Bates Group Managing Director David Birnbaum Quoted by Ignites, a Financial Times Service

Bates Group Managing Director David Birnbaum is quoted in an Ignites (FT's Mutual Funds industry publication) article on the compliance concerns companies need to consider during and after a merger or acquisition.  Read the full story below

Compliance Team Clashes Put M&A Deals in Jeopardy

By Jill Gregorie December 15, 2016

As the race to boost assets, broaden distribution reach and improve margins pushes more firms to consider buying or merging into another shop, consultants and lawyers warn firms that are considering rushing to the altar to look out for one thing: a culture clash in the compliance department can quickly erase anticipated business gains.

Both before and after striking deals, companies need to engage in meticulous due diligence of compliance risks and ensure careful integration of the two regimes in order to avoid exposure to regulatory liabilities that could undermine any financial benefits of the transaction, lawyers say.

“Compliance has moved to the forefront and is now a top priority of things to check off and understand before signing a deal,” says Jay Langan, a managing partner in Deloitte’s M&A Transaction Services.

The second half of 2016 saw a number of notable mergers, and analysts anticipate that regulatory changes, fee pressures and other market forces will prompt further consolidation in 2017, as reported. Just this week, for example, UniCredit finally struck a $4.1 billion deal to sell Pioneer Investments to France’s Amundi. Recent months have also brought the Henderson-Janus merger, Nationwide’s purchase of Jefferson National and Eaton Vance’s acquisition of Calvert.

As other firms are expected to follow, compliance should be top of mind during even early phases of due diligence.

“You need to make sure that what you’re buying and what you’ve valued will still exist, and not just make assumptions about regulatory actions,” says David Birnbaum, an attorney and managing director at Bates Group, an Oswego, Ore.-based management consulting firm that provides legal and regulatory support for the financial services industry.

Calvert, for example, publicly admitted to two missteps that drew SEC investigators — bond mispricing and misuse of shareholder assets for marketing purposes — just prior to its acquisition. When Eaton Vance announced plans to buy the shop days later, the Boston-based buyer made clear that its agreement was to buy only the assets of the socially responsible specialist, and that liabilities related to the regulatory “pre-closing” problems “remain with the seller.”

While it’s standard for an acquirer’s compliance culture to become the dominant regime, proper integration is still a two-way process, says Birnbaum, who formerly served as a senior legal executive and advisor to Merrill Lynch’s U.S. and international wealth management businesses and worked on Bank of America’s acquisition of Merrill.

“If you’re trying to get a lot of buy-in, it helps to educate and explain changes to the acquired team. Here’s what you did, here’s what we do. Here’s what you require, here’s what we require. Here’s what will be required in the future, and here’s how we transition that.”

In the case of a “merger of equals,” firms need to designate who’s in charge and then ensure that decision is upheld, says Ted Laurenson, a partner with Chicago-based McDermott Will & Emery.

The new compliance chief should hold separate and distinct training sessions for supervisors and employees. “You want those managers to understand they’re supervising to a different and perhaps higher standard,” Birnbaum says.

Firms should establish transition teams that consist of representatives from corporate strategy, business development, and finance working alongside compliance, legal and risk, he adds. Together, they weigh in on whether to approve of acquisitions and dispositions.

First, the compliance team should access all publicly available information, including regulatory filings, annual reports and proxy statements, Birnbaum says. Then they should bring in representatives from the acquired firm for interviews and background material.

The transition team should request paperwork demonstrating the regulatory health of the firm. These include a list of key employees who have left the firm, and when possible, why; a list of all the outside business ventures in which any portfolio managers are involved; and documents reflecting regulatory and disciplinary actions, Birnbaum says.

In addition, the acquirer should review legal incorporation documents, any outstanding financial obligations, any records of the target firm violating its code of ethics and their fee arrangement schedules.

“There may be three of four surprises — one pleasant surprise and two or three not so pleasant surprises. One of the larger unpleasant ones may be regulatory in nature,” he adds.

Transition teams should gather either virtually or in person to systematically review each document, he says. Ideally, due diligence team members will meet at the beginning and end of each day to discuss any issues that arose and determine which concerns warrant additional scrutiny.

International deals add another layer of complexity. If acquiring a foreign business, compliance teams may rely on local counsel and regulatory experts to conduct due diligence on the target business, says Laurenson, of McDermott Will & Emery. In those instances, cross-border communication is especially paramount.

“I have found that offshore advisors are sometimes not as well informed about the requirements of U.S. regulations, and think that complying with somewhat analogous foreign regimes is enough, even if that regime has different details from the American regime,” he says. “You have to be careful with that.”

Keeping regulators posted is also crucial. In order to demonstrate that the new firm intends to follow the letter and spirit of the rules, legal and compliance leaders should contact regulators as soon as possible and keep them apprised throughout the merger, Birnbaum says.

Controlling the message will ensure that any stories regulators hear “come from you, and not the press,” Birnbaum says.

Finally, for the new compliance regime to succeed long-term, it’s important that compliance leaders at both the acquiring firm and its target “get close,” Birnbaum says. They may be needed to retrieve such institutional knowledge as the operation of document management systems, or they may be able to assist with future litigation. If one compliance chief is asked to leave as part of the merger, a severance package may help to maintain good relations, in case that individual's assistance is ever required, he adds.

“The people who have dealt with problems before are the best for setting the stage to deal with any that show up later,” Birnbaum says.

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