Securities Compliance Sentinel - Analysis of Cutting Edge Securities Industry Issues

On January 1, 2013, California joined Maryland and Illinois in restricting securities employers' access to their employees' and job applicants' social media accounts.  This new law was announced on Twitter, and provides that an employer cannot require or request an employee or applicant to:

• disclose a user name or password for the purpose of accessing personal social media;
• access personal social media in the presence of the employer; or
• divulge any personal social media, except as provided in subdivision.

The law also prohibits discharging, disciplining, or retaliating against an employee or applicant by an employer who violates this law.  Employers may still terminate or sanction an employee or applicant if there is some other law that would allow such termination or sanction.  Further, such information may still be requested if it is relevant to an investigation or allegation of employee misconduct or violation of applicable laws and regulations.  However, the information may only be used for that investigation or a related proceeding.  Additionally, in what may be somewhat of a saving grace, the law does not apply to employer-issued electronic devices. 

California joins a growing number of states who are restricting securities employers from having access to their employees’ social media.  Time will tell if this legislation is wise or opens up a giant loophole for securities fraud.

The SEC's Division of Trading and Markets released guidance on the JOBS Act’s elimination of restrictions on analyst communication and research reports concerning initial public offerings of emerging growth companies.

The real quandary that the guidance addressed was related to the Elliot Spitzer settlement between regulators and major investment banks announced in 2003.  This settlement required strict firewalls between research and underwriting activities at certain major banks.  The SEC Staff clearly indicated that the JOBS Act “does not change" the settlement, thus requiring said signatories to obtain court approval to alter the pact.  If these signatories sought to change the pact, the SEC would then consider such an application, and respond accordingly.  However, the  SEC's view at this point is that it has no authority to change this settlement with a rule. 

Essentially, the SEC has said nothing has changed with the JOBS Act, and, if investment banks want to take advantage of the JOBS Act provisions, they better be prepared for a Court fight from the SEC.

This blog entry about hedge fund insurance coverage almost sounds like a car insurance commercial.  Sadly, both are critical in today's modern society.

Given the current regulatory environment, volatile market conditions, and the public perception of the industry, hedge funds face enormous risk in doing business.  Hedge funds should carry both D&O and E&O Liability Insurance to protect directors, officers, managers and the fund itself from liability.

The hedge fund should have coverage for governmental investigations.  Additionally, the hedge fund also needs coverage for when it or its affiliates are alleged to have committed fraud.  However, the hedge fund must be cautious in this particular area because insurance companies, generally, try to avoid such coverage and will construe just about anything as an admission of wrongdoing or responsibility.  Finally, the hedge fund has to ensure that its insurance coverage will pay for defense costs since said costs are usually the most expensive part of the process.

In short, hedge funds cannot just assume that insurance coverage will be there.  Periodic audits and check-ups are required before anything arises.  Like most insurance coverage, you never want to have to use it, but that is why it is there so make sure it will work.

With the east coast in the midst of Hurrican Sandy, I am sure we are all thinking about a nicer place right now.  Apparently, the Seventh Annual National Institute on Securities Fraud is November 15-16, 2012 in New Orleans. For more information and to register, call 800-285-2221 or log on to:  http://www.ambar.org/sfr2012.

Recently, the Department of Justice and the Federal Bureau of Investigation indicated that they are working on enough insider trading cases regarding the hedge fund industry to take them five years or more to complete.  This clearly indicates that the DOJ and FBI are going to continue to find insider trading actions with hedge funds.  This appears to be a “growth industry” for lawyers. 

Additionally, although the DOJ has recently been  the subject of much criticism because certain FCPA cases have collapsed, it has indicated that it will vigorously continue to prosecute FCPA actions.  The DOJ believes that this is part of a broader issue requiring enforcement.

Thus, there is no relief for the weary on the horizon.

The SEC approved a number of rule changes promulgated by the MSRB to facilitate risk-based examinations for participants in the municipal securities industry.  These municipal securities industry participants are, generally, FINRA members. 

In particular, the new rules, G-9 and G-16, relate to record preservation and periodic examinations, respectively.  It is believed that these new rules will allow FINRA to focus on the municipal securities industry participants who pose the greatest risk to the market.  FINRA will now be allowed to examine these participants every four years as well as require that certain records be maintained for four years rather than three. 

The new periodic examinations were immediately effective while the changes to record keeping are effective June 16, 2012.

Although the use of social media has been embraced by many industries, it is of particular concern for investment advisors and broker-dealers.

In many situations, the use of these outlets touch upon several areas.  For investment advisors and broker-dealers, the advertising requirements under the Investment Advisors Act of 1940 and certain Securities Exchange Act of 1934 provisions may be implicated when one uses social media, including various features on Linked In or Facebook.  Additionally, recordkeeping is a critical function required by both acts since this information must be maintained.  Further, it is likely that those who work for either and use social media sites, may require supervision.  Additionally, when one uses these types of communications, there are various regulations that require the firms to monitor these third party communications to ensure that, among other things, non-public information is not disclosed.  Firms would also be required to apply their audit function to these media policies and procedures internally, to determine if the procedures are effective.  Moreover, the SEC, FINRA and the states may begin to regulate these types of social media in amore forceful manner. 

As such, although social media venues may present certain benefits, the risk is palpable.

My colleague, Josh Horn, has written an amazing article that should be on every compliance officer’s desk.  It details methods for investigating and responding to ponzi schemes. 

In this day and age, we are met with another Ponzi scheme occurring or being uncovered almost every day.  Josh’s article is an exceptional primer since it details the steps for a proper investigation, as well as, disseminating the investigation results to the appropriate authorities.  Further, Josh lays out an approach to avoid litigation, and, if litigation does strike, responding to it.  This article appeared in the September – October 2011 Special Edition for the National Society of Compliance Professionals, in its publication, N.S.C.P. Currents, and may be viewed at www.foxrothschild.com/newspub/newspubArticle. aspx?id=4294970030.

I hope everyone considers it.

Recently, a bipartisan bill was introduced in the United States Senate that would require states to obtain the identity of persons who act behind corporations.  Essentially, this legislation would end the practice of unidentified persons forming corporations and remaining invisible. 

In particular, the legislation is designed to prevent hidden and faceless persons from running or hiding behind corporate entities.  The legislation would not require states to verify the information, but penalties would apply if any information was submitted falsely to the states.  The senators who introduced this legislation, specifically, are concerned about the potential for problems arising in shelf registrations as well as financial fraud.  Although the legislation has the support of a bipartisan group of senators, and a variety of law enforcement officials, it is not supported by regulated companies or financial services institutions. Further, the organization for Secretaries of State is against the legislation.  This organization claims the proposed legislation will increase burdens on their offices, who are already dealing with reduced state budgets.

In short, this bill may not ultimately succeed especially given that a prior version was defeated earlier.  However, one wonders if the states will take up this cause and require such information given the extent of the perceived issues relating to financial fraud in today’s markets.