Menu

Uncategorized

Beth Haddock ESG

ESG and Sustainability Trends

0

Strong governance trends continue to gain momentum increasing the need to review and potentially upgrade testing of ESG claims, data privacy and business ethics controls.

  • Larry Fink’s annual CEO letter entitled A Fundamental Reshaping of Finance has sparked debate. We expect ESG assets to continue to grow in 2020. Accordingly, the importance of ESG compliance will too, especially as the topic remains an SEC exam priority. For example, the CEO letter shows the importance of understanding ESG claims and the search for common principles and standards. Potentially we will see an increase in reliance on SASB or similar standards. Mr. Fink stated: “While no framework is perfect, BlackRock believes that the Sustainability Accounting Standards Board (SASB) provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics.”
  • Also upping the ante on environmental, social and governance causes is MSCI. It rolled out formal principles of sustainable investing, commenting that ESG should be central to the investing process. Complexity and confusion may continue as others join this effort.
  • While implementing ESG processes, we believe it is prudent to look beyond just the reports. The need for business and investment decisions to be made on accurate and fulsome information also reminds us that marketing and advertising standards, as well as anti-fraud investment concepts, will remain paramount. Read more at HBR Why Not to Rely on Sustainability Reports Alone.
Legal

Power to the Partnership between Compliance and Legal

, , , , , , ,

A frequently misused quotation, “The first thing we do, let’s kill all the lawyers,” from William Shakespeare’s Henry VI, isn’t about a disdain for the legal department but is homage to their power. The character that utters the line, Dick the Butcher, knows he can’t get away with murder if the lawyers are watching.

The lesson is this, there is power in the partnership with your law department.

It’s an easy misperception made by many who don’t understand: compliance and legal are one in the same, right?  Not quite. While they benefit from working hand-in-hand, there is a small, yet significant, difference in who these two entities primarily serve that may result in different approaches to the same situation.  Compliance officers’ gatekeeper role is complex and sometimes conflicting, while a lawyer has a more direct and aligned duty to a client: a lawyer’s client is the company (officers, directors, employees, shareholders); a compliance officer’s client is also customers, the board, regulators, investors, and in some cases securities markets (“stakeholders”). Additional insight on the relationship between law officers and compliance officers can be found here.

As a result, the perspective of an organization’s lawyers on issues starts off narrow – with the goal to protect the company. It’s up to compliance officers to collaborate with the lawyers to consider other stakeholders in order to build a Sustainable Governance program which will ultimately offer the company better protection.  Doing so will make compliance programs more effective; a respected and deeply collaborative relationship with the organization’s lawyers will help the compliance officers as they monitor for and help prevent violations of the law, while the lawyers focus on what management can do.  There will be scenarios where a course of action is permitted because the law has not kept pace with business innovation or the law is unclear. In the same scenario, a compliance officer may advise not to take an action because the compliance officer seeks to prevent legal violations which includes looking forward and considering reputational, political and regulatory risks. For example, one could imagine legal and compliance debate about required disclosures and licenses to launch fintech, artificial intelligence and virtual asset products into the market place.  Listen to episode 4 of the What’s Ethical podcast to learn more about opportunities and risks with these new technologies. Reputational risks of undisclosed potential conflicts can be exacerbated when operational procedures are not followed as directed.  DOJ and others recently opened investigations of McKinsey & Company for allegedly failing to adequately disclose and mitigate conflicts when acting as an advisor as well as a creditor in bankruptcy cases where McKinsey allegedly received favorable treatment over other creditors including pension plans.

McKinsey’s lawyers may have relied on a separation – ethical walls – between the investment and advisory businesses to manage any conflicts of interest as well as an interpretation that the law does not require third-party bankruptcy advisers to be disinterested.  Compliance officers looking at the same scenario may focus more on operational controls and add-value by collaborating with lawyers to test the strength of the ethical walls.

A Meeting of the Minds: Holding One Another Accountable

The key is for both lawyers and compliance officers to recognize their role and how they can help each other achieve their goals more effectively. Ultimately, collaboration and unified responses from Compliance and Legal will greatly contribute to delivering Triple Bottom-Line Compliance of protection, productivity, and impact.  Learn more about fostering a successful compliance dynamic within your organization by visiting www.bethhaddock.com.

compliance

Compliance Best Practices: Focus on The Means, Not Just the Ends

, , , , , ,

Focusing on the end result is often what many compliance officers are concerned with.  If you get the result you want, that’s all that matters in the end – right? Not quite.  After all, so much rides on how you achieve the end result.

As a compliance officer, you likely wear a number of “hats” within your business. From change agents and business managers to quality assurance representatives, project managers, and therapists – each role plays a critical part in successfully doing your job of ensuring successful “end” results for the company.

A strategy for mastering these different roles – or for achieving any goal – is to focus on how it is to be done and done effectively.  As a compliance professional, consider how you advise, support, and contribute currently – are you maximizing your influence to get things done?

Ask yourself the following questions to see if you are leading with a focus on the “means” or the “ends”:

  1. Do you use fear of enforcement or fear of the government when challenged?
  2. Do you think what you say is more important than how you say it?
  3. Do you think Compliance issues are more important or more serious than business issues?
  4. Do you feel as though you are siloed or alone in your work?
  5. Do you identify issues that are “out of scope,” distancing yourself?
  6. When you innovate to support the business, do you exclude business ethics considerations?

If you’ve answered “yes” to any of these questions, consider whether you are losing an opportunity to be influential and make a more meaningful impact.

Becoming an Influencer

Building influence takes time. A fantastic place for compliance officers to start is with building trust by excelling as a project manager, tailoring surveillance to material business risks, and connecting with clients and those associated with your regulatory duties as a gatekeeper.

Trust won’t come automatically with your job title as a compliance officer; instead, an influential compliance officer makes an impact by earning the trust of the business while maintaining his/her gatekeeper role. Trust will be earned has you show knowledge of the regulatory landscape, listen to colleagues and develops approaches that meet current and future commercial or organizational needs.

The goal is to become more than just an advisor on legal issues. As MaryJean Bonadonna, CCO at AXA Advisors, believes: “Compliance has to be embedded—not just inserted.” When you become a true influencer, you’ll find yourself engaging on non-compliance issues such as business products, internal controls, or any number of other topics.

When we become influencers in our organizations, we can more effectively insert compliance within each element of the business – applying our knowledge, expertise, and anticipation of business or legal challenges, ultimately allowing the company to be effectively proactive.

In the end, ironically, it’s “the means” – how we achieve results through influence – not “the ends” that will create successful compliance within your organization.  The how is done with earned influence.  Learn more about becoming an influencer who focuses on “the means” by visiting, www.Bethhaddock.com

dilemmas

Being “True North” when Dilemmas Surface

, , , , , , ,

There is one question at the center of many dilemmas compliance professionals will face in their career.  The answer is often obvious; sometimes not: What is ethical?

By focusing on one’s “True North” orientation, compliance professionals can strengthen their professional value-add and their organization’s compliance and business standards.

For example, when compliance departments prepare annual certifications to boards, regulators and others to report on the compliance program (and potentially disclose compliance gaps), compliance should conduct research, schedule interviews, and obtain supporting certifications.

What if a compliance officer is asked to prepare and submit a certification but doesn’t have the time or authority to conduct the due diligence? Is it ethical to do so?

The answer may seem obvious, but it is not necessarily easy.  And therein lies the challenge.

Uncommon but Inevitable

Such dilemmas are rare.  However, those times are the true test of one’s commitment to ethical standards and the organization’s best interest, essentially this is a compliance officer’s True North orientation.

There will inevitably be times when there are conflicts between a compliance professional’s responsibility to the organization and the gatekeeper function for government regulators. In this example, a compliance officer will need to get help or conduct the due diligence in order to meet his or her ethical responsibilities as a gatekeeper.

Compliance officers need to balance the need to be client-centric and effective gatekeepers, equally guarding the employer’s interests while delivering on legal requirements. Compliance must give regulators and others a genuine and accurate certification of good health. If a gap were to be discovered later, but mistakenly not disclosed in the certification, the firm and the unprepared compliance officer both could have been held accountable for being negligent.

To be impactful, compliance officers should be aligned with and believe in the culture, the organization, and the business efforts they serve. Compliance officer job descriptions routinely contain phrases like “strong ethics needed” included in the list of qualifications. “True North Ethics” is one of the keys to a compliance officer’s success – protecting an organization and one’s contribution.

Ethics and Leadership

Dilemmas will inevitably arise that challenge a compliance officers’ responsibility to both protect their organizations and serve as a gatekeeper for government regulators. They need to avoid focusing only on protection.  Compliance officers must be simultaneously aligned with and believe in the culture, the organization, and the business efforts they serve.

This need creates the opportunity to serve as a True North ethical beacon that communicates and demonstrates advocacy for sustainable governance while also managing their personal liability.

You can learn more about True North Ethics in my book Triple Bottom-Line Compliance: How to Deliver Protection, Productivity, and Impact as well as my podcast What’s Ethical?

To learn more about how you can innovate with compliance, contact my office today. If you would like to read about my philosophy and how to support business growth so there is measured and informed risk-taking, here’s a look inside my book.

African American Businesswoman Giving Presentation To Executive

8 Elements for Effective, Sustainable Compliance Programs

, , , , ,

The end of summer and the arrival of fall marks a return to school and a regular schedule for our country’s youth. It also marks a return to a more traditional work schedule for many adults and perhaps most compliance officers.

And not unlike the turn of a new year, the return to school and work can be viewed as an opportunity to review, reconsider, and retool one’s approach to life, and to managing compliance.

With that in mind, compliance officers returning from summer vacation might consider taking a pause and consider ways to increase effectiveness and efficiency.

The following eight strategies, the core of my book Triple Bottom-Line Compliance: How to Deliver Protection, Productivity, and Impact, can be a catalyst for more effective and sustainable compliance programs. The present time is a great opportunity to learn about and apply the following eight key elements.

  1. Align – To achieve sustainable governance, take a longer-term approach. Look to align interests and incentives to win wider engagement and avoid repeated compliance deficiencies.
  2. Verify – Build trust-but-verify cultures using a Triple Bottom-Line Compliance System including
    • Protection: Surveillance to search for and find red flags
    • Productivity: Being analytical, looking at things holistically, connecting the dots, and knowing business patterns as well as individuals’ traits
    • Impact: collaborating with others in the organization to double-check any findings to make sure they reflect a real or potential compliance breach and if so, going directly to the source of the risk as an advisor and an educator
  1. Serve your Client – Build strong relationships and possess superior communication skills. Compliance Officers that are also business leaders, strategists, project managers, and influencers are able to get more done for their clients.
  2. Network – The day-by-day workflow of questions, issues, projects, and resolutions may lead to conflicts of interest and a crisis. Manage your professional brand and reputation.
  3. Build legal alliances – The Legal department can provide important and strategic relationships but it’s up to the compliance officer to keep them on board with Triple Bottom-Line Compliance. A compliance officer must think ahead, educate lawyers, and advocate for taking a longer-term view when needed.
  4. Master diplomacy – Master be diplomacy and understanding many different stakeholders. Be the resource not only finds problems but fixes issues.
  5. Be your true north – “True North Ethics” means there is an authentic fit for a compliance officer within an organization. Align with and believe in the culture, the organization, and the business efforts you serve. Without such an alignment the compliance officer may be too focused on protection and may struggle to lead the rest of the organization regarding positive business ethics when faced with conflicts of interests.
  6. Brand yourself and contributing – Act like a leader and be perceived as one who builds relationships with FOCs, lawyers, and regulators while delivering Triple Bottom-Line Compliance. A strong compliance officer should be clear, definitive, and decisive but may only be so after listening to, collaborating with, and explaining why the regulatory requirement is as it is.

These eight strategies are part and parcel of the “Circle of Compliance.” The circle demonstrates the way a compliance program can protect and add value.

You can learn more about the Circle of Compliance and how to implement it in your own compliance practice in my book Triple Bottom-Line Compliance: How to Deliver Protection, Productivity, and Impact. Click here to download chapter 5 about the power of Networking, for free.

After you read the chapter, don’t forget to apply what you learn and take advantage of your existing and growing circle of influence at back-to-school events, fall parties, and other environments where your positive influence can be felt.

To learn more about how you can innovate with compliance, contact my office today. If you would like to read about my philosophy and how to support business growth so there is measured and informed risk-taking, here’s a look inside my book.

Investors

How Can a Triple Bottom Line Compliance Approach Help Protect Investors?

, ,

  1. Conflicts are Avoided or, When Appropriate, Disclosed

The SEC fined a regional advisory firm this month for selling investments without proper disclosure and raising questions about whether the investments were made for the benefit of the advisors, instead of the investors.  It’s, unfortunately, a reminder that recommendations to seniors, retirees or other vulnerable investors should be carefully reviewed.  If you are considering a new compliance notice – this is a good case to distribute. Read on to understand how a sustainable governance approach can protect investors – especially as one considers the Securities and Exchange Commission’s (SEC) Regulation Best Interest.

On Sept. 14, 2018 the SEC charged Indianapolis-based investment advisory firm Steele Financial Inc and its sole owner Tamara Steele with selling approximately $13 million of high-risk securities to more than 120 advisory clients, many of whom are current or former teachers or other workers in public education, without disclosing that she and her firm stood to receive commissions of up to 18 percent from the sales.

The SEC alleges that between December 2012 and October 2016 Steele Financial Inc. and Tamara Steele sold to advisory clients and other investors more than $15 million of the securities of Behavioral Recognition Systems Inc. (BRS), a private company previously charged with fraud by the SEC.  Ms. Steele and Steele Financial received commissions of cash and warrants from BRS that were worth more than $2.5 million.  Steele and Steele Financial allegedly targeted their own advisory clients who generally did not invest in individual stocks, selling more than 120 clients approximately $13 million of BRS securities without disclosing that the defendants were receiving commissions from BRS.  The complaint further alleges that the defendants created false invoices and took other steps to conceal their involvement in selling BRS securities. The SEC stated it believed that Ms. Steele took advantage of her clientele including “clients whom she herself described as ‘two-pension, two Social Security families.”

Many conflicts of interest can be mitigated with disclosure.  In other situations, such as with the Steele Financial case, disclosure may not be adequate. Compliance should help the business review compensation incentives to avoid conflicts and allow a business to grow sustainably and serve its clients.

  1. Technology is Used to Eliminate or Minimize Bias

I recently interviewed Jasmin Sethi, a veteran legal and compliance expert with a history at the SEC and Blackrock, and now her own fintech company, for insights about the power of technology to mitigate bias in investment recommendations and Regulation Best Interest.

We discussed the arguably thin, but crucial, line between screening investment recommendations against the current “reasonable basis” standard for broker-dealers and the standard proposed under Regulation Best Interest.  We also discussed the tremendous opportunity to manage or avoid conflicts of interest by using technology. For instance, compliance officers can help the business calibrate algorithms, portfolio modeling tools and other financial analysis tools to ensure they operate as intended providing objective investment analysis.

  1. Regulatory Priorities, Economic Trends, and Industry Developments Are Proactively Considered

Please listen to my third podcast to hear a thought leader share her insights. It will help you develop your strategic approach for this important issue that is likely to lead to new regulatory requirements. It will also help you confirm your governance and incentives are designed to avoid situations like that experienced by Steele Financial.

For more on how you can take steps to protect your investors, check out my book, Triple Bottom-Line Compliance: How to Deliver Protection, Productivity and Impact.

Insider Trading

Ask Beth: How Can A Compliance Officer Make a Sustainable Impact Preventing Insider Trading?

, , , , ,

A first step towards preventing insider trading is managing non-public material information. Compliance officers that don’t stop there and also test the technology behind related regulatory reporting and surveillance and train employees to combat Fudge-Factor Thinking can bring more sustainable value.

On Sept. 13, 2018, the Securities and Exchange Commission (SEC) announced that Cowen Execution Services LLC (formerly Conergex Execution Solutions LLC) will pay $2.75 million to settle charges that the broker-dealer firm provided the SEC with incomplete and deficient securities trading information known as “blue sheet data” because of coding errors. Blue sheet data is used by the regulators to detect illegal trading practices and firms can use the same data analytics for their own trading surveillance programs. The technology is powerful. As the Cowen case shows, so are coding errors that go undetected.

The coding errors occurred over a period of nearly four years which caused, according to the SEC, approximately 29 percent of Cowen’s submissions to contain deficient customer identifying information and other errors involved trade details. Although the firm was previously sanctioned in March 2012 for deficient blue sheet submissions, the order found that the firm did not take reasonable steps to ensure that its blue sheet submissions to the SEC were accurate and it failed to identify the deficiencies during this period.

As the fourth quarter approaches, compliance officers should consider not just completing an annual review of policies, but also testing core technology such as trading reporting, regulatory submissions or algorithms within investment software. Compliance has an opportunity to protect the firm and add-value to the business operations by helping find errors before they have a bigger impact.

Just over ten years ago, a young hedge fund manager named Tom Hardin was swept up in a much bigger insider trading scandal that involved the Galleon Group, at the time one of the largest hedge funds in the world with over $7 billion under management.

On the way to pickup his dry-cleaning, Tom was approached by the FBI regarding his own illegal trades. Tom agreed to cooperate as an informant helping the FBI build more insider trading cases including a one against the Galleon Group insiders.

I recently interviewed “Tipper X” Tom Hardin on my podcast.  In the interview, he provides insightful tips about how to prevent insider trading. We also discussed the power of using behavioral incentives to drive good business decisions and combat Fudge-Factor Thinking.

Fudge-Factor Thinking, the behavioral economics term that describes when people use common rationalizations to justify unethical behavior, comes into play more significantly than it should.  Tom used it when he placed a trade he thought would be fine because there weren’t any real victims and it was the way he thought everyone secured an “edge” trading the capital markets. His training didn’t involve behavioral incentives. He recalls simply being told, “Don’t email anything you don’t want on the cover of the Wall Street Journal”.  Today, his advice to others is more pragmatic. He encourages compliance officers to have an open door, be there to answer questions and challenge Fudge-Factor Thinking. His training wasn’t adequate. He didn’t have a mentor.  He tells a compelling story any compliance officer who doubts the impact of engaging training or his or her individual contribution should listen to. For more information, you can listen to my podcast here.

Compliance officer technology

Three Mid-Year Takeaways for Compliance Officers

,

In its first six months, 2018 has proven to be a time of innovation and change for both fintech and regtech. Compliance officers and others have had to strike a balance between embracing new technology and strategic advice so clients are informed. Only in this way can they take the measured risks needed to support innovation. Though many trends affecting the industry are worth keeping an eye on, three stand above the rest.

1. It’s Still About Conduct

Words like cryptocurrency or blockchain were unknown ideas only a few years ago. Now, fortunes may be won and lost on their successes and failures. SEC Chair Clayton has taken strides in the past year to cement his organization’s understanding and position on the future of these technologies – so much so that the SEC just appointed Valerie Szczepanik as its first ‘Crypto Czar.’ Szczepanik affirms that the SEC does not intend to rein in technology, but instead to continue to regulate conduct. https://www.sec.gov/news/press-release/2018-102

2. Regtech is Growing. Be Curious and Get up to Speed.

The momentum we’ve seen in the past few decades has been an amazing testament to how quickly trends evolve today – and they are only getting faster. It was not so long ago that the smartest computer in the world could barely win a game of chess. Currently, we can fit the world in our pockets, and we trust machines to make the most sensitive trades on Wall Street. Though the genie is out of the bottle, so to speak, there will always be a human element to all of this.

The automation afforded by innovations such as blockchain or AI is certainly improving efficiencies for COs. Beyond simplified surveillance, there are benefits to gain within compliance program including workflow, agility, speed, integration, and analytics. For a great overview of this topic, I’d recommend “Regtech is the new Fintech.”

3. Technology Cannot Replace Sound Judgment.

Experienced compliance advice is needed more than ever.  As companies innovate with new products, services, and business models, experienced compliance officers are crucial to their success. Without them, business may grow too quickly. In the excitement of rapid growth, compliance and governance mistakes can arise.

Betterment is a useful case in point. This June, the industry leader and freshman fintech robo advisor was hit with both corporate and executive fines for what Finra cited as window dressing.

This spring, Chief Justice Roberts delivered a commencement address to his daughter’s high school class. In his remarks, he lamented about the difficulty in striking a balance between the power of technology and human attributes like curiosity and analytical thinking –  perspectives and skills that are key to the success of compliance officers, lawyers, and other risk professionals. Chief Justice Roberts offered this warning: “beware of the robots.” He was not referring to the robots of some remote future, but to the machines with which we interact every single day.

Chief Justice Roberts did not paint a dystopian picture of the future; he simply cautioned that technology does not just influence the decisions we make, but how we come to make decisions.

Yes, tech is key to our innovation. We can’t innovate, though, if we let the tech steer us away from our own analytical development. Tech is a tool  – use it that way and remember if you understand the technology you will be better positioned to advise on risks and internal control issues. No matter how advanced the tech innovation, planning, strategy and other analytical skills will be needed.

To learn more about how you can innovate with compliance, contact my office today. If you would like to read about my philosophy and how to support business growth so there is measured and informed risk-taking, here’s a look inside my book.