Enterprise 2.0 – Regulatory and Compliance Concerns

I’m once again speaking at the Enterprise 2.0 Conference.

Social Media & Social Networking: Some Cautionary Tales (Location: Room 312)

Social media (Twitter, LinkedIn) and enterprise social networking solutions (profiles, activity streams, social analytics) can deliver compelling business value. However, benefits do not come without risks. This panel discussion with experts and practitioners will provide insight as to the policy, governance, and security issues warranted to mitigate risks.

Moderator – Mike Gotta, Senior Technical Solution Marketing Manager for Enterprise Social Software, Cisco
Panelist – Julie LeMoine, Enterprise Collaboration, Innovation Expert
Panelist – Doug Cornelius, Chief Compliance Officer, Beacon Capital Partners LLC
Panelist – Stew Sutton, Principal Scientist, Knowledge Management, The Aerospace Corporation
Panelist – Suzanne McGann, Social Media Program Manager, Global Interactive Strategy, Medtronic

The session is Tuesday afternoon, 2:30 to 3:30 in Room 312 at the Hynes Convention Center. Stop by if you can.

Be Mindful of Compliance Costs

That story is title does not come from me; it’s a quote from  Commissioner Troy A. Paredes of the Securities and Exchange Commission.

We cannot simply focus on the costs and benefits of a single rule change on a stand-alone basis. It is the totality of the regulatory infrastructure that impacts the private sector. As part of this analysis, we need to be mindful of compliance costs. It is costly for firms to comply with the regulatory obligations they confront both in terms of out-of-pocket expenditures, as well as the opportunity cost of the time and effort of personnel that could have been directed toward other productive endeavors. Indeed, the compliance burden on investment advisers has increased of late due to, for example, the need to comply with the new “pay-to-play” rule restricting political contributions; the recent amendments to Part 2 of Form ADV concerning the preparation and delivery of a “brochure” and “brochure supplements” to advisory clients; and the recent amendments to the custody rule.

The Commissioner was giving a speech to the Hedge Fund Regulation and Current Developments symposium at the Center for Law, Economics & Finance at the The George Washington University Law School on June 8.

There was lots of blame thrown at the hedge fund industry after the financial crisis of 2008 with very little data to support the accusations.  Commissioner Parades also addressed this point:

Regulatory decision making should be supported by data, to the extent available, and economic analysis. This is particularly important to stress insofar as the SEC is concerned, because the SEC is an agency that traditionally has overwhelmingly been comprised of lawyers. Empirical analysis must be much more central to decision making at the SEC than has been the case.

Commissioner Parades is just one of five commissioners, so his position is not necessarily a controlling influence. But it’s still good to see that at least part of the SEC is focusing on there being better regulatory, not just more regulatory control

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Compliance Bits and Pieces for June 17

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

Still Writing, Regulators Delay Rules by Louise Story in the New York Times

Regulators overseeing financial reform are delaying many of the planned changes in the immense market for complex securities known as derivatives because they are running drastically behind schedule in writing their new rules.

The Road To Corruption by Richard E. Messick in The FCPA Blog

A new World Bank study on corruption in the roads sector shows the challenges contractors and engineering firms working in developing countries face when trying to avoid being drawn into schemes that violate the Foreign Corruption Practices Act or the anti-corruption laws of other nations or both.

What Codes of Conduct Should Really Achieve by Matt Kelly in Compliance Week‘s The Big Picture

If you’ve read any news coverage of Straus-Kahn and the IMF, you’ve already seen the startling fact that the IMF actually had two codes of conduct: one for senior executives, another for everyone else. The sheer stupidity of that should be self-evident to anyone who cares about corporate governance and conduct. It strikes anyone, even the rest of the world that doesn’t care about corporate compliance on a daily basis, as a double-standard that encourages all employees to ignore both codes.

The SEC Releases its 29th Annual Small Business Capital Formation Report in 100 F Street

Earlier today the Securities and Exchange Commission released its Final Report from the 29th Annual Forum on Small Business Capital Formation held in November 2010. This year’s forum yielded 36 recommendations from three working groups and a number of written recommendations submitted by organizations concerned with small business capital formation.

Bruins and Compliance

I never thought the Bruins would win a championship under the current ownership. For the Celtics, Red Sox, and Patriots, it took a change of ownership for them to become championship caliber. The “Tone at the Top” was to win the championship. Nothing else was acceptable.

The owners of the Bruins had been accused of having the team be just good enough. That is, good enough to keep attendance up to sell beer and popcorn.

It’s been thirty-nine years since the Stanley Cup has been in Boston in the hands of a Bruins player, since the days of Bobby Orr and Phil Esposito in black and gold.

Boston Globe Staff Photo / Jim Davis

Three Compliance Officers Walk Into a Bar…..

The professional recruiters of Howard-Sloan must have been up really late one night to come up with the idea of trying to find America’s Funniest Compliance Professional. Mitchell Berger, Howard-Sloan’s chief executive, said that for several years in the 1980s to ’90s, the firm put on a similar contest for accountants. I suppose if you can find funny accountants, you can find funny compliance officers.

It sounds like the pickings were slim. Compliance officials from around the country sent in demo tapes of their comedic skills. A mere 15 were submitted. From those, six performers were selected.

Give a round a round of applause and a belly laugh to Michael L. Shaw from pharmaceutical giant GlaxoSmithKline PLC, who earned the title of America’s Funniest Compliance Professional.

Even better, the event raised over $11,000 for juvenile diabetes research.



Thanks to Dennis Liu for highlighting the story for me.

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Fund Adviser Not Liable for False Statements in Fund Prospectus

A recent ruling in favor of the Janus mutual funds’ adviser in the Supreme Court is continued fall out from the mutual fund market timing scandal from almost a decade ago. The prospectuses for several Janus funds represented that the funds were not suitable for market timing and could be read that Janus Capital Management LLC, the mutual fund’s investment adviser, would implement policies to curb market timing. They didn’t and certain traders were able to engage in market timing.

First Derivative Traders represented a class of plaintiffs who owned the stock of the Janus Capital Group, the publicly traded company that owned the investment adviser. After the allegations of market timing surfaced the share price of Janus fell precipitously.

First Derivative alleges that JCG and JCM “caused mutual fund prospectuses to be issued for Janus mutual funds and made them available to the investing public, which created the misleading impression that [JCG and JCM] would implement measures to curb market timing in the Janus [mutual funds]. … Had the truth been known, Janus [mutual funds] would have been less attractive to investors, and consequently, [JCG] would have realized lower revenues, so [JCG’s] stock would have traded at lower prices.

That sounds like very tentative claim to me, especially when you insert the legal fiction that a mutual fund is separate from the fund’s advisers.

The issue is whether the adviser can be held liable in a private action under Rule 10b-5 for false statements in the mutual fund’s prospectus. Under Rule 10b–5, it is unlawful for “any person, directly or indirectly, . . . [t]o make any untrue statement of a material fact” in connection with the purchase or sale of securities. 17 CFR §240.10b–5(b). To be liable, the adviser must have “made” the material misstatements in the prospectuses.

The US Supreme Court says no. It was the fund itself that made the false statement, not the investment adviser. They are legally separate entities with separate boards. In fact, the board of the Janus fund was more independent than required by statute. Only the fund, not the adviser, has the obligation to file the prospectuses with the SEC.

This rule follows from Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., 511 U. S. 164 (1994).  The Court held that Rule 10b–5’s private right of action does not include suits against aiders and abettors. Suits against entities that contribute substantial assistance to the making of a statement may be brought by the SEC. Private parties can only bring suit for direct statements. A broader reading of “make,” including persons or entities without ultimate control over the content of a statement, would substantially undermine Central Bank, said the Court, If persons or entities without control over the content of a statement could be considered primary violators who “made” the statement, then aiders and abettors would be almost nonexistent.

It’s not that Janus didn’t suffer for allowing market timing. In 2004, Janus reached a settlement with the SEC for market timing allegations Janus paid $100 million in disgorgement and civil penalties. A big chunk of that cash was returned to the fund shareholders.

The Supreme Court decision merely draws the line at a derivative lawsuit by the adviser’s corporate shareholders.

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Image is As janus rostrum okretu ciach by Ultima Thule in Wikimedia Commons

Corruption and Twitter

“If someone is being hit for a bribe, isn’t the easiest thing just to put it on Twitter? It goes round the world in next to no time.”

Richard Alderman, head of the U.K.’s Serious Fraud Office, is apparently serious about Twitter. After self-congratulating themselves for organizing the government overthrows in North Africa and the Middle East, social media sites are apparently ready to stop global corruption.

So I decided to search through Twitter to see what it had to say about bribery. I started with what I thought would be the most obvious using #bribe. The most common messages using that hashtag looked something like this example:

Had to resort to the best method of all just to get my niece to come to Target with me #bribe #sparklynailpolish

Not exactly focusing on the world’s problems.

But I did notice a message from @IPaidABribe, connected to the IPaidaBribe.com the Indian website mentioned in the Financial Times article. That led to this message:

I suppose that is closer to what Mr. Alderman was talking about.

On the other hand Mr. Alderman is in charge of enforcing the UK Bribery Act which makes it a crime to pay a bribe. So if you do report a bribe on Twitter, Mr. Alderman would be responsible for bringing charges against you. The SFO has said they would use prosecutorial discretion when bringing charges, so from a practical matter it would seem unlikely that you would end up with charges against you. But still, would you publicly announce that you just broke the law?

A few days ago, I heard about the Bribespot app for your smartphone that allows you to report bribery and see where it happening using the mapping tool. That would hide your identity when making your bribery report.

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Compliance Bits and Pieces for June 10

Here are some recent compliance-related stories that caught my eye.

Investment Advice from George Carlin by Kent Thune in The Big Picture

Try not to live in a hypothetical world.

“What if there were no hypothetical questions?” ~ George Carlin

Regulatory Delay Stokes Unease Over Dodd-Frank by Deborah Solomon and Victoria McGrane in the Wall Street Journal

Banks, investors and companies are scrambling to cope with uncertainty caused by regulators’ delays in fleshing out the Dodd-Frank financial-overhaul law, amid fears the holdup might disrupt the $583 trillion derivatives market and spark a wave of lawsuits. More than 100 new derivatives requirements in the law take effect on July 16, even though regulators have yet to issue final rules in the affected areas. The holdup raises concerns that a large swath of the financial system might be thrown into legal gray areas.

Lockheed Martin Gets Into Step With UK Bribery Act With New Policy by Samuel Rubenfeld in WSJ.com’s Corruption Currents

In one of the first examples of a multinational company publicly adapting its compliance procedures to the U.K. Bribery Act, Lockheed Martin Corp. said in a regulatory filing late Monday on behalf of a former subsidiary that it is changing its internal policy in light of the new law.

US Senators and Rep. Frank Urge SEC to Exclude Banks from Municipal Advisor Regulatory Regime in Jim Hamilton’s World of Securities Regulation

In the view of the Senators and Rep. Frank, this broad requirement would move the regulations beyond the intent of the legislative language and have the unintended consequence of subjecting many banks and bank personnel to onerous regulation regardless of whether they provide the type of advice that would warrant regulation under Dodd-Frank. Many banks provide a broad range of banking services to municipalities, they noted, including deposit, basic cash management, lockbox, and short-term lending services.

Finally, Some SEC Action on the July 21 Deadline for Fund Managers

If you’re a private fund manager you have been worried about the looming July 21 deadline for registration. Given the 45 day review period, the filing deadline was June 6. That came and went without the SEC having the rules in place for registration. Sure, the SEC commissioners and staff have been saying the plan to extend the deadline. But, still no extension.

Looking ahead to June 22, it looks like the SEC will finally take up the formal action. The Open Meeting for June 22 is all about the Investment Advisers Act.

Agenda:

Item 1: The Commission will consider whether to adopt new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to give effect to provisions of Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration of investment advisers with the Commission, require advisers to hedge funds and other private funds to register with the Commission, and address reporting by certain investment advisers that are exempt from registration.

Item 2: The Commission will consider whether to adopt rules that would implement new exemptions from the registration requirements of the Investment Advisers Act of 1940 for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States. These exemptions were enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules also would clarify the meaning of certain terms included in a new exemption for foreign private advisers.

Item 3: The Commission will consider whether to adopt a rule defining “family offices” that will be excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.

Hopefully, they won’t change their mind about extending the deadline.

Crowdsourcing the Purchase of a Beer Company

Some beer lovers who were fans of Pabst Blue Ribbon heard that its parent company, the Pabst Brewing Co., was up for sale. The previous owner had died, leaving it to a charitable trust. Charities couldn’t hold on to the asset so they had to sell it.

The beer lovers were a few hundred million dollars short on the purchase price. This is the 21st Century, so they decide to create a website, buyabeercompany.com, to crowdsource the purchase price. They even set up a Twitter account and Facebook page. Each investor would receive a “crowdsourced certificate of ownership,” as well as beer of a value equal to the amount invested.

Those of you with even a vague understanding of securities laws will see that this will not end well.

The fundraising effort was relatively successful. They elicited $14.75 million in pledges during their first few weeks. Apparently, they eventually raised $200 million in pledges from more than 5 million pledgors.

That was not enough money to purchase the company, but it was enough to get in trouble with the Securities and Exchange Commission.

Under Section 5(c) of the Securities Act, it’s unlawful to offer to sell a security unless it is registered with the SEC or there is an applicable exemption. There is no exemption for beer lovers.

From the SEC Administrative Order, it sounds like the beer lovers thought that by merely asking for pledges to eventually buy the company they were not offering securities for sale. The SEC disagreed and pointed to Section 2(a)(3) of the Securities Act that defines “offer to sell” as “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.”

So how does Kickstarter not violate Securities Law? Those projects involve selling a product, not selling securities. I pledged for a trebuchette project on Kickstarter. I get two of the Trebuchettes; I don’t get an interest in the company making the product.

I suppose the beer lovers could merely have pre-sold cases of PBR to raise capital. But if you think the securities laws are tough to deal with, try dealing with interstate liquor sales.

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