US federal laws and regulations, as well as the rules of self-regulatory organizations, impose numerous yearly reporting and compliance obligations on private equity firms. While these obligations include many routine and ongoing obligations, new and emerging regulatory developments also impact private equity firms’ compliance operations. This post provides a round-up of certain annual or periodic investment advisory compliance-related requirements that apply to many private equity firms. In addition, this post highlights material regulatory developments in 2014 as well as a number of expectations regarding areas of regulatory focus for 2015.
Posts Tagged ‘Compliance officer’
Today [January 14, 2015], the Commission considers rules that are designed to address the lack of transparency in the security-based swaps (SBS) market that substantially contributed to the 2008 financial crisis. These rules are the result of the Congressional mandate in the Dodd-Frank Act, which directed the SEC and the CFTC to create a regulatory framework to oversee this market.
The global derivatives market is huge, at an amount estimated to exceed $692 trillion worldwide—and more than $14 trillion represents transactions in SBS regulated by the SEC. The continuing lack of transparency and meaningful pricing information in the SBS market puts many investors at distinct disadvantages in negotiating transactions and understanding their risk exposures. In addition, as trillions of dollars have continued to trade in the OTC market, there is still no mandatory mechanism for regulators to obtain complete data about the potential exposure of individual financial institutions and the SBS market, in general.
Two recent Dodd-Frank whistleblower awards suggest that the program is becoming the kind of “game changer” for law enforcement that many had predicted. The program, which took effect in August 2011, mandates the payment of bounties to persons who voluntarily provide information leading to a successful securities enforcement action in which more than $1 million is recovered. Informants are entitled to receive between 10 and 30 percent of the amounts recovered, with the precise amount to be determined by the SEC.
A series of developments threaten to blur the important distinction between the corporation’s legal and compliance functions. These developments arise from federal regulatory action, media and public discourse, policy statements from compliance industry leaders, and new surveys reflecting the increasing prominence of the general counsel. If left unaddressed, they could lead to significant organizational risk, e.g., leadership disharmony, misallocation of executive resources, ineffective risk management, and the loss of the attorney-client privilege in certain circumstances. The governing board is obligated to address this risk by working with executive leadership to assure clarity between the roles of general counsel and chief compliance officer.
Strong oversight by boards of directors—meaning typically by authorized board committees—of compliance-and-ethics (“C&E”) programs can be essential to promoting legal and ethical conduct within companies. In a variety of ways, board oversight should help to ensure that a program is effective and that directors and companies are otherwise meeting applicable C&E-related legal standards. Nonetheless, this is an area of uncertainty for many boards and managers, and can even be a struggle for some.
In Reporting to the Board on the Compliance and Ethics Program, published in the June issue of Compliance & Ethics Professional, we examine various aspects of such oversight from a law and good-practices perspective.
On September 30, 2013, the U.S. Securities and Exchange Commission (SEC)—quietly, and with little fanfare—released an informal statement of policy in the form of frequently asked questions (FAQ), in which it addressed its recent case against Ted Urban.  In doing so, the SEC shed light on when and how the agency will seek to hold legal and compliance personnel responsible for failing to supervise employees on the business side.
As many will recall, the Urban case was closely watched by securities legal and compliance professionals, who worried that a decision by the commissioners could be used by enforcement staff to make such professionals easier targets in future enforcement actions. Ultimately, the commissioners dismissed the case. That said, given the circumstances surrounding the case’s dismissal, legal and compliance officers were left with little guidance as to whether the case against Urban could be used against them to establish supervisor liability.
First, let me thank you all for taking part in today’s program. Events like this are an invaluable tool for regulators and market participants alike — not least of all because we get to see who the early frontrunners are for the next America’s Funniest Compliance Officer contest. As I’m sure you all know, that’s a real contest that was last held in 2011, although, given that there were only a handful of contestants who turned out to compete, maybe it’s more likely that none of you knew. In case you missed it, the winner brought down the house with a joke about a priest, an Irishman, a Frenchman and Rule 15a-6. It was hysterical — not Reg. M hysterical, but still hysterical.
All joking aside, it is essential that we as regulators and you as compliance officials continue to engage in this type of open dialogue and coordination to promote a robust culture of compliance across the securities industry. Indeed, your work is key to enhancing the Commission’s ability to protect investors and ensure that the markets in which they put their capital to work remain fair and efficient, a result which is in all of our best interests.
In January 2011, the Commission, with Commissioners Casey and Paredes dissenting, issued a staff report on a study, conducted pursuant to Section 913 of the Dodd-Frank Act, of the effectiveness of the existing regulatory standards of care that apply when brokers and investment advisers provide personalized investment advice to retail customers. In addition to mandating that study, Section 913 authorized, but did not require, the Commission to adopt rules establishing a duty of care for brokers identical to that which applies to investment advisors — in other words, a uniform fiduciary duty for brokers and investment advisors — and to undertake further efforts to harmonize the two regulatory regimes.
We recently conducted a survey of broker-dealer compliance officers to gather perspectives and practices around new regulatory initiatives and amendments that will likely have a material impact on financial institutions: the Dodd-Frank Act and FINRA’s know-your customer (KYC) and suitability rules.
We thought it would be useful to understand how firms and their compliance functions are responding.
The survey consisted of 12 questions focused on 4 specific initiatives:
- 1. The uniform fiduciary standard under Dodd-Frank Title IX
- 2. Regulation of the over-the-counter (OTC) derivatives markets under Dodd-Frank Title VII
- 3. The Volcker Rule regulating proprietary trading under Dodd-Frank Title VI
- 4. FINRA’s new KYC and suitability rules (FINRA Rules 2090 and 2111)
The role of the chief compliance (and ethics) officer is currently a hot, if confused topic. What does she do — ensure good process or enforce strict compliance? To whom does she report — GC/ CFO or to CEO/board? What is her role in shaping the company’s voluntary adoption of ethical standards — beyond what the law requires?
This issue has been thrust into high relief by regulators and enforcers who, in light of various scandals, want a more independent compliance function in corporations. For example, changes in the federal sentencing guidelines would give corporations extra credit if the “specific individual” in the corporation with “day-to-day operational responsibility for the compliance and ethics program” has direct access to the board of directors. The issue has also received attention in the resolution of various high-profile cases, including a recent Pfizer Inc. settlement of criminal and civil matters with the U.S. Department of Justice and the U.S. Department of Health and Human Services, which required that the company’s chief compliance officer bypass the GC and report directly to the CEO.
Let me offer a somewhat contrarian, more nuanced view about the critical importance of a chief compliance officer, but in a right-sized role.