Directors should make sure that their companies maintain robust compliance programs and disclosure controls and procedures, as the SEC has stepped up its enforcement efforts with a goal of pursuing all types of violations of the federal securities laws. SEC Chair Mary Jo White has vowed to pursue even the smallest infractions, basing the SEC’s “broken windows” enforcement policy on the theory that “minor violations that are overlooked or ignored can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines.”i And just over a year into her tenure, she has done just that, with the SEC filing a record 755 enforcement actions in 2014.ii
These enforcement actions span the securities industry and include several first-ever cases. Among other things, the SEC continued its aggressive cross-border anti-corruption enforcement in 2014, filing significant actions against several companies under the Foreign Corrupt Practices Act (FCPA), and obtaining the highest-ever FCPA penalties against individuals. Signaling that “even the smallest infraction” will be pursued, the SEC recently brought enforcement actions against 34 individuals and companies for failure to promptly report their securities holdings and transactions as required under Section 13(d) or (g) and Section 16 of the Securities Exchange Act of 1934, and against 10 micro-cap companies for failing to file required Form 8-Ks disclosing certain financing agreements and unregistered stock sales.
In addition to utilizing new investigative approaches and innovative data and analytical tools to ferret out many of these violations, the SEC received more than 3,500 tips from whistleblowers in fiscal year 2014, the largest number since the whistleblower rules went into effect in 2011.iii Since 2011, the SEC has given 14 whistleblower awards, nine of which were awarded in 2014. And the SEC recently announced its largest ever award of $30 million, which is more than double the previous record of $14 million. The size of these awards provides strong incentive for individuals to report suspected conduct to the SEC.
The increase in whistleblower activity shows no signs of abating. To the contrary, Sean McKessy, Chief of the SEC’s Office of the Whistleblower, has said that he intends to broaden the scope of the SEC’s activity in this area, making employers who retaliate against whistleblowers a priority. The SEC brought its first whistleblower retaliation case in June, resulting in $2.2 million in sanctions against the offending company. McKessy has suggested that this case may be the first of many, noting that the SEC is actively looking to bring cases against employers who make it more difficult for whistleblowers to come forward and provide information to the SEC. Employee confidentiality agreements, including in the context of employment and severance agreements, that “impede” whistleblower activity are now falling under heightened scrutiny. Of particular concern are clauses that prohibit employees from reporting misconduct to a government agency without first getting approval from a supervisor, or that prohibit all discussion of such misconduct without including an express exclusion for protected whistleblower activity, particularly if such clauses threaten an employee with termination or legal action based on a disclosure.
In light of these developments, it is critical for companies to have comprehensive and effective compliance programs in place, including a transparent process for internal investigations. Companies should also review and update as necessary their anti-retaliation policies and procedures and make sure employees and executives at every level are sufficiently trained in this area.
This post was excerpted from our annual Top 10 Topics for Directors in 2015 alert. To read the full alert, please click here.
i Speech by SEC Chair Mary Jo White entitled “Remarks at the Securities Enforcement Forum,” (Oct. 9, 2013).
ii Press Release, “SEC’s FY 2014 Enforcement Actions Span Securities Industry and Include First-Ever Cases” (Oct. 16, 2014).
iii “SEC Reports Rise in Whistleblower Tips in Fiscal 2014,” Reuters (Nov. 18, 2014).