Compliance Career Chat Today!!!!!!!!

Compliance Career Chat

Kevin Saunders ‘09

Legal & Compliance Examiner in the Large Institution Division

The Federal Reserve Bank of Chicago

The Institute on Compliance invites all students to a series of informal discussions with alumni about careers incompliance. The first compliance chat will feature Kevin Saunders ’09. He will provide an overview of his career path, the type of work that he does, and suggestions that he has for obtaining positions in compliance. Students are encouraged to ask questions. 

 Thursday, September 6, 2012

Noon-1:00 p.m.

Room C40

Lunch will be provided.


Facebook’s Legal Woes and Growing Pains Continue

Facebook’s common stock plunged to a new low on high trading volume as original shareholders seized their first opportunity to sell their shares since the May IPO.  On Thursday, the 90 day lockout period on original shareholders selling ended as shares FB dropped 6.37% to close below $20.  Analysts are mixed on how to play the drop with some seeing this as a golden buying opportunity for an undervalued stock and others seeing this as another example of instability and uncertainty in the young company.

It has been anything but a walk in the park for Facebook as the most anticipated IPO in recent memory has been plagued since its first day on the market.  Trading glitches at the open led to a slew of class action suits from disgruntled investors as Facebook and Nasdaq tried to shift the blame to one another.  Moreover, the stock spent the summer trading well below its initial price of $43 as negative publicity about privacy concerns, and the maturity of the company was compounded by pressure from short sellers.

Additionally, legal pressure against Facebook’s privacy policies increased in recent days and weeks in the wake of an FTC settlement.  The ninth circuit is reconsidering a previously dismissed lawsuit which alleged improper use and sale of private user data.  The dismissed lawsuit is getting a second look as FTC allegations and a Facebook settlement has bolstered the plaintiff’s case.

Financial Regulators and Advancing Technology: The Social Media Paradox

Under Rule 206(4) of the Investment Advisors Act of 1940 (“the Act”), the SEC states that a Registered Investment Advisor (“RIA”) is prohibited from engaging “in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.” Registered Investment Advisors consist of individuals or firms that are in the business of giving advice about securities, and thus must be registered with the Securities and Exchange Commission or a state’s securities agency. Rule 206(4) was designed to protect the public from deceptive advertising tactics by investment advisors across the nation. Sounds simple enough, right?

If only that were so…

The imprecision of this rule has created confusion and uncertainty for RIAs for decades following its enactment. Fortunately for RIAs, the SEC released “SEC No-Action Letter, Clover Capital Management, Inc.” in 1983, which outlines certain circumstances the Commission deems to be prohibited under Rule 206(4). The Clover no-action letter prohibits certain activities including, but not limited to:

  • Failing to disclose the effect of material market or economic conditions on the results portrayed (e.g., an advertisement stating that the accounts of the adviser’s clients appreciated in the value 25% without disclosing that the market generally appreciated 40% during the same period);
  • Including models or actual results in an advertisement that do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid;
  • Failing to disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;
  • Using advertisements that include testimonials or that refer to past specific recommendations unless certain information is provided

While Clover created greater confidence for RIAs at the time of its release, it has failed to evolve with advancing technology and changes in advertising practices. For instance, the surge in social media has convoluted RIA efforts to comply with SEC regulations considerably. According to the seventh annual Investment Management Compliance Testing Survey, released in July of 2012, social media use among RIAs increased over the past year, with 80% of RIAs stating they have adopted formal written policies concerning social networking, up from 64% in 2011 and 43% in 2010.

For instance, many firms have adopted social media policies and procedures stipulating who is permitted to use social networking for business purposes. All of those posts should be pre-approved by the firm’s chief compliance officer or a designee. This process helps to avoid situations in which a member of the firm distributes inconsistent or noncompliant information using social media.

However, how should RIAs with several thousand employees monitor the use of each employee’s personal social media profiles? If a sales representative of an RIA endorses a specific portfolio on his personal Facebook page, what ramifications could the RIA face? If client testimonials are subject to SEC regulations, what effect does that have on client postings on an investment advisor’s Linkedin profile? For instance, recent cases have indicated that “Liking a Page” on Facebook is allowed and encouraged since it is not considered a type of testimonial, but “Liking a Status Update” is an “endorsement” of another user’s post and is a violation of SEC standards.

To address these ambiguities, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a National Examination Risk Alert in January of 2012 entitled “Investment Adviser Use of Social Media.” The alert recommends various precautionary measures RIAs can implement in order to better prevent potential social media violations by their employees. However, the list is by no means exhaustive and explicitly states that adhering to all suggested procedures will not create a “safe harbor” for an RIA in the event of a violation.

As technological advancements continue to transform marketing strategies across the financial industry, RIAs must work diligently to devise compliance and corporate governance procedures which help overcome the uncertainty surrounding the outdated, ambiguous regulations set forth by both the SEC and FINRA.

Can Employers Ask For Your Social Networking Account Login Information?

As people are posting more and more about their personal and professional lives on social networking sites, employers are now asking employees and job applicants for passwords to their social networking accounts. This often puts job applicants and employees seeking to keep their personal lives separate from their professional lives in an awkward situation. Many job applicants fear that if they do not comply with the employer’s request, that they may be passed up for the position.

While there is no federal law protecting the social networking privacy of job seekers and employees, those living in Illinois can breath a sigh of relief when it comes to dealing with employer requests to hand over passwords to social networking accounts. On August 1, 2012, Illinois became the second state in the U.S. to pass a law making it unlawful for an employer to ask for an employee’s or job applicant’s password or other account information to gain access to the employee’s or job applicant’s account on a social networking website. The law even bars employers from asking for such information when conducting background checks.

However, employees and job applicants should still set privacy settings on their online profiles to ensure that information that they would not want an employer to see is not publicly available. This law does not stop employers from viewing information on online profiles that isn’t restricted by privacy settings on the website. In addition, employers can still restrict access and use of the Internet and social networking sites in the workplace.

Federally Appointed Trustees: Helping or Hindering?

Tensions between failing companies and federally appointed Trustees in Bankruptcy have created challenges for federal bankruptcy courts across the nation. While companies that file for Chapter 11 bankruptcy tend to choose a venue that will be more favorable to their restructuring objectives, federally appointed Trustees are increasingly resistant to grant such accommodations.

The most common form of bankruptcy is Chapter 7, which serves to provide immediate relief of outstanding debts to creditors by halting company operations and liquidating existing assets in their entirety. Chapter 7 bankruptcies are supervised by federally appointed Trustees who are responsible for gathering debtors’ non-exempt assets, managing the sale of those assets, and distributing the proceeds to outstanding creditors. In contrast, Chapter 11 governs the process of reorganization of a debtor in bankruptcy proceedings. Chapter 11 enables businesses to undergo a financial reorganization, also supervised by a court appointed Trustee in Bankruptcy. Chapter 11 typically empowers the Trustee with the ability to operate the debtor’s business, and affords the debtor various mechanisms to restructure its business with the goal of eventually emerging from debt. Recent notable Chapter 11 bankruptcies include both Lehman Brothers Holdings Inc. and Washington Mutual during the heart of the financial crisis of 2008.

Failing businesses argue that the U.S. Trustees’ lack of leniency regarding choice of venue will leave them with potentially no way out of bankruptcy. The Trustees counter that their responsibility is “to preserve the integrity of the bankruptcy system, [and that sometimes] in doing so, it will not be in the best interest of a particular company.” As the debate continues, it will be interesting to see whether a trend begins to develop in favor or against the U.S. Trustees’ devotion to uphold stringent standards for American companies filing Chapter 11.

For more information on this issue see:

Wall Street JournalTesting Chapter 11’s Limits – U.S. Watchdogs Square Off With Companies over Venue, Executive Bonuses. By: Rachel Feintzeig and Jacqueline Palank


The Corporate Law Society Will Be Returning In The

Fall 2012 Semester

The Chicago-Kent Corporate Law Society is committed to promoting the study of corporate and business law at Chicago-Kent and preparing members for successful careers in practice areas, such as financial services, securities regulation, real estate, tax, and banking law. Our goal is to promote the importance of having a fundamental understanding of both law and business in the workplace, and enable members to gain insight from practicing lawyers in all areas of corporate law.

We are planning on hosting a number of workshops, panels and networking events featuring corporate and transactional lawyers from the Chicago area where students can garner practical legal skills.

For More Information About the Corporate Law Society’s Upcoming Events Please Visit:

 The Chicago-Kent Corporate Law Society’s Facebook Page

If you would like to be on the email list to receive updates on the Society’s meetings, events, and opportunities, please send an email to:

Supreme Court Will Determine Constitutionality of PCAOB

Earlier this year, the Supreme Court agreed to hear oral arguments on the constitutionality of the Public Company Accounting Oversight Board, known as the “PCAOB”, or as many others have amicably dubbed it, “peek-a-boo” (a reference to the acronym, as well as its function to “surprise” inspect audits of accounting firms).  The PCAOB arose out of the Sarbanes Oxley Act (“SOX”), a rather infamous piece of legislation among accountants and CFOs alike. Continue reading