A Window into the SEC’s Enforcement Strategy
On November 18, 2016, US Securities and Exchange Commission (SEC) Chair Mary Jo White gave a speech covering the SEC’s enforcement strategy at the New York University School of Law. Considering the admitted results of the “bold and unrelenting” SEC enforcement strategy White had first promised in her Congressional nomination hearings, a fitting alternative title to her speech would be “and I meant it.”
Before moving on to an analysis of the speech, it’s worth noting that the SEC works closely with the US Department of Justice (DOJ) on some enforcement issues, including actions involving the Foreign Corrupt Practices Act (FCPA). For our discussion of a recent speech on that topic by Assistant Attorney General Leslie R. Caldwell of the DOJ’s Criminal Division, see An Inside Look at FCPA Enforcement.
“Investigate to Litigate” Strategy
White laid out the SEC’s enforcement strategy, which she calls “investigate to litigate,” of investigating with the aim of acquiring persuasive and court-admissible evidence that leverages a win at trial or a favorable settlement. This includes, she noted, sharing what the SEC has learned during its investigation with defense attorneys to encourage cooperation.
“This sort of blunt and bold transparency,” according to White, “drives home to parties in our crosshairs that we are ready, willing, and able to litigate the case – and win.” Crediting this strategy, White declared that the SEC has “not lost a jury trial in federal district court in two and a half years, and the wins have been significant.”
White considers whistleblowers under the Dodd-Frank Act to be “key sources of significant cases.” The SEC has paid more than $100 million to reward whistleblowers and received more than 4,200 tips in fiscal year 2016. However, she notes that since some corporations implicitly or explicitly discourage whistleblowing, the SEC has been aggressive in enforcing anti-retaliation provisions of the Dodd-Frank Act and in litigating against employers who impede reports (see footnotes 14 through 16 for examples).
Targeting Bad Actors
White also stressed that the while the SEC continues to go after company misconduct, the commission has focused on punishing responsible individuals. She reasons that companies can only act through their employees, and that individual liability creates a strong deterrent effect on market participants.
Admissions of Wrongdoing
Another weapon in the SEC’s enforcement arsenal is the requirement that individuals and companies must admit wrongdoing as a condition of settling some types of charges. This unique requirement, which White calls “a first for a civil financial regulator,” was implemented by White in 2013 and informed by her experience negotiating guilty pleas as a criminal prosecutor. Most other civil settlements, by contrast, are settled without requiring the charged party to admit (or deny) any wrongdoing. The SEC’s example has, according to White, inspired other financial regulators (such as the US Commodity Futures Trading Commission and the Consumer Financial Protection Bureau) to follow suit.
While White acknowledges the difficulty of measuring the effectiveness of the SEC’s enforcement activity, she avers that:
[A]fter decades in the trenches in both the public and private sectors, I am convinced that strong enforcement has a uniquely deterrent value in white collar enforcement – sophisticated and knowledgeable market participants pay very close attention to what the SEC and the Department of Justice are doing and modify their conduct accordingly.
Accordingly, White says that SEC enforcement actions result in measurable success when they hone in on “cases that have a strong and immediate impact on problematic industry norms and practices.”
What SEC Enforcement Means to You
The SEC’s “bold and unrelenting” enforcement under White’s vigil underscores the importance of effective compliance and ethics programs that go beyond checking the boxes to promote a culture of honesty and integrity. Savvy leaders will note that in addition to the deterrent effect on market misconduct, attention to SEC enforcement actions lets them derive salient lessons to drive ethical conduct. For example, they can gain insights into what to emphasize in writing and implementing policy, and hire compliance professionals who incorporate case-based learning into employee training programs.
Additionally, while White emphasizes that the SEC rewards whistleblowing to the Commission, smart employers also encourage internal reports as a way to beef up their compliance programs. Although “whistleblower hotlines” are common, they may not be enough. Studies have shown that employees feel more comfortable and less rushed if they have multiple avenues to report, including options to report in person, via email, or using online reporting.
A vigorous anti-retaliation program is a necessary part of every company’s compliance program. While it’s true that not all allegations of financial fraud or other misconduct will withstand judicial scrutiny under the laws enforced by the SEC, workers have even broader protections under state and federal employment laws.
To prevent major misconduct in the first place, a compliance program needs to be more than a pretty piece of paper. Companies need to combine compliance with culture. Part of that process involves reinforcing a compliance culture by communicating leadership’s goals and values to all employees through effective training.
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