Tag: Compliance & ethics


The Role of Chief Compliance Officers Must be Supported

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Chief Compliance Officers of Investment Advisers (CCOs) play an important and crucial role in fostering integrity in the securities industry. They are responsible for making sure that their firms comply with the rules that apply to their operations. As part of that effort, CCOs typically work with senior corporate leadership to instill a culture of compliance, nurture an environment where employees understand the value of honesty and integrity, and encourage everyone to take compliance issues seriously. CCOs of investment advisers (as with CCOs of other regulated entities) also work to prevent violations from occurring in the first place and, thus, prevent violations from causing harm to the firm, its investors, and market participants. Given the vital role that CCOs play, they need to be supported. Simply stated, the Commission needs capable and honest CCOs to help protect investors and the integrity of the capital markets.

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DOJ Provides “Best Practices” for Corporate Internal Investigations

Eugene Illovsky is a partner at Morrison & Foerster LLP. This post is based on a Morrison & Foerster publication by Mr. Illovsky.

What does the Department of Justice think is a high-quality internal investigation? How does DOJ decide whether an investigation was good enough to help a company avoid, or at least mitigate, criminal charges? In recent speeches, DOJ has provided important guidance on its view of best practices, and some useful common-sense reminders, for our clients’ counsel and their investigating board committees. Much of that guidance came in May 19, 2015 remarks by Criminal Division head Assistant Attorney General Leslie Caldwell, as well as in other recent speeches.

AAG Caldwell made clear that DOJ does indeed take the time to scrutinize and “evaluate the quality of a company’s internal investigation.” She explained that the Department does this evaluation “through our own investigation” as well as “in considering what charges to bring against a company.”

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Governance Challenges Arising From “Corporate Cooperation” Concepts

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine, with assistance from Joshua T. Buchman and Kelsey J. Leingang; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

The current Department of Justice emphasis on “corporate cooperation” in the context of government investigations creates the potential for significant tension to arise between governance and executive leadership, which potential should be recognized and addressed proactively by the board.

The DOJ Criminal Division has, with notable frequency this spring, sought to increase public transparency as to the process it applies when making a decision with respect to corporate prosecutions. A principal goal of DOJ’s public effort is to clarify the parameters it considers in deciding how to proceed when made aware of alleged corporate wrongdoing. This goal includes making the value of cooperation, and the consequences of noncooperation, more clearly apparent to corporations and their advisors. [1]

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Capital Unbound: Remarks at the Cato Summit on Financial Regulation

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the Cato Summit on Financial Regulation. The complete publication, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am happy to be with you in New York City. When I have the opportunity to travel for meetings or to conferences such as this, I have fundamentally different conversations than when I am in Washington, D.C. In Washington, conversations frequently are scripted. Participants, who may be accompanied by trade association representatives and lawyers, use their talking points and have been coached to “stay on message.” Those discussions are undoubtedly meaningful as we at the Securities and Exchange Commission (“Commission” or “SEC”) engage in rulemaking and otherwise set policy.

But outside of Washington D.C., people generally want to talk about something else. They want to share their dreams and concerns about running their businesses. They want to show how their products, services, and innovations contribute to the economy, create jobs, and improve standards of living. And more importantly, they want to demonstrate how inside-the-beltway regulations are often focused on concerns that do not represent the biggest risks of harm to investors, customers, and businesses outside the beltway. I hear how regulations distract attention from the real risks and challenges of operating a business in globally competitive markets.

Compliance with securities laws and regulations is only one component of running a company. A business must also comply with laws on consumer protection, taxes, safety, employment, zoning, and the environment, to name only a few. If you have multiple locations—such as in New York, New Jersey, and Connecticut—you must deal with regulators in each jurisdiction. Soon, it may seem like you exist not to provide a good or service, but just to stay in compliance with the law.

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Human Rights Through A Corporate Governance Lens

George Dallas is Policy Director at International Corporate Governance Network (ICGN). The following post is based on an ICGN publication by Mr. Dallas and Lauren Compere, Managing Director at Boston Common Asset Management; the complete publication, including annexes, is available here.

Human rights [1] are attracting increasing attention from a corporate governance perspective as a dimension of both business ethics and enterprise risk management for companies. Indeed, the ethical and risk dimensions are in many ways intertwined, insofar as ethical lapses or inattention to human rights practices by companies may not only breach the human rights of those affected by corporate behaviour, but may also have material commercial consequences for the company itself. In extreme cases human rights problems can pose a franchise risk to companies [2]; in lesser cases these can increase costs and damage valuable relationships with stakeholders.

In a broad governance context human rights cannot be simply framed as a reputational or “non-financial” risk; the consequences of poor human rights practices can materially impact a company’s stakeholder relations, financial performance and prospects for sustainable value creation. Accordingly, human rights is an issue warranting greater attention from long-term investors as a matter of investment analysis, valuation and engagement with companies.

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The SEC as the Whistleblower’s Advocate

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent address at the Ray Garrett, Jr. Corporate and Securities Law Institute–Northwestern University School of Law in Chicago, Illinois; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am very honored to address the Garrett Institute, one of the most important programs in the country for corporate and securities lawyers, and to be in David’s home territory of Northwestern Law School where he served as Dean before going on to serve as a very distinguished Chairman of the SEC in the late 1980s.

Although the Garrett Institute was established 35 years ago to honor former SEC Chairman Ray Garrett, Jr., I really first came to learn about him when I did a bit of research for a speech I gave in honor of former SEC Commissioner Al Sommer on the importance of the SEC as an independent agency. Mr. Sommer, himself a legendary Commissioner, was recommended by Chairman Garrett to succeed him as Chairman. Seemingly, that did not come to pass because Commissioner Sommer was a Democrat during a Republican administration. That, however, did not stop Chairman Garrett, a Republican, from recommending the person he thought would be the best for the job.

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Holding Corporate Officers and Directors Accountable for Failures of Corporate Governance

The following post comes to us from Greg M. Zipes, a trial attorney with the United States Department of Justice. This post is based on his article Ties that Bind: Codes of Conduct that Require Automatic Reductions to the Pay of Directors, Officers, and Their Advisors for Failures of Corporate Governance that was recently published in the Journal of Business and Securities Law. All comments are in Mr. Zipes’ individual capacity and do not reflect the views of the Department of Justice.

Executives and directors at large corporations rarely face personal liability for failures of oversight that lead to large penalties or losses to their companies. As outlined in my recent article, the American consumer can help provide a solution to this lack of accountability.

I propose that corporate executives and directors sign binding codes of conduct requiring them to uphold specific standards within their corporations. They would agree to specific, transparent reductions in compensation if they fail to live up to these standards. This proposal does not rely on the altruism of these corporate heads to sign. Rather, it assumes that those consumers, dismayed by corporate excesses, will direct at least a portion of their business towards those companies with executives who are willing to put their compensation on the line.

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Suspect CEOs, Unethical Culture, and Corporate Misbehavior

The following post comes to us from Lee Biggerstaff of the Department of Finance at Miami University, David Cicero of the Department of Finance at the University of Alabama, and Andy Puckett of the Department of Finance at the University of Tennessee.

Trust is part of the foundation of public markets. Scandals at firms such as Enron and HealthSouth fractured this foundation and motivated market participants to ask why executives and other employees at these firms misled investors. Some regulators and experts conjecture that the roots of these scandals can be traced to the actions and attitudes of those at the very top of corporate leadership. In the words of Linda Chatman Thomsen (Director, Division of Enforcement, Securities and Exchange Commission) “Corporate character matters—and employees take their cues from the top. In our experience, the character of the CEO and other top officers is generally reflected in the character of the entire company.” In our paper, Suspect CEOs, Unethical Culture, and Corporate Misbehavior, forthcoming in the Journal of Financial Economics, we provide evidence consistent with this perspective by demonstrating an empirical link between CEOs’ revealed character and the misbehaviors of the firms they manage.

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SEC Enforcement Developments in 2014, and a Look Forward

The following post comes to us from Bill McLucas, partner and chair of the securities department at Wilmer Cutler Pickering Hale and Dorr LLP, and is based on a WilmerHale publication by Mr. McLucas; the complete publication, including footnotes, is available here.

As we noted last year in our memorandum focused on 2013 developments, Securities and Exchange Commission Chair Mary Jo White has called for the SEC to be more aggressive in its enforcement program. By all accounts, the Enforcement Division has responded to that call. The past year saw the SEC continue the trend, started under Enforcement Director Robert Khuzami in 2009, of transforming the SEC’s civil enforcement arm into an aggressive law enforcement agency modeled on a federal prosecutor’s office. This should not come as a surprise since both Andrew Ceresney, the current Director, and George Cannellos, Ceresney’s Co-Director for a brief period of time, like Khuzami, spent many years as federal prosecutors in the Southern District of New York. And the Commission itself is now led for the first time by a former federal prosecutor, Mary Jo White, the US Attorney for the Southern District of New York from 1993 to 2002. Given the events of the past decade involving the Madoff fraud and the fallout from the 2008 financial crisis, we believe both the aggressive tone and positions the SEC has taken in recent years will continue.

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Private Equity Fund Managers: Annual Compliance Reminders and New Developments

The following post comes to us from David J. Greene, partner focusing on investment fund formation, structuring, and related transactions at Latham & Watkins LLP, and is based on a Latham client alert by Mr. Greene, Amy Rigdon, Barton Clark, and Nabil Sabki.

US federal laws and regulations, as well as the rules of self-regulatory organizations, impose numerous yearly reporting and compliance obligations on private equity firms. While these obligations include many routine and ongoing obligations, new and emerging regulatory developments also impact private equity firms’ compliance operations. This post provides a round-up of certain annual or periodic investment advisory compliance-related requirements that apply to many private equity firms. In addition, this post highlights material regulatory developments in 2014 as well as a number of expectations regarding areas of regulatory focus for 2015.

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