Growing Demands of Compliance Oversight Weighing Down Directors

Not surprisingly, directors are feeling the weight of this growing regulatory burden.  In a recent survey, 56 percent of directors responding said that growing regulation and enforcement initiatives are putting excessive burdens on directors.⁴  With the growing demands on directors’ time, there is increasing temptation for directors to adopt a “check the box” approach to their legal and regulatory oversight responsibilities.  Such an approach, however, would be a mistake.  Among other things, having a strong compliance program in place can reduce a company’s penalties under the Federal Sentencing Guidelines.  In addition, enforcement agencies often consider the effectiveness of a company’s compliance programs when deciding whether to bring charges or settle an enforcement action.  Further, last year the SEC and Department of Justice jointly issued guidance on what they consider to be an effective compliance program for purposes of the Foreign Corrupt Practices Act (FCPA).  Among other things, the guidance cautions against a “check the box” approach to compliance and emphasizes that the SEC and DOJ will consider whether senior executives and the board of directors have set the right tone at the top and demonstrated a commitment to a “culture of compliance” that is reinforced and implemented throughout the organization.⁵  In a 2013 survey, 60 percent of directors responding said that their board had held discussions regarding tone at the top this year, up from 46 percent in 2012,⁶and 46 percent said they had increased their interactions with members below the executive level as part of their compliance oversight, a 15 percent increase over 2012.⁷

Having a strong and effective compliance program in place is even more important with the increasingly vigorous enforcement of regulations.  The SEC and the Department of Justice have been ramping up their enforcement efforts under the FCPA over the past several years.  Two-thirds of the top 20 largest criminal FCPA case resolutions have occurred in the last three and one-half years, and three of the top five largest penalties ever issued have been in the last year.⁸The price for violating the FCPA can be very high, involving not only significant fines and penalties, but also reputational damage, criminal prosecution and investor lawsuits.

In addition, the SEC’s new Chairman, Mary Jo White, promised Congress that she would pursue a “bold and unrelenting” enforcement program, and with just over seven months at the helm, she appears to be fulfilling her promise.  In Chairman White’s short tenure, the SEC has changed its “neither admit nor deny” settlement policy to require admissions of wrongdoing from certain defendants when settling enforcement actions.  The SEC has already applied its new policy in two high profile cases this fall — one involving Philip Falcone and his hedge fund firm, Harbinger Capital Partners LLC, and the other involving J.P. Morgan Chase & Co.  The SEC has also begun imposing more significant monetary penalties, and has announced new initiatives to target fraudulent and improper financial reporting, abusive trading and fraudulent conduct in securities of microcap companies.

Although the SEC is utilizing increasingly sophisticated and powerful technology and tools to assist in its enforcement efforts, the agency is also getting help from whistleblowers.  The SEC received over 3,000 tips in the first two years of its new whistleblower program.  The announcement of a recent award of $14 million to a single whistleblower will likely spur even more tips.

This post was excerpted from our Top 10 Topics for Directors in 2014 alert. To read the full alert, please click here.