H. DAVID KOTZ serves as a Managing Director at Berkeley Research Group (BRG), an international expert services and consulting firm that offers independent expert testimony, litigation and regulatory support, authoritative studies, strategic advice, and document and data analytics. At BRG, Kotz focuses on internal investigations and consults with and provides expert testimony on the regulation of and securities trading by broker-dealers, investment advisers, hedge funds, insurance companies and banks. He also serves as a compliance monitor for firms that have entered into deferred prosecution agreements and similar arrangements with government agencies. Previously, Kotz served as the Inspector General of the Securities and Exchange Commission (SEC).

Foreword xiii

Preface xvii

Acknowledgments xxiii

About the Author xxv

CHAPTER 1 Jurisdiction of Regulators – Who Regulates Whom and What 1

1.1 Federal Financial Regulatory Structure 2

1.2 The Securities and Exchange Commission (SEC) 3

1.3 The Financial Industry Regulatory Authority (FINRA) 6

1.4 The Commodity Futures Trading Commission (CFTC) 8

1.5 The National Futures Association (NFA) 10

1.6 The Department of Justice (DOJ) 12

1.7 Recent Regulatory Failures to Uncover Fraud 14

1.8 Expert Advice on Overlapping Regulations 19

CHAPTER 2 How to Strengthen Governance and Compliance in Light of New Regulations 23

2.1 Dodd-Frank Act’s Impact on Governance and Compliance 25

2.2 Managing Executive Compensation 29

2.3 Creating Effective Policies and Procedures 30

2.4 Ensuring Accountability within an Organization 32

2.5 Red Flags of an Unethical Culture 33

2.6 Ethical Decision-Making 34

CHAPTER 3 How to Manage Whistleblowers’ Complaints 37

3.1 Oversight and Failures of the SEC’s Whistleblower Program 37

3.2 The Dodd-Frank Act’s Restructuring of the SEC’s Whistleblower Program 41

3.3 Whistleblower Complaints to the SEC since the Restructuring of Its Program 43

3.4 The CFTC’s New Whistleblower Program 45

3.5 Significant U.S. Supreme Court Decision on Whistleblower Complaints 46

3.6 Managing Complaints Brought to Internal Compliance Officials 47

3.7 Putting Appropriate Whistleblower Policies and Procedures in Place 51

3.8 Effect of the SEC and CFTC’s New Whistleblower Programs 52

CHAPTER 4 How to Defend SEC Examinations 55

4.1 SEC Authority to Conduct Examinations 55

4.2 SEC’s Office of Compliance Inspections and Examinations (OCIE) 57

4.3 Types of SEC OCIE Exams 57

4.4 Preparation for the Exams 58

4.5 Process of Examinations 60

4.6 How the SEC Exam Concludes 65

4.7 SEC OCIE Examination Trends 66

4.8 Not Underestimating the SEC Examiners 67

CHAPTER 5 How to Defend FINRA Examinations 69

5.1 FINRA Qualification Standards and Rules and Regulations 70

5.2 FINRA’s Risk-Based Approach 71

5.3 FINRA’s Regulatory and Examination Priorities 71

5.4 Differences between FINRA and SEC Exams 78

5.5 Types of FINRA Exams 79

5.6 Conduct of FINRA Exams 80

5.7 How the FINRA Exam Concludes 83

5.8 Educating the FINRA Examiners 84

CHAPTER 6 How to Defend an NFA Examination 87

6.1 Types of Entities under the Jurisdiction of the NFA 87

6.2 Impact of the Dodd-Frank Act 90

6.3 NFA Examination Process 90

6.4 Preparing for an NFA Exam 92

6.5 Length and Conduct of the NFA Exam 93

6.6 How the NFA Exam Concludes 95

6.7 CFTC Examinations 96

6.8 Focusing on Strict Compliance with the Regulations 97

CHAPTER 7 How to Defend SEC Enforcement Actions 99

7.1 SEC’s Law Enforcement Function 99

7.2 How SEC Enforcement Actions are Triggered 101

7.3 Commencement of an SEC Enforcement Action 102

7.4 Converting the Inquiry to a Formal Investigation 103

7.5 Discovery Conducted by the SEC 104

7.6 The SEC Enforcement’s “Wells” Process 105

7.7 Use of Experts in SEC Enforcement Proceedings 108

7.8 Settlement Discussions 109

7.9 Trends in SEC Enforcement 110

7.10 Minimizing Exposure in an SEC Enforcement Case 114

CHAPTER 8 How to Defend FINRA Enforcement Actions 115

8.1 FINRA Disciplinary Actions 116

8.2 FINRA Enforcement Process 123

8.3 FINRA’s Formal Proceeding 125

8.4 Challenges of FINRA Enforcement Process 125

8.5 Conduct of the FINRA Hearing 126

8.6 Settlement Possibilities 128

8.7 Disciplinary Sanctions Available to FINRA 128

8.8 Right to Appeal Decision of Hearing Panel 129

8.9 Recent Trends in FINRA Enforcement 129

8.10 Mounting an Aggressive Defense 130

CHAPTER 9 How to Defend CFTC Enforcement Actions 131

9.1 Increased Aggressiveness on the Part of CFTC Enforcement 131

9.2 Types of Enforcement Actions Brought by the CFTC 133

9.3 Triggers for CFTC Enforcement Actions 137

9.4 CFTC Enforcement Process 137

9.5 Differences between CFTC and SEC Enforcement Proceedings 138

9.6 The CFTC “Wells” Process 139

9.7 CFTC Enforcement’s Use of Experts 140

9.8 Settlement Discussions 141

9.9 CFTC Enforcement’s Use of Administrative Proceedings 142

9.10 Trends in CFTC Enforcement 142

9.11 Flawed Assumptions about CFTC Enforcement Process 143

9.12 Strategies for CFTC Enforcement Cases 144

CHAPTER 10 How to Defend NFA Enforcement Actions 147

10.1 NFA Disciplinary Actions 147

10.2 How Complaints are Triggered 148

10.3 Investigative Process 149

10.4 Settlement 150

10.5 The Hearing Panel and Hearing Committee 151

10.6 Conduct of the Hearing 152

10.7 Written Decision after the Hearing 153

10.8 Appeal of an Adverse Decision 153

10.9 The MRA Procedure 154

10.10 Types of Penalties Assessed by the NFA 155

10.11 Number and Types of Disciplinary Actions 156

10.12 Trends in NFA Enforcement 159

10.13 Preparing a Defense 159

CHAPTER 11 How to Participate in the Regulatory Comment Process 161

11.1 Dodd-Frank Rulemaking 161

11.2 SEC Rulemaking Process 162

11.3 Candidates for Comments 163

11.4 Role of Trade Association in Comment Process 163

11.5 Content of the Comment Letter 165

11.6 Approaches to an Effective Comment Letter 168

11.7 Significance of the Economic Impact of Proposed Regulations 168

11.8 Requesting Meetings with Agency Officials 170

11.9 Submitting Comments after the Deadline 171

11.10 Learning about Rulemakings 171

11.11 Assistance from Outside Counsel 172

CHAPTER 12 How to Defend FCPA Claims 173

12.1 FCPA Provisions 173

12.2 FCPA Enforcement Authority 174

12.3 Violations of the FCPA 175

12.4 Penalties for Violating the FCPA 176

12.5 FCPA Exemptions 176

12.6 DOJ/SEC Guidance 177

12.7 The U.K. Bribery Act 179

12.8 Devising Effective Compliance Programs 180

12.9 Training on Compliance Standards 181

12.10 Achieving a Culture of Compliance 181

12.11 Risk-based Due Diligence and Monitoring 182

12.12 Conducting FCPA Compliance Assessments 183

12.13 Importance of Risk Assessment 184

12.14 Management of Third Parties 185

12.15 Conducting Due Diligence on Acquisition Targets 187

12.16 The Triggers for an FCPA Enforcement Action 188

12.17 Self-disclosing Violations 189

12.18 Reducing Exposure 190

CHAPTER 13 How to Conduct Internal Investigations 191

13.1 Limiting Exposure through Effective Internal Investigations 191

13.2 Lessons Learned from High-Profile Investigations 192

13.3 Commencing the Internal Investigation 193

13.4 Retaining an Outside Investigator 194

13.5 Initial Steps of Investigation Process 195

13.6 Methods of Obtaining Information 195

13.7 Collecting Documents 196

13.8 Strategies for Conducting Interviews 197

13.9 Briefing Management during an Investigation 200

13.10 Drafting the Investigative Report 201

13.11 Incorporating Recommendations for Improvement 201

13.12 Protecting Files Associated with Internal Investigation 202

13.13 Retaining the Investigative Report 204

CHAPTER 14 Conclusion 205

14.1 Overlapping Jurisdictions after the Dodd-Frank Act 206

14.2 Regulatory Failures Post-Financial Crisis 209

14.3 Improving of Coordination between Regulatory Agencies 210

14.4 Understanding the Regulatory Climate 212

About the Website 215

Index 217

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