August 3, 2010
Authored by: Paul Huey-Burns
Public companies should be aware of the following potential landmines – there are others – crafted into the Dodd-Frank Act:
Enhancements to whistleblower incentives and protections (§ 922), which may encourage employees to report borderline (or even non-existent) issues to authorities.
The lowering of the standard for “aiding and abetting” liability from “knowing and substantial” assistance to “knowing or reckless and substantial” assistance (§ 929 O), which may encourage the SEC to pursue marginal actions against companies or individuals who potentially may have assisted a violation. (The Act also mandates a GAO study of the benefits and detriments of enabling private rights of action for aiding and abetting violations. Such a study could be a basis for legislative attempts, within the next few years, to overturn the long-standing prohibition of such actions established by Central Bank of Denver and other cases.)
Empowerment of the SEC to seek and obtain monetary penalties in administrative proceedings against entities and individuals who are not registered with the Commission, e.g. public companies that are not registered as broker-dealers or investment advisors (§ 929 P). There is a perception that administrative proceedings – unlike actions in federal district court –provide the SEC with a “home-court advantage.” Previously, the Commission would have had to file an action in district court were it to seek monetary penalties against a public company.
The mandating of more rigorous deadlines for the completion of enforcement actions, which may cause the SEC Staff to be even less flexible than currently in accommodating reasonable scheduling requests (§ 929 U). The more rigorous deadlines may also cause the Staff to be less willing to give thoughtful, measured consideration to a potential defendant’s/respondent’s arguments.
Enhancements to federal sentencing guidelines in matters involving financial fraud and the extension of the federal statute of limitations for securities actions (including actions by the SEC seeking monetary penalties) from 5 to 6 years (§ 1079 A).
As is true of other aspects of the Act, the broad parameters of the enforcement and litigation provisions will be sharpened by subsequent agency rulemaking. In addition, from an enforcement perspective, the discretion with which prosecutors deploy the tools now available will largely determine the legislation’s true impact.