The evolving regulatory and litigation landscape continues to present risks for companies and their advisers. Most recently, in a statement consistent with the SEC’s oft-stated willingness to pursue “gatekeepers” for corporate misconduct,1 SEC Commissioner Kara M. Stein articulated the view that the role of “trusted advisors” in preventing fraud should be closely examined.2
In a keynote address delivered to compliance and other market professionals on May 19, 2014, Commissioner Stein observed that, in her experience, and despite the SEC’s increased emphasis on gatekeeper accountability,3 in-house lawyers typically have not been the subject of SEC enforcement. Commissioner Stein suggested that the SEC focus on in-house lawyers as they continue to scrutinize the role of accountants, directors and others, stating:
[O]ne gatekeeper that often is absent from the list of cases I see every week are the lawyers. Lawyers often serve as trusted advisers, and they give advice on almost every corporate transaction. They prepare and review disclosures that investors rely upon – disclosures that are at the core of the Commission’s regulatory program. And in most cases, they do a good job. But when lawyers provide bad advice or effectively assist in a fraud, sometimes their involvement is used as a shield against liability for both themselves, and for others.
Are we treating lawyers differently from other gatekeepers, such as accountants? I think we should carefully review the role that lawyers play in our markets, with a view towards how they can better help deter misconduct and prevent fraud.4
While the views expressed by Commissioner Stein are hers alone and do not represent those of the Commission, her statements are an example of the SEC’s increased focus on the role of in-house and outside advisers. For instance:
- As recently noted by the authors,5 company contracts and policies that can be read as incentivizing whistleblowers not to report alleged wrongdoing to the SEC or as otherwise attempting to evade SEC programs and compliance are under increased scrutiny. The SEC’s Chief of the Office of the Whistleblower in recent remarks has strongly cautioned counsel against drafting such materials, noting that the SEC has the power to preclude counsel from practicing before the Commission.6
- SEC Chair Mary Jo White, in remarks delivered at the New York City Bar Association on May 19, 2014, indicated that the SEC intends to rely on Section 20(b) of the Securities Exchange Act of 1934 as a means of holding accountable individual corporate insiders or advisers who participate in disseminating false or misleading statements.7 The SEC may use Section 20(b) to target individuals it considers gatekeepers notwithstanding, for instance, the Supreme Court’s 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders,8 where the Court held that only the maker of an allegedly false statement can be liable under Rule 10b-5.9
- Outside the context of SEC enforcement, the Delaware Chancery Court, in a recent case involving the contested sale of Rural/Metro to Warburg Pincus,10 found the financial adviser to Rural/Metro liable for aiding and abetting the board’s breach of its fiduciary and disclosure duties (while the board itself was shielded from liability under the company charter’s raincoat provision).11 In so doing, the court criticized the financial adviser’s conflict of interest in seeking to obtain a role in financing the potential buyer’s acquisition without disclosing these efforts to the seller. The court emphasized the adviser’s role as a “gatekeeper” and its view that “[t]he threat of liability helps incentivize gatekeepers to provide sound advice, monitor clients, and deter client wrongs.”12
In-house and outside advisers to corporations need to consider their role in deterring potential corporate wrongdoing and investor harm in light of the current regulatory environment. Advisers should be aware of best practices for identifying and handling red flags of potential wrongdoing, avoid conflicts of interest in counseling clients and disclose any such conflicts that exist.