Social Media and Compliance

Here are materials from my presentation on Social Media and Compliance at the EthicsPoint Regional User Forum.

SlideDeck:Social Media and Compliance

SlideDeck with Notes: Social Media and Compliance – Hosted on JD supra

Sites Shown:

Doug’s Thoughts on Compliance Guidelines

Social Media Site Shown:

Doug on the Social Media Site Shown:

New Rules of the Game under the New York Public Pension Fund Reform Code of Conduct

Cleary Gottlieb put together a useful Alert Memo on The New Rules of the Game under the New York Public Pension Fund Reform Code of Conduct (.pdf) They outline the key provisions of the Reform Code and suggest action steps for investment firms that do business (or seek to do business) with New York Public Pension Funds and may become subject to its requirements or similar requirements.

The principles reflected in the Reform Code are likely to extend beyond the agreement with Carlyle, whether other industry participants voluntarily agree to abide by them or they are incorporated into new federal and/or state legislation or regulations. The Attorney General’s office has indicated that it expects the Reform Code to establish a generally applicable framework for relationships between Public Pension Funds and investment firms going forward; at a minimum, it appears likely that firms seeking to do business with New York Public Pension Funds will be asked to be bound by the Reform Code. Attorney General Cuomo has described the Reform Code as representing the “new rules of the game” and praised Carlyle for “leading the industry toward critical change of the public pension investment system.”

EthicsPoint Regional User Forum

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Today I am attending the EthicsPoint Regional User Forum in Natick, Massachusetts. Here is the agenda:

  • EthicsPoint Executive Overview – Bill Piwonka, EthicsPoint Senior Director of Marketing will share insight on all things EthicsPoint – including product roadmap into 2010
  • Management, Oversight, and Analytics – A panel of experts will share best practices and ideas on using EthicsPoint’s reporting and analytics to drive transparency and insight into the risks facing your organization
  • Client & Industry Benchmarking Data –  See how your organization’s reporting statistics compare to others in your industry and the entire EthicsPoint customer base
  • Social Media in Compliance – Doug Cornelius (hey that’s me!) will lead a discussion on how you can incorporate tools such as LinkedIn, Twitter, Facebook, YouTube, Delicious and others to help foster a culture of integrity and compliance. Check out Doug’s website at https://www.compliancebuilding.com
  • Incident Awareness and Intake Roundtable – Roundtable opportunity to learn how other EthicsPoint customers have encountered and solved challenges around incident awareness and intake

I assume most of the sessions will be dark, but I may have some notes. I will be sharing my presentation and resources on Social Media in Compliance in a later post.

EthicsPoint provides an anonymous complaint and tip hotline for my company.

Sustainability, Ethics and Business Performance

Ted Nunez, Ph.D. Director, Ethics & Corporate Compliance at Kaplan EduNeering gave the presentation on this webinar. Compliance already has a lot on its plate, does sustainability also belong there?

These are my notes:

To start, what is corporate social responsibility? It depends on who’s asking. Different companies have different views and different needs. It’s not just about the environment.

Ted set out three meanings of sustainability:

1. Environmental sustainability
2. Sustainable business practice
3. Sustainability – synonymous with CSR (or CR)

The shift in sustainability is moving from a mere public relations ploy to a strategic position.

Ted pointed out that consumers drive demand and offered up a “Green Gauge” (from a IBM Global 2008 CEO Study):

  • True-blue greens – 30%
  • Greenback greens – 11%
  • Sprouts – 26%
  • Grousers – 15%
  • Apathetics – 18%

Another driver is reputation and brand. A Fortune Magazine study found that a company’s intangible assets account for 75% of a company’s total value.

Another driver is to attract and retain employees.  Ted offered up these four factors related to greater employee happiness:

  • Contributing to something bigger than ourselves
  • Experiencing “flow,” or full engagement, regularly
  • Expressing our gratitude to others
  • Being emotionally connected

Ted went on to espouse some principles of sustainable business performance:

  • Redesign Processes, Products and Facilities
  • Measure Environmental and Social Impacts
  • Build a Culture of Sustainability

New York Public Pension Fund Reform Code of Conduct

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In a widely publicized story, The Carlyle Group has agreed to adopt New York Attorney General Andrew Cuomo’s Public Pension Fund Reform Code of Conduct. It is the first money manager to adopt Cuomo’s new “code of reform” for the municipal-pension market. (Carlyle executives will not be subject to any criminal liability under the settlement with the NYAG.)

It is not clear how the ban on placement agents will interact with the SEC limitations on general solicitation under Rule 502. Many private investment funds use a broker/dealer as an intermediary with potential investors (including public pension funds) to comply with the SEC rule. It seems like the ban on placement agents could hurt the ability of smaller funds and newer funds to obtain investments from public pension funds. If a private investment fund seeking investors has no existing relationship with the public pension fund, then contacting the public pension fund directly could be considered part of a general solicitation in violation of SEC rules. The placement agent, if a licensed broker/dealer, can help establish the relationship to avoid a general solicitation.

References:

Image is from Wikimedia commons under Creative Commons License: NYStateMap2.PNG.

Have a Coke and . . . Alternative Billing

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Many have been contemplating and prognosticating the death of the billable hour for lawyers. I found it interesting to see a similar movement in the advertising industry. (I was unaware that the advertising industry also worked on a billable hour model.)

A story in the latest issue of The Economist points to a movement to pay advertising agencies for value, not hours: Clock-watchers no more. “On April 20th Coca-Cola said it would adopt a ‘value-based’ compensation system for the advertisers that do work for its 400 brands. Rather than paying advertising agencies for hours worked, Coke will pay for results achieved.”

The New Coke model covers an advertising agency’s costs, plus a bonus. The bonus depends on measured results, including overall performance, and the sales and market share of the products being advertised. Coke states that the goal of the program is not to cut costs, but to inspire creativity and efficiency.

I wonder if the legal department at Coca-Cola is following the lead of the advertising department?

Supreme Court to Rule on Sarbanes-Oxley

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On Monday, the Supreme Court agreed to rule on the constitutionality of the Public Company Accounting Oversight Board. The Sarbanes-Oxley Act passed in 2002 created PCAOB as a new government agency to regulate firms that audit the books of publicly traded companies. The key question in the case is whether the Act violated the separation-of-powers doctrine. The case is Free Enterprise Fund v. PCAOB (08-861).

In this challenge, Free Enterprise Fund and Beckstead and Watts, LLP, LLP contend that Title I of the Sarbanes-Oxley Act of 2002 , 15 U.S.C. §§ 7211-19, violates the Appointments Clause of the Constitution and separation of powers because it does not permit adequate Presidential control of the Public Company Accounting Oversight Board. Congress made the Board’s exercise of its duties subject to the control of the Securities and Exchange Commission. The SEC sets the rules and may remove members. In turn, the President appoints members of the SEC, with the advice and consent of the Senate, and may remove them for cause. In appellants’ view this  scheme vests Board members “with far reaching executive power while completely stripping the President of the authority to appoint or remove those members or otherwise supervise or control their exercise of that power.”

Effectively, they object that the members of PCAOB, an independent agency, are appointed by the SEC, another independent agency, instead of the President. Neither the President of the United States nor a Presidential alter ego possesses any power to remove PCAOB members for cause or otherwise.

The D.C. Circuit did not accept this challenge and ruled in favor of PCAOB and the United States.

References:

Insider Trading at the SEC

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A report from the SEC’s Inspector General has publicized that two attorneys at the Securities and Exchange Commission are under “active” criminal investigation by the FBI for trading stocks based on inside information. Bad news for an agency that is still under fire for missing the Madoff fraud.

Besides the salacious news, there are some items in the report that I think are interesting for a compliance professional.

According to some undated material, there was a thought in the early days of the SEC that its employees should not be permitted to trade in securities at all. That position was not finally adopted, but there is along history of limiting the ability of SEC employees to trade in securities. The restrictions are designed to ensure public confidence that Commission staff are not benefiting personally with respect to their information about securities. There is also an important need to prevent real and apparent conflicts of interest.

Rule Five of the Commission’s Conduct Regulation, 17 C.F.R. 200.735-5, contains the limitations applicable to all SEC Commissioners and employees. Some key limitations are:

  • Carrying securities on margin, purchasing securities with borrowed funds, and selling short
  • Purchasing securities of a company that to the employee’s knowledge is involved in current Commission investigations or proceedings
  • Purchasing or selling options, futures, or options on futures
  • Selling a security that has been held for fewer than six months

The SEC has a detailed reporting structure that employees must follow when buying and selling securities. It sounds like the structure doesn’t work.

“Our investigation revealed that the Commission lacks any true compliance system to monitor SEC employees’ securities transactions and detect insider trading. In addition, the OIG found that there is a poor understanding and lax enforcement of the Rule 5 reporting requirements.”

The SEC requires the investment advisers it regulates to have strict controls to avoid insider trading. It seems they lack the control themselves.

CBS News video story:

References:

When Someone Steals Your Content

The web is a cut and paste world. Inevitably, someone will steal your blog post content. Rarely is their much you can do about it.

Another compliance blog copied my post on Perspectives on Hedge Fund Registration and plopped it into their blog.

They were lazy and just copied the html, leaving the picture hotlinked to my site. That means I can change the image on them, leaving a message for its readers to see that the publisher is a thief. So I replaced the picture of Paul Kanjroski on my server with a new image.

Thanks to Dominic Jones of IR Web Report for showing me how to do this (its easy).

Here is the result:
Fun games with content thieves

New Custody Rules for Investment Advisers

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The Securities and Exchange Commission proposed rule amendments as part of their Open Meeting on May 14, 2009. They talked about the proposed rules, but have not actually made them available. It is hard to judge the potential impact of the rules with being able to see them.

According to the press release and the speech by Mary Schapiro here is a summary of the proposed rules:

  • All registered investment advisers with custody of client assets will undergo an annual “surprise exam” by an independent public accountant to verify those assets exist.
  • If you are an investment advisers whose client assets are not held or controlled by a firm independent of the adviser, you will be required to obtain a SAS-70 report that describes the controls in place, tests the effectiveness of those controls, and provides the results of those tests.
  • You would be required to disclose in public filings with the SEC the identity of the independent public accountant that performs your “surprise exam.”
  • The proposed rules would require that all custodians holding advisory client assets directly deliver custodial statements to the clients instead of through the investment adviser, and that advisers opening custody accounts for clients instruct those clients to compare account statements they receive from the custodian with those received from the adviser.

According to Commissioner Schapiro: “We are taking this action in response to major investment scams — such as Madoff — and many other potential Ponzi schemes.”

Public comments on the proposed rule amendments must be received by the Commission within 60 days after their publication in the Federal Register.

References: