regulatory change simplified: a review of key d&o regulatory issues

Regulatory Change Simplified: A Review of Key D&O

Regulatory Issues

MODERATOR:

Paul Lavelle, President, LVL Claims Services, LLC

PANELISTS:

Charles J. Clark, Esq., Partner, Kirkland & Ellis

Nina "Nicki" Locker, Esq., Member, Wilson Sonsini Goodrich & Rosati

Michael R. Smith, Esq., Partner, King & Spalding LLP

Foreign Corrupt Practices Act – Overview and Trends

Review of FCPA provisionsKing & Spalding

What is the FCPA?

• An anti-bribery statute• A public company accounting statute• Adopted in 1977 to prohibit bribery of foreign

government officials• Enforceable by the U.S. Department of Justice

and the SEC• Penalties and collateral consequences of

violation are severe• Enforcement activity has dramatically increased

in recent years

King & Spalding

Review of FCPA provisions

Anti-bribery provisions• Makes it a criminal offense for U.S. companies or persons to

bribe foreign officials for business purposes

Recordkeeping and internal control provisions• Requires U.S. issuers (SEC registrants) to make and keep

detailed and accurate financial records; prohibits the falsifying of corporate records to conceal bribes to foreign officials and other improper payments

• Issuer must devise and maintain a system of internal accounting controls to ensure accurate reporting of transactions, safeguarding of assets and financial statements are prepared in accordance with GAAP

King & Spalding

Recent FCPA enforcement trends

King & Spalding

New SEC FCPA Enforcement Unit“While we have been active in this area, more needs to be done, including being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations.” Robert Khuzami, Director of the Division of Enforcement at the SEC, August 2009

DoJ Fraud Section• Hiring additional prosecutors

• FCPA team set to double in 2011

Increased enforcement • Currently, 150 live cases in DOJ Fraud Section

• FBI undercover sting – military and law enforcement supply companies. 22 executives arrested in January 2010

Recent FCPA enforcement trends

King & Spalding

Total penalties2002 – 2010 (in millions)

Collateral Consequences of an FCPA violation

• Announcements of FCPA investigations or resolutions are increasingly followed by:

• shareholder derivative demands or suits • 10b-5 class action suits • employment related litigation

King & Spalding

Dodd-Frank SEC Enforcement Provisions


• Expanded Secondary Liability

• Reduces required intent for aiding and abetting liability to a showing of “recklessness” (as opposed to “knowingly”).

• Adds aiding and abetting liability under the Securities Act, Investment Company Act, and the Investment Advisers Act.

• Clarifies SEC’s authority to bring “control person” claims.

• Monetary Penalties in Administrative Proceedings• Authority to seek civil monetary in cease and desist proceedings; previously limited to seeking disgorgement of unlawful profits.

• May result in increased use of administrative proceedings where pretrial discovery is limited and no right to jury trial.

Kirkland & Ellis


• Jurisdiction Over Foreign Securities Transactions

• Attempts to grant SEC jurisdiction over foreign transactions if “significant steps” taken in the U.S. to further the violation, or if foreign misconduct had a “foreseeable substantial effect” in the U.S.

• Passed in response to Supreme Court’s June 2010 “f-cubed” case; however, language creates some ambiguity whether the provision accomplishes that objective.

Kirkland & Ellis


• “Collateral” Bars

• Authority to seek industry-wide bars, prohibiting association with investment adviser, broker-dealer, or other regulated entity.

• Previously, bars could only relate to working in the capacity in which the person committed a violation.

• Other Provisions• Increased funding, greater budget autonomy, and streamlined hiring authority for market professionals.

• Establishes deadlines for SEC enforcement actions, inspections, and examinations.

Kirkland & Ellis

Implementation of Dodd-Frank Reforms

• Significant Role of SEC

• Complicated, multi-year rulemakings, studies, and other regulatory actions to be completed by over a dozen regulatory agencies.

• SEC will take up much of the reform burden, undertaking 124 activities, including 17 studies, to implement the bill.

• SEC rulemaking and reporting requirements span a variety of issues, including OTC derivatives, private fund advisers, credit rating agencies, corporate governance, whistleblowers, resolution authority, systemic risk, and securitization.

Estimated 800 Hires Needed to Comply with New Obligations

Kirkland & Ellis

Enforcement’s Structural and Policy Changes

Kirkland & Ellis


• A Swifter SEC

• Eliminating an entire layer of management and restricting the use of tolling agreements.

• Delegating authority to obtain formal orders and issue subpoenas.

• Streamlining the Wells process and other processes.

• Increased Credit for Cooperation

• Formalized policy for into entering cooperation agreements with individuals.

• Utilizing DOJ-style deferred-and non-prosecution agreements.

• Expedited process for securing criminal immunity requests.

Kirkland & Ellis


• Office of Compliance and Inspection Examinations

• Support of Enforcement’s specialization initiative through sweep examinations.

• New procedures for third-party verification of information obtained in examinations.

• SEC Enforcement Manual (October 2008/revised March 2010)

• Greater transparency in investigative process and charging decisions.

• Formalization of policies: privilege waivers, contact with senior staff during investigation, parallel proceedings, access to investigative files, and closing process.

• Other Madoff Inspired Changes

• Dedicated complaint center, Office of Market Intelligence.

• New Division of Risk, Strategy, and Financial Innovation.

Kirkland & Ellis

Whistleblower Statute


• Genesis SEC’s lack of response to warnings re Madoff Ineffective SEC bounty program before Dodd-Frank Lack of robust internal corporate reporting processes

• Highlights Increased bounty payments

• 10 to 30 % of total sanctions recovered by government (greater than $1 million)

Voluntary submission of original information• Derived from independent knowledge/analysis • Must not be legally obligated to provide information

Wilson Sonsini Goodrich & Rosati


Broad eligibility for bounty• Employees, analysts, suppliers, customers

No requirement to report internally • No concrete incentive for reporting internally first • Incentive to bypass internal compliance processes

Investigation, remediation and self-reporting might eliminate any monetary sanctions

Protections for whistleblowers• Confidentiality • Prohibits discrimination • Retaliation claims


Opening The Floodgates

• Significant Increase in SEC enforcement activity FCPA: where the real money is

• 2010: 12 FCPA investigations with a total of more than $500 million in monetary penalties

• Increase in Shareholder Litigation Class action securities lawsuits Shareholder derivative lawsuits Significant increase in retaliation employment claims


Dodd-Frank Provisions

• Clawback of Executive Compensation Requires issuers to recover incentive-based compensation

in event of restatement • Applies to current and former executive officers• Strict liability – only requires material non-compliance

with financial reporting requirements • Say-On-Pay

Non-binding vote to approve compensation of executives • Will reveal views re “overcompensation”


Regulatory Change Simplified: A Review of

Key D&O Regulatory Issues

QUESTIONS?

Regulatory Change Simplified: A Review of Key D&O

Regulatory Issues

MODERATOR:

Paul Lavelle, President, LVL Claims Services, LLC

PANELISTS:

Charles J. Clark, Esq., Partner, Kirkland & Ellis

Nina "Nicki" Locker, Esq., Member, Wilson Sonsini Goodrich & Rosati

Michael R. Smith, Esq., Partner, King & Spalding LLP

regulatory change simplified: a review of key d&o regulatory issues

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