Doug Cornelius on compliance for private equity real estate
On Thursday, May 7, 2009, 11:00 a.m., the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will hold a hearing on: “Perspectives on Hedge Fund Registration”
The Committee will be offering a live webcast of the hearing.
The Securities and Exchange Commission brought its first insider trading enforcement action involving credit default swaps. Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners L.P., and Jon-Paul Rorech, a salesman at Deutsche Bank Securities Inc., are charged with insider trading in credit default swaps of VNU N.V., an international holding company that owns Nielsen Media and other media businesses.
The SEC’s complaint alleges that Rorech learned information from Deutsche Bank investment bankers about a change to the proposed VNU bond offering. This change was expected to increase the price of the CDS on the VNU bonds. Rorech tipped Negrin about the contemplated change to theVNU bond offering, and Negrin then purchased CDS on VNU for a Millennium hedge fund. When news of the restructured VNU bond offering became public, the price of VNU CDS substantially increased. Negrin closed Millennium’s VNU CDS position at $1.2 million profit.
“This is the first insider trading enforcement action involving credit default swaps,” said Scott W. Friestad, Deputy Director of the SEC’s Division of Enforcement. “As alleged in our complaint, Rorech and Negrin checked their integrity at the door and schemed to engage in insider trading of CDS to the detriment of investors and our markets.”
James Clarkson, Acting Director of the SEC’s New York Regional Office, added, “CDS may still be obscure to the average individual investor, but there is nothing obscure about fraudulently trading with an unfair advantage. Although CDS market participants tend to be experienced professionals, there must be a level playing field with even the most sophisticated financial instruments.
It should not come as no surprise that the buying and selling of Credit Default Swaps is subject to the insider trading laws.
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Crystal M. Consonery, PhD, CCEP shared the experiences of Home Depot during the 2008 Corporate Compliance & Ethics Week. The goal was increasing awareness of the Corporate Compliance department. So they decided to use Corporate Compliance & Ethics Week to launch their departmental awareness and branding.
One of Home Depot’s eight core values is “Doing the Right Thing.” Corporate Compliance is the embodiment of the value: Doing the “right” thing was at the forefront when they were tailoring their message to meet the needs of the company’s diverse population and in the selection of events and topics of discussion that would appeal to associates at different levels
in the organization.
Their schedule of events was announced through various communication channels, including elevator posters, lobby easels, the company’s weekly communication newsletter, and a company-wide communication from the CEO. They also invited external corporate compliance colleagues to the week’s events.
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While FINRA has a very strict limitation on advertisements focusing on procedures, investment advisers have a principles driven approach to limitations on advertising.
To start, an advertisement is any communication addressed to more than one person that offers (1) analysis concerning a security, (2) any information to used in making a determination to buy to sell a security, or (3) any investment advisory service with regard to securities. That means bulk emails, television ads, radio ads, websites, and social networking sites are advertisements. If you label yourself as an investment adviser in your Facebook profile, Twitter profile, or blog information, those sites are advertisements. Even if you use them solely for personal purposes, they may be considered an advertisement if you mention securities or offer your services.
Given the broad definition of advertisement, you should just assume that your activity on a social networking site is an advertisement.
Let’s focus on the things you can’t do in an advertisement and then come back to how they affect an investment adviser’s use of the internet and social networking sites. These all come from the general prohibition on fraud under Section 206 of the Investment Advisers Act.
First, you can’t have “any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.” That means no recommendations on LinkedIn or other social networking site. That means you would need to moderate your blog comments and delete any that seem like a testimonial or recommendation.
Second, you can’t refer to past specific recommendations of securities. However, you can separately provide a separate detailed list of all past recommendations over at least the past year, with name of the security, the date recommended, and the price at which it was recommended. You also need to include a legend that past performance is not an indication of future performance. That means you can’t advertise your past success. Effectively, you can’t cherry-pick your best performing securities recommendations. You also need to disclose all material facts necessary to avoid unwarranted inference.
Third, you can’t advertise a graph, chart, formula, or other device for use in determining which securities to buy or sell or when to do so.
Fourth, you can’t offer any report, analysis, or other service for free, unless it is actually entirely free and without any condition or obligation.
Fifth, your advertisement can’t have any untrue statement or material fact or otherwise be false or misleading.
In looking at these principles, you can’t communicate something on a web 2.0 site that you could not put in a newspaper advertisement.
There has not been any additional guidance from the SEC on the use of Web 2.0 by investment advisers. In a speech last week, Mary Schapiro said that the SEC “hasn’t come to a resolution on the new technology.” That alone may shy investment advisers away from using web 2.0 and social networking sites.
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Can a lawyer hire a third person to send a “friend request” to a witness? According to an opinion from the Philadelphia Bar Association’s Professional Guidance Committee the answer is no.
Although the information on someone’s Facebook profile is discoverable, a lawyer can’t try to access the page through deception. Although imperfect, I liked this analogy in the Bar Opinion:
The inquirer has suggested that his proposed conduct is similar to the common — and ethical — practice of videotaping the public conduct of a plaintiff in a personal injury case to show that he or she is capable of performing physical acts he claims his injury prevents. The Committee disagrees. In the video situation, the videographer simply follows the subject and films him as he presents himself to the public. The videographer does not have to ask to enter a private area to make the video. If he did, then similar issues would be confronted, as for example, if the videographer took a hidden camera and gained access to the inside of a house to make a video by presenting himself as a utility worker.
This opinion should not affect a workplace from putting a sensible policy in place for dealing with Facebook and other Web 2.0 tools. Make sure you have a Blogging / Social Internet Policy.
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The Society of Corporate Compliance & Ethics is promoting the week of May 3-9, 2009 as Corporate Compliance & Ethics Week.
The fi360 Fiduciary Score is a quantitative evaluation of how well a fund meets a minimum set of due diligence criteria. The score can quickly help identify a list of Mutual Funds and Exchange Traded Funds that are worth further research in your selection process. You can also use the score as part of your ongoing monitoring process since it can highlight funds with potential deficiencies.
If you are an investment adviser, you need to conduct your diligence on the investment choices you distribute. As we saw in the Hennessee Group administrative action, if you promote your diligence program you have to actually follow that program. [Failure to Conduct Diligence Can Lead to SEC Sanctions]
The fi360 scoring system weights a fund’s standing in relation to thresholds in nine areas. The more points, the worse the fund choice. Zero is good and 100 indicates significant shortfalls. The nine areas for scoring:
Fi360 offers investment fiduciary education, practice management, and support. They also offer training and certification for investment fiduciary professionals.
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AB 1825, (California Government Code 12950.1) mandates that employers who do business in California and employ 50 or more employees provide two hours of sexual harassment prevention training to supervisors located in California at least once every two years.
Kaplan Eduneering offered a webinar: What You Should Know About California AB 1825 – Harassment Prevention Training for Supervisors. Thomas H. Petrides a Partner at K&L Gates LLP gave the presentation. These are my notes.
The law was first enacted effective January 2005, so for many employers, 2009 is another required “training year”.
In August of 2007, the California Fair Employment & Housing Commission issued Regulations regarding the required content of the training materials for AB 1825 harassment prevention training programs, including “E-learning” interactive, computer-based programs.
“Supervisors” have a broad definition. Anyone that has the authority to direct other employees may be enough to classify that person as a supervisor.
Under California law, the employer will be strictly liable for unlawful harassment of its supervisors, even if the harassment was unknown by the employer. (This is different than federal law.)
Training is only required for supervisors that are located in California. But if you don’t do the training for other similar supervisors in other states, you risk having a different standards attack in a lawsuit.
It is better to be over-inclusive in providing the training. The regulations provide that attending training does not create an inference that the employee is a supervisor.
The supervisors have to stay for two full hours, whether is in person training or remote training. If you leave 15 minutes early, you are not sufficiently trained. Tom pointed out that the training need not be two consecutive hours.
New supervisors have to received training within 6 months. However, if it’s a new employee and they received training at their prior job, you can use that. The burden is on the new employer to show that the prior training was sufficient.
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The Swine Flu has spread in the United States with about 100 confirmed cases in over 10 states. There has even been one confirmed death. These are still very small numbers.
Keep in mind that the CDC estimated that about 36,000 people died of flu-related causes each year, on average, during the 1990s in the United States. So one death related to the swine flu, no matter how tragic, is not significant as a nationwide health problem. The Swine Flu has a long way to go to become even an average influenza outbreak.
Personally, I am not worried, still take public transportation, and don’t wear a surgical mask when I am out. (To be on the safe side, I have not been kissing any pigs.)
Although I am clearly skeptical that the Swine Flu will arise to a pandemic, all the news coverage did make think about the ethical issues related to pandemic. Earlier this week I focused on the disaster recovery and compliance issues related to a pandemic. I decided to take a detour from business ethics and took a look at medical ethics.
There are some interesting ethical issues that come into play with a pandemic. Who gets treated first? Who doesn’t get treated if you have to ration supplies?
The CDC takes the position that the over-riding, guiding principle in pandemic influenza management is the preservation of a functioning society. That means medical providers, public safety personnel, and individuals essential to the “functioning of key aspects of society” get treated first. (I assume that compliance officers do not fall into any of those groups.)
In this video, Markkula Center for Applied Ethics Director of Bioethics Margaret R. McLean talks with Center Executive Director Kirk O. Hanson about the recent outbreak of Swine Flu and some of the ethical issues it may pose.
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Florida fund manager Arthur Nadel was indicted Tuesday on criminal charges for allegedly soliciting hundreds of millions of dollars in investor money under false pretenses and misappropriating client funds. Mr. Nadel, 76 years old, was charged in a 15-count indictment with mail fraud, securities fraud and wire fraud.
“It’s a much more complex story than the indictment may suggest,” said Mark Gombiner, Mr. Nadel’s lawyer. “We’re going to be evaluating what our defenses are.” Mr. Gombiner said his client will plead not guilty.
Previously, the SEC had filed a complaint against Mr. Nadel related to the same frauds perpetrated on his investors. “Nadel solicited prospective clients to invest in the funds by making various misrepresentations about the performance and value of the funds, including that the net asset value of each of the funds was tens of millions of dollars,” the U.S. Attorney’s Office in New York said in a statement. “Nadel also claimed to investors that his purchases and sales of securities in the Funds had generated cumulatively more than $271 million in gains. In truth, Nadel’s trading resulted in an overall net loss in the funds.”
Back in January, Nadel went on the run and spent two week in hiding. He had ditched his car in an airport parking lot. One of his investors had demanded an independent audit after the fallout form the Madoff scandal.
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