to hedge funds.
  • Liquidity fund advisers with at least $5 billion in combined assets under management attributable to liquidity funds and registered money market funds.
  • Advisers with at least $5 billion in assets under management attributable to private equity funds.

One other noteworthy change to Form PF requirements is that advisers will not be required, as originally proposed, to formally certify that information submitted on Form PF is “true and correct” under penalty of perjury. SEC has chosen FINRA to accept Form PF filings. That means more use of the IARD filing system. And perhaps, moving a step closer to FINRA becoming the SRO for investment advisers. Sources:

Halloween and Compliance

A compliance professional can turn the fun and chaos of Halloween into a boring night on the study of procedure. Here, I’ll prove it.

Let’s start with costumes.

Have you imposed a “no costume = no candy” rule. Perhaps you merely skimp on the older kids who have skimped on dressing up. If you, like me, are suddenly living in winter you need to figure out what do with the kids who are all bundled up fighting the cold. They might all look like Eskimos tonight instead of zombies and superheroes.

Perhaps you are afraid to skimp because those older kids who didn’t put much effort into a costume may put more effort into toilet paper and eggs. Are you willing to compromise on your rule because you are afraid of the repercussions. How would that reflect on your compliance program?

Let’s move on to technology.

What about using Halloween metaphors to remind yourself about protecting your computer? Try the FCC:

  1. Are cyber ghouls and online scammers feasting on your computer? This Halloween, learn how to stop them at OnGuardOnline.gov.
  2. Don’t let someone decide to be you for Halloween. Read more about online identity theft at OnGuardOnline.gov.
  3. Don’t let computer security worries haunt you at night. OnGuardOnline.gov says download software updates and patches often.
  4. Garlic? Stake through the heart? OnGuardOnline.gov says only the latest security software protects you from online vampires.
  5. Zombie warning! Update your security software often to protect your computer from zombie bots. Read more at OnGuardOnline.gov.
  6. Don’t let old security software spook you. Keep firewall, anti-virus, and anti-spyware software updated, and visit OnGuardOnline.gov.
  7. Beware of online tricks this Halloween and enable your computer’s firewall. Find out more at OnGuardOnline.gov.
  8. Don’t let a virus ruin your computer’s Halloween spirit. Visit OnGuardOnline.gov for tips to keep your computer virus-free.
  9. Don’t be a “phish” for Halloween. Visit OnGuardOnline.gov to learn how to spot computer scams that try to hook your personal info.
  10. When you tell kids about Halloween safety, tell them about online safety too. To learn how, read Net Cetera at OnGuardOnline.gov.
  11. If you leave your laptop for ‘just a sec,’ it could become someone else’s Halloween treat. Visit OnGuardOnline.gov to learn more.
  12. Can you spot an internet scam dressed up as a great deal? Visit OnGuardOnline.gov for tips on how to spot online frauds.

And let’s put a little scare into you while your little ones are running around the neighborhood.

A team of local law enforcement agencies in Milwaukee are going door-to-door in search of sex offenders who are breaking their compliance rules.  “Offenders are not allowed to have anything related to trick-or-treating that includes bowls of candy Halloween decorations, pumpkins. They can’t have their porch light on indicating that the residence is participating in any trick-or-treat activities,” said Melissa Othmer of the Department of Corrections, Probation and Parole.

Boo!

The jack o’ lantern Death Star is by Noel Dickover with instructions on his site, Fantasy Pumpkins, on how to create one yourself.

Compliance Bits and Pieces for October 28

These are some compliance-related stories that caught my attention recently:

The Role of Compliance and Ethics in Risk Management by Bruce Carton in Compliance Week’s Enforcement Action

Carlo V. di Florio, director of the SEC’s office of compliance inspections and examinations, recently spoke at the National Society of Compliance Professionals’ National Meeting held in Baltimore, Maryland. di Florio focused his remarks on three main points:

  1. Ethics is fundamental to the securities laws, and ethical culture objectives should be central to an effective regulatory compliance program;
  2. Leading standards have recognized the centrality of ethics and have explicitly integrated ethics into the elements of effective compliance and enterprise risk management; and
  3. Organizations are making meaningful changes to embraced this trend and implement leading practices to make their regulatory compliance and risk management programs more effective.

SEC Raises the Bar on Tone at the Top by John T. Dalton in SAI Global’s Viewpoint

A Reuters article last week revealed that the Securities and Exchange Commission (SEC) has begun taking a new tact when conducting its compliance examinations at brokerage firms. Of note, this new practice by the SEC will require more direct involvement by a company’s executives and members of senior management in the compliance exam process, including on-site meetings and interviews with examiners. According to the article, the SEC had previously relied upon chief compliance officers as its primary points of contact for examinations, but that by involving top management, the SEC now hopes “to get more respect for chief compliance officers.

Everything Old is New Again: Alcoa and Olympus by Tom Fox

In an article in the Wall Street Journal (WSJ), entitled “Kickback Probe at Alcoa Heats Up”, reporter Dionne Searcey takes a look at the arrest of two figures in the bribery investigation of Alcoa’s activities in Bahrain in connection with the government owned manufacturing company known as Alba. In an article in the New York Times, entitled “Acquisitions at Olympus Scrutinized,” reporter Hiroko Tabuchi reviews “a tale of deals and advisors, with puzzling results.” Both cases present novel twists and turns that, if you told someone the facts, you would be accused of making up both stories.

Stay Away From These 5 Investigation Interview Mistakes by Lindsay Walker in Corporate Compliance Insights

1. Not Prepping for the Interview
2. Failing to Ask the Question
3. Failing to Build Rapport
4. Failing to Stop Denials
5. Showing Judgment

Firms Must Protect Customer Information – Always by Mark Astarita in SEClaw.com

The SEC has provided another example of an unintentional violation [of Regulation S-P], and charged three former brokerage executives for failing to protect confidential information about their customers. According to the Commission, when GunnAllen Financial Inc. was winding down its business operations last year, its former president and former national sales manager violated customer privacy rules by improperly transferring customer records to another firm. The SEC also accused the firm’s compliance director with failing to enforce the supervisory procedures in an unrelated incident.

DOL issues final rule on 401(k) investment advice exemptions By Hazel Bradford in Pensions & Investments

The Department of Labor on Monday finalized a rule spelling out permissible scenarios for giving investment advice to 401(k) participants without running afoul of prohibited transaction rules. The rule, which will goes into effect in 60 days, allows for providing investment advice under one of two scenarios: through the use of a computer model certified as unbiased, or through an adviser paid a “level,” or flat, fee that does not change based on investment choices.

Thanks to LexisNexis for selecting Compliance Building as one of the Top 25 Business Blogs of 2011. You can also vote on which of the 25 should be The Top blog.
LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

The Top 25:

  1. Business Law Post
  2. California Corporate & Securities Law
  3. Compliance Building
  4. Conference Board Governance Blog
  5. CorpGov.net
  6. DealLawyers.com Blog
  7. Delaware Corporate and Commercial Litigation Blog
  8. FCPA Compliance and Ethics Blog
  9. FCPA Professor
  10. Fedseclaw.com
  11. M&A Law Prof Blog
  12. Marler Blog
  13. Nancy Rapoport’s BlogSpot
  14. New York Business Litigation and Employment Attorneys Blog
  15. No Funny Lawyers
  16. Ponzitracker
  17. Race to the Bottom (Corp Governance Blog)
  18. Reverse Merger Blog
  19. Robert A. G. Monks’ Blog
  20. SEC Actions
  21. The Conglomerate
  22. The Corporate Library Blog–GMI
  23. TheCorporateCounsel.net
  24. The D&O Diary
  25. The Venture Alley