As companies prepare for the second year of filings under the Securities and Exchange Commission’s (“SEC”) new conflict minerals rule, many companies are looking for guidance from the first annual filings, which were due June 2, 2014. As expected, the inaugural Form SD and conflict minerals report filings reflect diverse approaches to the new compliance and disclosure requirements. We offer below some observations based on the first round of conflict minerals filings for companies to consider as they address their compliance programs and disclosures for the 2014 calendar year. It is important to note, however, that the shape of future compliance and reporting obligations will be impacted by the outcome of the pending litigation challenging the conflict minerals rule, which also is discussed below, and any subsequent action by the SEC.
Posts Tagged ‘Compliance & ethics’
After a year of “first ever” actions targeting private equity, fund managers should be vigilant, even about seemingly small issues.
In reviewing the results of SEC Enforcement’s fiscal year that ended on September 30, the agency congratulated itself on its comprehensive approach to enforcement and its “first-ever” cases. Private equity fund managers should consider a number of important takeaways.
The SEC Continues to Pursue a Broken Windows/Zero Tolerance Approach
Although the Enforcement Division announced a record number of enforcement actions, and the largest aggregate financial recovery, 2014, unlike in years past, did not include a headline-grabbing case such as Enron, Worldcom or Madoff. More recently, the agency has chosen to emphasize its pursuit of smaller cases as a way of improving compliance in the industry. SEC Chair Mary Jo White and Enforcement Director Andrew Ceresney have each touted the agency’s “broken windows” approach to enforcement. A “broken windows” strategy means that the SEC will pursue even the smallest violations on the theory that publicly pursuing smaller matters will reduce the prevalence of larger violations. Ceresney has described “broken windows” as a zero tolerance policy. This past year illustrated the agency’s commitment to applying enforcement sanctions to what some might consider “foot fault” incidents. For example, in September 2014, the SEC announced a package of three dozen cases involving a failure to promptly file Section 13D and Section 13G reports, as well as Forms 3 and 4. Many of the filers charged were just days or weeks late in disclosing their positions. In announcing the cases, Ceresney emphasized that inadvertence was not a defense to late filings.
We have written a detailed essay presenting practical vision of the responsibilities of lawyers as both professionals and as citizens at the beginning of the 21st century. Specifically, we seek to define and give content to four ethical responsibilities that we believe are of signal importance to lawyers in their fundamental roles as expert technicians, wise counselors, and effective leaders: responsibilities to their clients and stakeholders; responsibilities to the legal system; responsibilities to their institutions; and responsibilities to society at large. Our fundamental point is that the ethical dimensions of lawyering for this era must be given equal attention to—and must be highlighted and integrated with—the significant economic, political, and cultural changes affecting major legal institutions and the people and institutions lawyers serve.
It has been reported that approximately two-thirds of companies in the U.S. are affected by fraud, losing an estimated 1.2% of revenue each year to such activity.  Indirect costs associated with fraud, such as reputational damage and costs associated with investigation and remediation of the fraudulent acts, may also be substantial. When and where implemented, an internal whistleblower hotline is a critical component of a company’s anti-fraud program, as tips are consistently the most common method of detecting fraud.  Consequently, it is essential that companies consider implementing, if they have not already done so, effective whistleblower hotlines.  To the extent hotlines are currently in place, companies need to evaluate them to ensure that the hotlines are operating as intended and are effective in preventing and identifying unethical or potentially unlawful activity, including corporate fraud, securities violations and employment discrimination or harassment. This evaluation should be a key element of every company’s assessment of its compliance and ethics program.
Two recent Dodd-Frank whistleblower awards suggest that the program is becoming the kind of “game changer” for law enforcement that many had predicted. The program, which took effect in August 2011, mandates the payment of bounties to persons who voluntarily provide information leading to a successful securities enforcement action in which more than $1 million is recovered. Informants are entitled to receive between 10 and 30 percent of the amounts recovered, with the precise amount to be determined by the SEC.
Last month, the SEC announced that it brought enforcement actions primarily relating to Section 16(a) under the Securities Exchange Act against 34 defendants. The defendants were 13 individuals who were or had been officers or directors of public companies, five individual investors, ten investment funds/advisers and six public companies.
This post briefly discusses several noteworthy points regarding this development and also discusses practical steps that companies could consider taking in response.
In our paper, Public Pressure and Corporate Tax Behavior, which was recently made publicly available on SSRN, we examine whether public scrutiny related to firms’ tax avoidance activities has a significant effect on their tax avoidance behavior. In contrast to U.S. regulations that only require disclosure of significant subsidiaries, the U.K.’s Companies Act of 2006 (“Companies Act”) requires firms to disclose the name and location of all subsidiaries, regardless of size or materiality. Although the U.K. law went into effect in 2006, in 2010, ActionAid International, a global non-profit dedicated to ending poverty worldwide, discovered that approximately half of the firms in the FTSE 100 were not disclosing the name and location of all subsidiaries. ActionAid’s finding was prima facie evidence that the Companies House was not enforcing the subsidiaries disclosure requirement. More importantly, the fact that some firms chose not to comply with the law suggests that the cost of disclosing detailed information on subsidiaries was greater than the benefit of a more complete information environment for the non-compliant firms.
The world of American finance has been invested by a new scandal. At its core, there is New York’s Federal Reserve; in other words, the institution that supervises America’s main banks. The scandal exploded because of the revelations emerged in a legal lawsuit about a layoff.
Carmen Segarra, a supervision lawyer, sued after being fired only seven months into her job. The New York Fed says it fired her due to poor performance. Segarra instead maintains that she was given the pink slip because she did not adapt to ‘Fed culture’—so permissive towards banks it regulates, almost to the point of collusion.
In our paper, Executive Gatekeepers: Useful and Divertible Governance?, which was recently made publicly available on SSRN, we study the role of executive gatekeepers in preventing governance failures, and the counter-incentive effects created by equity compensation. Specifically, we examine the following two questions. First, do executive gatekeepers actually improve governance in the average firm? Second, does the effectiveness of gatekeepers in ensuring compliance and/or reducing corporate misconduct depend on their incentive contracts?
The increasing use of Non- and Deferred Prosecution Agreements (N/DPAs) has enabled federal prosecutors to incrementally expand their traditional role, exemplifying a shift in prosecutorial culture from an ex-post focus on punishment to an ex-ante emphasis on compliance. N/DPAs are contractual arrangements between the government and corporate entities that allow the government to impose sanctions against the respective entity and set up institutional changes in exchange for the government’s agreement to forego further investigation and corporate criminal indictment. N/DPAs enable corporations to resolve allegations of corporate criminal conduct, strengthen corporate compliance mechanisms to prevent corporate wrongdoing in the future, and mitigate the risks that collateral consequences of a conviction can bring for companies, their shareholders, employees, and the economy.