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Recent Trends in Securities Class Action Litigation: 2017 Full-Year Review

The Harvard Law School Forum on Corporate Governance and Financial Regulation -

Posted by Stefan Boettrich and Svetlana Starykh, NERA Economic Consulting, on Wednesday, April 25, 2018 Editor's Note: Stefan Boettrich and Svetlana Starykh are Senior Consultants at NERA Economic Consulting. This post is based on a NERA Economic Consulting publication by Mr. Boettrich and Ms. Starykh.

In the 25th anniversary edition of NERA’s annual study, Recent Trends in Securities Class Action Litigation, we examine trends in securities class action filings and resolutions in 2017. New findings discussed in this year’s report include an increase in filings, again led by a doubling of merger-objection filings.

Highlights of the 2017 report include:
  • A record 432 federal securities class actions filed in 2017, the third straight year of growth, and a 44% increase over 2016.
  • Federal merger-objection filings more than doubled for the second consecutive year to 197 in 2017.
  • A total of 353 securities class actions were resolved in 2017—a post-PSLRA high. Of those, 148 cases settled, coming close to the 2007 record of 150.
  • The average settlement in 2017 fell to less than $25 million, a drop of roughly two-thirds compared to 2016.
  • Aggregate NERA-defined Investor Losses were $334 billion in 2017, a 50% increase over the five-year average.
  • Aggregate plaintiffs’ attorneys’ fees and expenses were $467 million, a drop of roughly 65% to a level not seen since 2004.


Compliance into the Weeds-Episode 79, Starbucks and Compliance

FCPA Compliance & Ethics -

In this episode, Matt Kelly and I go into the weeds to consider the recent racial incident at Starbucks store in Philadelphia where two African-American males were arrested for criminal trespass while waiting for a third colleague to join them for a business meeting. They had not purchased any products but were not engaging any [...]

The post Compliance into the Weeds-Episode 79, Starbucks and Compliance appeared first on Compliance Report.

The GDPR’s Impact on American Retailers

Corporate Compliance Insights -

How Businesses Can Minimize Their Risk It is estimated that well over half of U.S. businesses are out of compliance with the GDPR regulations set to take effect on May 25. Businesses are simply unprepared because they struggle with understanding the regulations and whether or not they are affected. Greg Sparrow touches on issues of GDPR, The post The GDPR’s Impact on American Retailers appeared first on Corporate Compliance Insights.

(This is only a summary. Click on the headline to view the entire article at Corporate Compliance Insights and participate in the discussion.)

Innovation in Operationalizing Compliance: Part I

FCPA Compliance & Ethics -

Over this three-part series, I will be visiting with Ben Locwin on how to more fully operationalize your compliance program. In Part I, we consider how embedding compliance as a key component of the business equation and the role of forecasting can aide in operationalizing compliance.  The Benefits of Embedding Compliance It all begins with [...]

The post Innovation in Operationalizing Compliance: Part I appeared first on Compliance Report.

How Much American IP Is China ‘Stealing?’

BRINK News -

This is the third piece in a week-long series on intellectual property. You can read the previous pieces here and here.

The U.S. has been justifying its intention to impose tariffs on more than $150 billion in Chinese products by claiming that they are a response to China unfairly gaining access to American trade secrets.

U.S. officials say China aims to cheat its way to dominance in high-value technological fields such as renewable energy, telecommunications and artificial intelligence.

The blue-ribbon Commission on the Theft of American Intellectual Property estimates the total cost to the American economy resulting from IP theft as between $225 billion and $600 billion annually. The commission labels China the “principal IP infringer.” However, only a portion of the IP value lost to China is stolen outright, notes Paul Goldstein, an IP expert at Stanford. Instead, it’s given away in negotiations with Chinese businesses, officials and investors.

The Danger of Joint Ventures

In some industries, China has long required foreign companies seeking access to the domestic market to enter into joint ventures with domestic firms. U.S. officials and some businesses say Chinese officials flout trade rules limiting the amount of technology that the Chinese partner can receive in a joint venture.

Nearly one in five (or 19 percent) of American businesses in China say they have been directly asked to transfer technology to a Chinese partner, according to a 2017 survey by the U.S.-China Business Council. Sixty percent of those firms said they made the transfer only reluctantly.

Exhibit 1: How Did Your Company Respond to a Request for a Tech Transfer?

Source: U.S.-China Business Council 2017 Member Survey

Licensing Requirements

China also uses onerous administrative review and licensing processes “to force the disclosure of sensitive technical information,” according to the Office of the U.S. Trade Representative. Foreign companies must submit to reviews and licenses to expand or establish operations or to offer products in the Chinese market. Chinese officials use the occasion to directly or indirectly ask for technical information.

There’s some debate as to how much sensitive technology is being disclosed this way, but many foreign companies see reviews and licenses as one of the most significant barriers to doing business in China.

Exhibit 2: U.S. Companies Experiencing Licensing Challenges in China

Source: U.S.-China Business Council 2017 Member Survey

Tech Acquisitions

U.S. trade officials contend that the Chinese government is directing private companies to buy American technology companies in tune with the government’s industrial policy. The Office of the United States Trade Representative states the Chinese government directs Chinese companies to acquire and invest in U.S. companies to obtain cutting-edge technologies and intellectual property.

Chinese foreign investment in the U.S. has grown sharply over the past decade.

Exhibit 3: Chinese Investment in the U.S.

Source: Office of the U.S. Trade Representative

Increasingly, this investment has taken the form of acquisitions rather than “greenfield” investments, trade officials say. And it’s grown particularly quickly in the high-tech and innovation-heavy sectors targeted by Chinese industrial policies.

Exhibit 4: Chinese Investment in High-Tech U.S. Sectors

Source: Office of the U.S. Trade Representative

In many cases, Chinese buyers contend that they have no ties to the government. Regardless, the U.S. administration is increasingly seeking to block Chinese acquisitions by arguing that economic leadership in advanced technologies is tied to the national interest.

Theft by Hacking

According to the Office of the U.S. Trade Representative, for over a decade, the Chinese government has “conducted and supported” cyber theft of American trade secrets to gain competitive advantage, according to U.S. trade officials.

Quantifying the extent and source of cyberattacks is difficult, for obvious reasons. But the Center for Strategic and International Studies, working with McAfee, estimates the total cost of cybercrime in North America is between $140 billion and $175 billion, or up to 0.87 percent of GDP.

Recently the Bureau of Industry and Security asked U.S. businesses about the impact of malicious cyber activity from all sources, not just China.

Exhibit 5: Impact of Malicious Cyber Activity on Companies

Source: Office of the U.S. Trade Representative

Assuming that China is gaining unfair access to foreign IP, are tariffs the answer?

Perhaps not, says Mr. Goldstein, the IP expert. He suggests pursuing relief through the Chinese courts by seeking criminal or civil penalties under the Economic Espionage Act or through the dispute resolution process established by the World Trade Organization’s TRIPs (Trade-Related Aspects of Intellectual Property) Agreement.

“Addressing these discrete appropriations [of IP] with trade sanctions,” he says, “is like performing microsurgery with a sledgehammer.”

FCPA Compliance: Automation and Mitigating Gifts, Meals, Entertainment and Travel Expenditures Risks (Part III of V)

Corruption, Crime & Compliance Blog -

The laundry list of companies that have been prosecuted for FCPA violations surrounding gifts, meals, entertainment and travel expenditures is lengthy.

Consider just two examples:

In SEC v. Diageo (2011) (copy Here), Diageo agreed to a $16 million settlement for a variety of illegal bribe payments and GMET expenses, including $64,184 spent on rice cakes and other gifts for the South Korean military over a four-year period, in small amounts of $100 to $300 per recipient.

In SEC v. Delta & Pine Land Company and Turk Deltapine, Inc. (2007), (copy Here), Monsanto discovered during pre-acquisition due diligence of Delta & Pine Land Company and Turk Deltapine that a Turkish subsidiary made payments of approximately $43,000 to Turkish government officials for the sale of cotton seed varieties.  The GMET expenses included cash, payment of travel and hotel expenses, air conditioners, computers, office furniture and refrigerators to multiple government officials.

Taking a step back, the corruption risks in this area are fairly obvious.  Gifts, meals, entertainment and travel expenditures are legitimate ways for companies to develop business and promote cordial relations with its customers, third parties and other entities with whom the company interacts.  As a legitimate source of funding, corrupt actors can abuse this source of funding to advance corrupt schemes and bribery.  As a result, gifts, meals, entertainment and travel expenditures remain a potential risk for companies.

The FCPA Guidance explains:

A small gift or token of esteem or gratitude is often an appropriate way for business people to display respect for each other. Some hallmarks of appropriate giving are when the gift is given openly and transparently, properly recorded in the giver’s books and records, provided only to reflect esteem or gratitude, and permitted under local law.

In particular, the FCPA Guidance provides some examples of prohibited GMET expenses:

  • A $12,000 birthday trip for a Mexican decision maker that included dinners and visits to wineries
  • $10,000 spent on dinners, drinks, and entertainment for a government official
  • A sightseeing trip to Italy for eight Iraqi government officials that included $1,000 in “pocket money” for each official
  • A chauffeur-driven trip around Paris for a government official and his wife

These examples are egregious.  For a compliance professional, the challenge is to provide your sales people with the examples that fall in the middle, to provide information that will help them make the close-call decisions confidently.

Many companies are purchasing or developing internal software solutions to promote GMET compliance.  In the past, companies relied on paper or electronic emails that was a time-consuming process requiring close manual review of GMET expense forms and chasing down approvals.  Today, compliance departments have the opportunity to leverage technology to automatically oversee GMET compliance.

With the help of automated solutions, companies can now more effectively monitor GMET expenses and intervene proactively to prevent possible abuse of a company’s GMET system for nefarious purposes.

Using automated solutions, companies are able to monitor on a real time basis GMET amounts spent by a variety of categories and specific risks, including:

  • Overall amount spent
  • Specific Recipients
  • Government Officials
  • Purpose of Expense
  • Approvals

For global companies, the challenges of GMET are more significant given the varying demands for GMET expenditures depending on local customs and business practices.  Many companies adhere to a single standard in all of its operations, while some may vary the specific policies depending on the local needs.  An automated solution provides increased capabilities to craft local policies, if warranted.  The need for locally-tailored poloicies always raises a significant tension with a global company’s desire to maintain consistent policies across the organization.  For that reason, many companies stick to a single, global-wide policy.

The post FCPA Compliance: Automation and Mitigating Gifts, Meals, Entertainment and Travel Expenditures Risks (Part III of V) appeared first on Corruption, Crime & Compliance.

New PwC Report: Age Diversity in the Boardroom

Corporate Compliance Insights -

Corporate boards that want to increase their diversity usually focus on gender and race. But are they paying enough attention to age diversity? PwC’s Census of Directors 50 and Under uncovers how younger directors may be setting the pace on specific areas inside the boardroom and explores what catalysts may lead to more age diversity. Areas The post New PwC Report: Age Diversity in the Boardroom appeared first on Corporate Compliance Insights.

(This is only a summary. Click on the headline to view the entire article at Corporate Compliance Insights and participate in the discussion.)

NIST Releases an Updated Version of its Cybersecurity Framework

Program on Compliance and Enforcement, New York University School of Law -

by Sabastian V. NilesMarshall L. Miller, and Jeohn Salone Favors

Last week, the U.S. Department of Commerce’s National Institute of Standards and Technology (NIST) released an updated Cybersecurity Framework that revises NIST’s baseline recommendations for the design of cybersecurity risk management programs.  In announcing its release, Commerce Secretary Wilbur Ross described the updated Framework as “a must do for all CEOs” and recommended that “every company” adopt the Framework as its “first line of defense.”  As with the prior version, the updated NIST Framework provides a useful tool to guide and benchmark company approaches to cybersecurity risk and will impact how regulators evaluate cybersecurity programs and incident responses across sectors.

The updated Framework, entitled Version 1.1, is intended to clarify and refine (rather than replace) NIST’s original 2014 Cybersecurity Framework, Version 1.0, and builds on the original version’s five core cybersecurity functions—Identify, Protect, Detect, Respond, and Recover—and tiered implementation system.  Instead of a “one-size-fits-all” approach, the Framework continues to be a flexible platform that can be customized to address the particular cybersecurity risks faced by any company.  

Of broader import, the updated Framework encourages companies to integrate cybersecurity objectives into strategic planning and governance structures and to ensure that cybersecurity is a central part of overall risk management.  In terms of other specific changes, Version 1.1 provides new guidance on how to use the Framework to conduct self-assessments of internal and third-party cybersecurity risks and mitigation strategies, includes an expanded discussion of how to manage cyber risks associated with third parties and supply chains, advances new standards for authentication and identity proofing protocols, and addresses how to apply the Framework to a wide range of contexts, such as industrial controls, the use of off-the-shelf software, and the Internet of Things.  

Though use of the Framework is voluntary for private sector entities and not intended to impose heightened regulatory burdens, the Federal Trade Commission has adopted and utilized the Framework as a benchmarking tool to assess the reasonableness (or inadequacy) of select companies’ responses to cybersecurity breaches in enforcement actions.  In a similar vein, the Securities and Exchange Commission has itself utilized the Framework and endorsed it as an aid to guide corporate cybersecurity policies, disclosures, and risk management. 

As the NIST Framework continues to develop into an important benchmark for cybersecurity policies and programs, public companies should review the updated Framework and consider how to use it to improve cybersecurity risk oversight and management (see the cybersecurity sections of our March 2018 memo on Risk Management and the Board of Directors for additional recommendations).

Sabastian V. Niles is a partner, Marshall L. Miller is of counsel, and Jeohn Salone Favors is an associate at Wachtell, Lipton, Rosen & Katz.

The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of New York University School of Law.  PCCE makes no representations as to the accuracy, completeness and validity of any statements made on this site and will not be liable for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with the author.

Breaking News in the Industry: April 24, 2018

Loss Prevention Media -

Suspect in multi-million dollar credit card fraud ring arrested

A suspect in 48 credit/debit card fraud cases has been arrested in Miami, according to the Pasco County Sheriff’s Office. Daniel Santos, 22, was arrested through a coordinated effort with the U.S. Marshalls Service and the Miami Dade County Police. Santos is currently held on no bond. He is charged with organized fraud and possession of stolen credit or debit card, among other related charges. Pasco deputies said Santos also has a history of violence to include battery, throwing a deadly missile, felon in possession of a firearm, lewd and lascivious sexual battery on a victim under 16, assault on law enforcement, fleeing to elude, and multiple drug arrests. Santos’ fraud crimes have been occurring since March 2015. Deputies said Santos obtains credit/debit cards by either buying them from people, stealing them, or obtaining them through “mail box hopping.” His fraudulent activity with other criminal associates has become a multi-million dollar fraud ring.

Pasco sheriff’s Detective Spencer Hubbell received his first case as an Economic Crimes Unit detective in 2016, which was a Santos case. Over the course of the next year, he was assigned numerous other fraud cases. Hubbell was able to link many of the cases together as being committed by Santos. Hubbell arrested Santos several times since receiving the first case, however, Santos was always able to make bond and continue his lifestyle of criminal activity, deputies said. With a total of 48 fraud cases, Hubbell said he was determined to locate Santos and put a stop to his crime spree. During the past week, Hubbell and Pasco sheriff’s Detective Darren Hill put their computer skills to use to locate where Santos was hiding, as Santos knew there were active warrants for his arrest. These detectives watched Internet videos Santos posted and noted specific geographical details regarding the surroundings where Santos was hiding. They were able to successfully identify the exact condominium building seen in the videos. That led to Santos’ arrest.   [Source: Tampa Bay Reporter]

Customer captures Apple store grab and run on smartphone [Viral Video]

Like other large retail outlets, Apple stores have their fair share of thefts, but it’s not often that such incidents are caught on a customer’s smartphone. Police are investigating a robbery that took place at one of the Cupertino company’s stores on the Plaza in Kansas City. One shopper, Margs Dickinson, managed to capture the crime while she was in the store buying an Apple Watch. She later posted the video on her Facebook page. Dickenson told the Kansas City Star that she happened to have her phone out and started recording on SnapChat. The three men are seen grabbing devices from the store as the alarms ring. It appears that one of them is holding an iPad—possibly an expensive 12.9-inch Pro, judging from its size. There’s also a tether dragging along the floor, which could have been what set the alarms off. The men then grab a number of iPhones before fleeing the scene on foot. Back in 2016, Apple started removing the security cords on its iPhones in a small number of stores in the UK and Canada. The untethered handsets have a ‘kill-switch’ that mean when they leave the outlet’s WiFi range, they can’t do anything but ring for Find My iPhone until the battery dies. They are also Activation Locked using iCloud as a deterrent. The thefts were a lot more brazen than a technique used a couple of years ago, which involved criminals wearing blue shirts like those worn by Apple store workers and posing as employees, enabling them to stealing goods from the stores. Anyone who has information on the robbery should call the TIPS Hotline at 816.474.TIPS.  [Source: TechSpot]

Fraudster pleads guilty to $179K credit card fraud scheme

A 22-year-old Queens, New York man pleaded guilty to his role in a $179,000 credit card fraud scheme that spanned the East Coast, federal prosecutors said Thursday. Xia Bin Xu, of Bayside, was part of a fraud ring that stole credit card information from more than 100 cardholders to create fake credit cards, which they used to buy luxury goods from retail shops up and down the East Coast and sell them on the black market from July 2014 to April 2015, court records show. The scheme was headed by two Flushing men – ringleader Mei Bao Lu and his second-in-command Yang-Shi Lin – who skimmed credit card information from dozens of cardholders to create fake credit cards, said U.S. District Attorney John Durham. Lu distributed the fake credit cards to several “buyers” – including Xu – with instructions to purchase gift cards and luxury merchandise. He then sold the goods at a discount to be put on the black market, Durham said. The group used 120 counterfeit credit cards – issued by 18 unknowing financial institutions – to make around $179,000 fraudulent purchases in Connecticut, Florida, Maine, Massachusetts, New York, New Jersey, Pennsylvania and West Virginia, court records show. In addition to being a buyer, Xu recruited other members to buy for the fraud ring, Durham said.

Cops began investigating the scheme in February 2015 when Connecticut police departments began receiving complaints about unauthorized charges to their credit and debit cards, court records show. The investigation found many of the fraud complaints came from people who’d dined in the same Clinton, Connecticut restaurant earlier that month, authorities said.  Xu was arrested on Sept. 10, 2015 for his role in the credit card fraud scheme and later released on bond. On Wednesday, he pleaded guilty in a Connecticut federal court to one count of access device fraud. He will be sentenced to up to 10 years in prison for the crime on July 24. Xu was one of several members of Lu’s group to be convicted on similar credit-card related charges in Maine, New Jersey, New York and West Virginia state and federal courts. Lu and Lin also pleaded guilty to similar charges and were sentenced in early February – Lu to a year and a half in prison and Lin to a year and a day.   [Source: Bayside Patch]

Employee charged with theft from cash registers

Franco Smith, 18, of the 300 block of Englewood Avenue, Bellwood, Illinois, was charged with misdemeanor theft after an internal investigation at Home Depot,  where he worked, found he had stolen as much as $1,750 from various cash registers over a three-month period, police said. He is to appear for a hearing May 15 in Maybrook Court.  [Source: Chicago Tribune]

Woman charged in $7,000 Victoria’s Secret underwear theft

A California woman who allegedly stole more than $7,000 in underwear and other merchandise from Victoria’s Secret was captured by Medford, Oregon, police after she took a cab to her motel room. Harmonie Jewel Taylor, 25, faces two felony theft charges in Jackson County Circuit Court, accusing her of shoplifting more than $7,000 worth of merchandise from Victoria’s Secret at Rogue Valley Mall early Wednesday afternoon, then taking about $3,500 worth of items from Safeway stores later that evening, according to court documents filed in her case. At about 12:30 p.m. Wednesday, surveillance video at the lingerie chain allegedly showed Taylor filling several bags with underwear, according to Medford police. Mall security attempted to stop her, but she was able to flee the parking lot on foot, according to police. Taylor, who has a San Francisco address listed in court records, allegedly used a cab service to get from the mall to her motel room, court documents say. After obtaining surveillance photo stills from mall security, the cab company confirmed it gave a ride to a woman fitting Taylor’s description from the mall to the Motel 6 on Biddle Road, and motel staff identified her. At 9:18 p.m. Wednesday,

Medford police witnessed Taylor returning to her motel room via taxi, where she allegedly had in her possession two Victoria’s Secret bags filled with items taken from two Medford Safeway stores. The stolen merchandise, listed only as a “large amount of miscellaneous items” in Medford police reports, was valued at about $3,599. Taylor allegedly attempted to provide police with a false identity before her identity was confirmed through fingerprint records, according to court documents filed in the case. She has at least one California fugitive warrant charging her with robbery out of San Francisco. Taylor made her first court appearance Friday in the theft cases, along with the fugitive case. She remained in the Jackson County Jail without bail. A call to Medford police wasn’t immediately returned, but records show that Victoria’s Secret has been a frequent target of multi-thousand dollar thefts — with most going unsolved. In May of last year, about 130 bras were reported stolen from the store, amounting to losses valued at $7,854; another Medford case that same month reported quantities of bralettes, push-up bras and panties stolen, totaling $4,536. Similar Medford thefts involving thieves brazenly stealing armfuls of women’s underwear have been reported since at least 2015, according to previous news stories. Medford police have noted that company policies bar employees from physically stopping shoplifters. News stories in similar Victoria’s Secret thefts around the country also point to store layouts that place registers at the back of the store, rather than near the exit. [Source: Mail Tribune]

The post Breaking News in the Industry: April 24, 2018 appeared first on LPM.

Suspected Shoplifter Jumps into Car; Injures Police Officer

Loss Prevention Media -

A suspected shoplifter who jumped into a car injured a police officer before driving out of the parking lot at Giant Eagle’s Market District store in Pittsburgh’s Shadyside neighborhood, police said. A cashier told the police officer assigned to work security detail at the grocery store near Centre and Negley avenues about a man believed to have been shoplifting, Department of Public Safety spokeswoman Alicia George said. The man was getting into his car when the officer approached him on foot. Then, the suspect began to drive away and struck the officer with an open car door, “throwing the officer to the ground,” George said. The officer, whose name was not released, suffered injuries to his hand and leg, according to George. He was taken to UPMC Mercy hospital, where he was “in good condition and receiving treatment.: Police are seeking the public’s help to identify and find the suspect involved in the incident. Officials did not provide a description of the suspect. They described the suspect’s getaway vehicle as a “newer model, maroon SUV” whose license plate ends with “1-9-3-3.” Police asked anyone with information to call detectives at 412.323.8800. Tips can remain anonymous.  [Source: Trib Live]

The post Suspected Shoplifter Jumps into Car; Injures Police Officer appeared first on LPM.

First in HR: Know Your Numbers in Hiring

The Compliance & Ethics Blog -

By Ashley Lipman Outreach Manager Before making a hire, it is essential for hiring managers and human resources to crunch some numbers and understand the costs associated. Some costs will be fixed based on your business needs; others will be variable depending on who you choose to hire. Employee turnover and replacement can cost the […]

Board Classification and Diversity in Recent IPOs

The Harvard Law School Forum on Corporate Governance and Financial Regulation -

Posted by James Cheap, Equilar, Inc., on Tuesday, April 24, 2018 Editor's Note: James Cheap is a Research Analyst at Equilar, Inc. This post is based on an Equilar publication by Mr. Cheap. Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk.

Recent tech IPOs such as Snap, Square Inc., Blue Apron, Stitch Fix Inc. and, most recently, Spotify, have all made headlines. In terms of corporate governance, board classification and gender composition are typically a major focal point in these initial offerings. While they don’t have to immediately meet the same criteria as long-time public companies, companies that IPO must eventually comply with standard rules and regulations, and their shareholders expect them to align with best practices.

In that vein, a recent Equilar study analyzed differences between recent IPO companies and more established ones regarding board classification and gender composition. Using the companies in the Equilar 500 as a baseline for established companies, the data show stark dissimilarities in board classification and gender make-up.


How to Be a Good Board Chair

The Harvard Law School Forum on Corporate Governance and Financial Regulation -

Posted by Stanislav Shekshnia (INSEAD), on Tuesday, April 24, 2018 Editor's Note: Stanislav Shekshnia is Senior Affiliate Professor of Entrepreneurship and Family Enterprise at INSEAD. This post is based on his recent article in the Harvard Business Review.

What do good board chairs do in and outside the board room? To explore this questions, INSEAD Corporate Governance Centre launched a research project that included a survey of 200 board chairs from 31 countries, 80 interviews with chairs, and 60 interviews with board members, shareholders and CEOs.

An effective chair, the people in our study largely concurred, provides leadership not to the company but to the board, enabling it to function as the highest decision-making body in the organization. As one survey respondent put it: “The chair is responsible for and represents the board, while the CEO is responsible for and is the public face of the company.” That crucial distinction makes the chair’s job very different from the CEO’s, and it calls for specific skills and practices. Here are some of them.


All of Your Fiduciary Duty in One Place

Compliance Building -

Of the trio of regulatory releases from the Securities and Exchange Commission last week, the one targeted at registered investment advisers is a little weird. It sets out the fiduciary duty of investment advisers, sort of, and proposes some new regulations.

One of the problems with the fiduciary duty is that it is not explicitly written into the statutes or regulations of the Investment Advisers Act. The SEC latched on to Section 206 and court cases have followed along. But if you look through the Act or the regulations you will not find a fiduciary duty stated.  Last week’s regulatory release, at least in part, was to “reaffirm – and in some cases clarify – certain aspects of the fiduciary duty that an investment adviser owes to its clients under section 206 of the Advisers Act.”

Of course, if this reaffirmation and clarification don’t get codified in the regulations, they are just a secondary source and will stay harder to find. The SEC did ask for comment on whether it would be beneficial to codify this interpretation. I would give that a resounding “yes.”

What does the SEC think are the obligations of an investment adviser’s fiduciary duty?

The Duty of Care and the Duty of Loyalty.

The release draws heavily from the 1963 Supreme Court case SEC v. Capital Gains Research Bureau, Inc. that was the landmark case holding that the Investment Advisers Act imposes a fiduciary standard on registered investment advisers.

Duty of Care

The SEC breaks down the duty of care into three prongs.

  1. the duty to act and to provide advice that is in the best interest of the client,
  2. the duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades, and
  3. the duty to provide advice and monitoring over the course of the relationship.

Acting in the best interest of the client is the big prong and the SEC gives lots of examples of what advisers should be doing.

  • duty to make a reasonable inquiry into a client’s financial situation, level of financial sophistication, experience, and investment objectives
  • duty to provide personalized advice that is suitable for and in the best interest of the client based on the client’s investment profile
  • update a client’s investment profile in order to adjust its advice to reflect any changed circumstances
  • have a reasonable belief that the personalized advice is suitable for and in the best interest of the client based on the client’s investment profile.
  • Take into account the costs of an investment strategy
  • Take into account the liquidity, risks and benefits, volatility and likely performance in determining if the strategy is in the best interest
  • Conduct a reasonable investigation into the investment sufficient to not base its advice on materially inaccurate or incomplete information.
  • Independently or reasonably investigate securities before recommending them to clients
Duty of Loyalty

“The duty of loyalty requires an investment adviser to put its client’s interests first. An investment adviser must not favor its own interests over those of a client or unfairly favor one
client over another.”

The SEC makes a point that in not unfairly favoring one client over another, an adviser is not locked into making pro rata allocations of opportunities.

An adviser has to try to avoid conflicts of interest with its clients, and make full and fair disclosure to its clients of all material conflicts of interest that could affect the investment advisory relationship. But disclosure of a conflict alone is not always sufficient to satisfy the adviser’s duty of loyalty. The disclosure must be clear and detailed enough for the client to understand and make an informed decision.


What do I see as the problems with these standards?

The first is its application to private funds and private fund advisers. The proposal is targeted at retail investors and separately-managed accounts. It skips any mention of the issues related to pooled investment vehicles like private funds. In those cases the client is the fund. For some advisers, there may also be a client that invests in the fund. The needs of the various investors in a fund may vary. The fund is a client and the fund investors may not be clients.

The SEC has danced around the private fund issues of the fiduciary duty and registration requirements for a decade. With the passage of Dodd-Frank, a bigger portion of the SEC’s registered investment advisers are private funds. It seems strange to have omitted them from this release.

I also think this release fails to clarify issues around the disclosure of conflicts in dealing with the duty of loyalty. The SEC hedges its statements. I expect we will see a fair amount of comments on this issue.



Innovation in Compliance Episode 6: Understanding the Fraud Pentagon with Jonathan Marks

FCPA Compliance & Ethics -

Jonathan Marks is a leading fraud expert. He’s helped companies across multiple markets uncover fraud. Jonathan has innovated compliance by creating the Fraud Pentagon. His innovation builds upon work that was done years ago, the fraud triangle. Jonathan takes it to new levels that are in line with today’s sophisticated, technology-saturated world. Today, he and [...]

The post Innovation in Compliance Episode 6: Understanding the Fraud Pentagon with Jonathan Marks appeared first on Compliance Report.

United Technologies Proxy Voting Guide

Corporate Governance -

United Technologies (UTX) provides technology products and services to building systems and aerospace industries worldwide. Most shareholders do not vote because reading through 100+ pages of the proxy is not worth the time for the small difference your vote will make. Below, I tell you how I am voting and why. If you have read […]

The post United Technologies Proxy Voting Guide appeared first on Corporate Governance.


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RT @ComplianceXprts: What You Need To Know About Auditing And Risk Management In The Transport Industry 4 months 5 days ago
RT @EthicalSystems: Our 2017 End of Year Letter from @JonHaidt and @azishf "This is the time for the business… 4 months 1 week ago
RT @ComplianceXprts: Inspection of Facilities and Sporting Venues - Due Diligence 4 months 1 week ago
RT @ComplianceXprts: 14 Essentials For Your Compliance Management System 4 months 3 weeks ago