Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

Top 10 FCPA Resolutions

The Foreign Corrupt Practices Act (FCPA) is a United States federal law which addresses accounting transparency and bribery of foreign officials. The US Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) are both responsible for FCPA enforcement – the SEC, for those companies under its regulatory jurisdiction, and the DOJ, for all other companies.  This enforcement famously leads to large settlement payments by offending companies, the resolution of which is often reached by collaboration among numerous governments and supervisory entities.

The ten largest FCPA resolutions as of the writing of this blog post are listed below, with links to more information and business case studies on each.


Business compliance wish list for cryptocurrencies

One of the hottest topics of 2017 was cryptocurrencies.  The blockchain-derived digital currencies such as Bitcoin, Ethereum, and Ripple were the subject of seemingly endless interest and speculation, in both the media and the markets.  In an excitement reminiscent to many of the dot-com boom, cryptocurrency companies rushed to become issuers via initial coin offerings (ICOs).  Companies that were previously unrelated to blockchain or any product of the technology changed their names or indeed their entire operational purposes to attract market interest.  Investors searched for information and guidance, experimented with the digital currency as both a payment service and a securities holding, and filled social media and dinner table conversation with curiosity and enthusiasm for the disruptive potential cryptocurrencies hold for banking, technology, and the markets.


Round-up on SEC compliance

This is the third in a series of seven posts about regulatory compliance priorities and enforcement trends.  The first post was about the Commodity Futures Trading Commission (CFTC).  Last week’s post was about the Federal Trade Commission (FTC).  Today’s post will be about the Securities & Exchange Commission (SEC).  On Thursday January 11, the post will be about the Food & Drug Administration (FDA).  On Thursday January 18, the post will be about the U.S. Department of Agriculture (USDA).  On Thursday January 25, the post will be about the Environmental Protection Agency (EPA).  Finally, on Thursday February 1, the post will be about the Federal Communications Commission (FCC).

The Securities & Exchange Commission (SEC) is the US regulator charged with enforcing federal securities laws and supervising the securities industry, including the market exchanges.  The SEC was created in 1934 by the Securities Exchange Act, which is one of the bodies of federal securities law it is now responsible for enforcing.  Other significant statutes within the purview of the SEC include the Investment Company Act of 1940 (regulating registration and conduct of investment companies), the Investment Advisers Act of 1940 (regulating registration and conduct of investment advisory organizations), and the Sarbanes-Oxley Act of 2002 (regulating accounting practices of public companies and ensuring investor protection).

As indicated by this last piece of legislation, which was introduced into law in the aftermath of a series of corporate scandals such as the Enron bankruptcy, the regulatory scope of the SEC has grown in both breadth and depth as a reaction to financial frauds and crises of the last two decades.  This increased emphasis on the role of the SEC in reaction to these events aligns with the SEC’s mandate, which is three-pronged: investor protection, maintenance of fair, orderly, and efficient markets, and facilitation of capital formation. Ensuring that investors can retrieve and rely on information provided by public companies and in the markets in order to make their investment decisions is a major priority for the SEC.  Maintaining a level playing field in the markets is therefore the SEC’s objective, and preventing or eliminating market abuse and unfair corporate practices contributes to achieving this goal.

From both its Washington, D.C. headquarters and its regional office, the SEC offers education programs, promulgates rules and guidelines, conducts investigations, supervises self-regulatory organizations in the trading and markets industries, oversees disclosures by public companies, and brings enforcement actions in light of suspected violations of federal securities laws and regulations.  Based on this diverse range of activities, the SEC is responsible for exacting competent authority over a wide variety of issues and interests that comprise its regulatory agenda and rule-enforcement practices.

  • Cryptocurrencies: The hot topic of 2017, digital currencies derived from blockchain technology such as bitcoin and Ethereum will likely endure in the public attention in 2018 as well.  Regulators worldwide have sounded a cautious note about the potential risks of the cryptocurrency markets, and widespread legitimate use of the payment service technology as a disruptor to the banking sector is still in its infancy.  There is no unitary approach to protection of users who transact in cryptocurrencies on platforms that do not treat them as customers and supervision of markets where companies use initial coin offerings (ICOs) to offer their tokens without the rigors of securities registration to the public.   Innovation has been prioritized over strict supervision; some balance between the two, rather than supremacy of one over the other, needs to be struck.  The SEC has issued a concise and clear statement on its preliminary opinion of cryptocurrencies, stopping short of bringing them all into their regulatory scope as securities but providing definitive guidance on its views and a clear indication of the direction its future treatment could take:  The SEC Chair’s Cryptocurrency Warning: 5 Things to Know
  • Whistleblowers in Silicon Valley: As discussed in this previous post about the CFTC, the SEC has a powerhouse whistleblower program.  This has enabled the SEC to encourage individuals to step forward to anonymously report misconduct, corruption, and fraud in exchange for employment protections and compensation.  Due to the concentration of the SEC on the securities industry, traditionally these whistleblowers have come from the financial services industry (for an overview of some significant whistleblowers in recent history from this sector, check out this post).  However, there’s a new proving ground for whistleblowers who may stand to take advantage of the SEC’s program: Silicon Valley.  Venture capital firms and huge private companies which take funds from investment companies or individuals – including Uber, Airbnb, and many other digital giants – are all subject to the rule-making and enforcement authority of the SEC:  Silicon Valley could be the next hotspot for SEC whistleblowers
  • Cybersecurity as facilitation of market abuse: 2017 was the year of several very public and damaging scandals involving cybersecurity lapses and data breaches.  It remains to be seen in 2018 how the disclosure and reporting expectations and requirements for companies suffering hacks and intrusions may be refined or expanded in the wake of public outrage.  One concerning theme which emerged in a number of the cases was the perception of or possibility for insider dealing.  This was either due to material knowledge of company executives about the breaches before they were publicized or the theft of financial data by hackers.  The SEC’s Market Abuse Unit’s Analysis and Detection Center will probably keep busy identifying and analysing patterns in trades that could be suspicious due to their connection or temporal proximity to cyberattacks:  SEC, DOJ charge seven with insider trading off stolen bank data
  • Prioritizing investor protection amid regulatory rollback: Ponzi schemes, misrepresentations to investors, and fraudulent corporate practices are not going to vanish from the markets any time soon.  In fact, as business becomes increasingly global and complex in nature, the risks of these events only grows.  At the same time, the overall trend in the United States is toward a regulatory ebb.  The emphasis is on leaner and more targeted regulatory action rather than an expanded or wide-ranging supervisory framework.  The question remains how major cases such as the SEC’s recent suit against Woodbridge Group over a massive Ponzi scheme will be handled amid this regulatory relaxation:  SEC sues bankrupt Woodbridge Group over $1.2 billion Ponzi scheme
  • Enforcement decline: Finally, and on a related note, many recent commentators have pointed to a decline in SEC enforcement actions as evidence that the agency’s regulatory touch will be diminished in the near term.  However, these numbers may be deceptive; indeed, it could be true instead that this perceived decline is not due to regulatory inaction but quite the contrary.  Instead, it could be because of pipeline efficiency in clearing investigation and enforcement actions in the recent period:  Has The SEC Gone Soft Under Trump? Enforcement Actions Are Down, But That’s Deceptive

Be sure to check back next week for a round-up on FDA regulatory compliance.


Compliance and social media influencers

Influencer marketing has become a major trend in the advertising industry with the increasing dominance of social media and blog networks in the media landscape. With influencer marketing, brands and their advertising agencies identify the individuals to whom certain demographic groups look to for suggestions on trends or products and services to purchase. These individuals, referred to as “influencers,” then share or produce editorial content for their followers (the people who like or connect to them on social media networks) or engage in the brand’s marketing activities.

Through these sorts of campaigns, both the brands and the influencers hope to gain a non-traditional advantage in appealing to a wider audience. From the brand perspective, they get creative and incredibly targeted content that is produced on a bespoke basis for very specific consumers who are already engaged and interested in the channel through which the content is shared. Through the detailed metrics that are abundantly available via social media and blogs, advertisers can determine which campaigns were successful in spurring either interest or actual sales. From the influencer perspective, they get opportunities to generate paid content and engage with their followers and fans in a novel way. Relationships with brands can be very lucrative for influencers, especially if they become long-term, and can drive significant, much-desired traffic for blogs and social media posts that brings attention to other content the influencer has to offer.

From the above, it is evident that along with all the opportunity comes a complex set of interests which may end up in conflict or give rise to concerns about business practices and accuracy of representations and disclosures. For influencers in particular, blurring the line between the position a follower or a fan, which is even on some networks referred to colloquially as a “friend,” and the position of a customer or a referral, complicates an informal relationship where few duties are owed. Instead, these interactions can occasionally be viewed as a commercial relationship where much more responsibility exists and can be potentially breached.

  • In the United States, the Federal Trade Commission (FTC) is one of those regulators who is contemplating stronger restraints in the practices of influencer marketing. The main area of the FTC’s concern centers on disclosure of the relationships between brands and blogger influencers. Without full, clear disclosures, consumers cannot make reliable, informed choices about purchases they may be influenced to make due to influencer marketing content. The FTC hopes to protect customers from being misled or ripped off entirely by influencer marketing that is targeted to them without providing them with the necessary disclosures for them to make ethical and financially-wise decisions. The FTC has already informed influencers and advertisers that disclosure of relationships between them must be “clear and conspicuous,” with posts that paid promotions clearly indicated as such so that they are not lost within the influencer’s unpaid content that engaging with would not lead to a directly-linked commercial interaction. These regulations have been around for some time, but the extra enthusiasm for enforcing them protectively will have a much bigger impact on the market going forward: Regulating influencers: What retailers need to know about the regulatory crackdown
  • The SEC also has influencer marketing on its regulatory enforcement docket. This is an interesting clash of social media advertising etiquette and investor protection priorities. Companies offering trading of cryptocurrencies have begun to rely on celebrities for endorsements. Much of influencer marketing is done in “testimonial” style, so this medium lends well to a celebrity sharing his or her preferences with thousands or millions of followers. When that preference is for a cryptocurrency investment, however, the endorsement may run afoul of proper disclosure expectations. These regulatory expectations for cryptocurrencies are still evolving, as the market for initial coin offerings (ICOs) is in its infancy still and nearly everything that happens with cryptocurrencies is new, with its impact on banking, the markets, and investors unproven as of yet. Central banks and regulators have taken wildly different approaches in different countries to handling demand for and developments in cryptocurrencies. In the US, this approach has been cautious and restrained, but one area in which the supervisors have not been quiet has been to protect potential investors from advertisements without appropriate disclosures: SEC warns celebrities over endorsing ICOs without proper disclosure
  • Brands and influencers aren’t the only ones who may need to meet a higher disclosure standard when it comes to advertisements that aren’t immediately identifiable as such. Hidden marketing on social media sites as just as insidious as the political advertising that has received so much attention in the press recently. As Congress pushes social media platforms like Facebook to make clearer disclosures about and take more monitoring and control responsibility for the advertisements that appear on their sites, the need to build in protections against deceptive actions by marketers and their partners is urgent as well: It’s not just Facebook’s Russian ads: Hidden advertising is pervasive and growing
  • Social media compliance enforcement will be a major priority for the FTC in this regulatory environment. It should be expected that even within regulatory rollbacks in other areas, the FTC will continue to pay attention to possible non-compliant social media posts and advertisers and their related influencers could be subject to formal enforcement actions. Compared to some other industries like banking or pharmaceuticals, advertising agencies are subject to a relatively sparse supervisory agenda. This light regulatory touch may change dramatically if the FTC chooses to extend and entrench investigation and enforcement efforts on influencer marketing. This is worrying for the influencers as well, who are even less likely than advertising agencies or marketing divisions of brands to have fully-formed compliance programs and to be ready to have the record-keeping and other regulatory controls they may need in place and up to speed: How to Comply with FTC Social Media ‘Influencer’ Rules
  • For more on influencer marketing and the way that brands, advertisers, and influencers may use it to spread content in the future, check out this 2018 forecast for possible trends in the practice, which will in turn dictate the ensuing regulatory priorities, from Forbes: The Influencer Marketing Trends That Will Dominate 2018

Given these potential developments and risks, it is definitely not premature to direct appropriate and pro-active compliance attention to the cultivation and use of influencer marketing networks. Regulatory and supervisory entities are already starting to consider cracking down on various marketing activities in this sphere, and enforcement of disclosure and reporting standards will become robust and should be aided by proper control frameworks.