Stephen Cohen, the SEC’s Associate Director of Enforcement, recently tied robust compliance programs to enforcement “credits.”
In remarks to compliance and ethics professionals at the annual conference of the Society of Corporate Compliance and Ethics, Cohen said that there is “no doubt . . . that a strong compliance and ethics program not only provides direct economic benefits to your company, but will also allow you to reap significant credit should you ever deal with us or our law enforcement colleagues.” In a post-financial crisis, post-Dodd- Frank world, Cohen said, “rigorous compliance must be at the forefront of every company’s attention.”
Cohen said that the enforcement staff gives credit to registrants that demonstrate effective compliance programs and a “genuine commitment to ethical principles.” In addition, according to Cohen, the staff will give much more credit to registrants that demonstrate that “misconduct is an outlier in a highly ethical and compliance-driven culture rather than a remedial step after investors have suffered losses.”
Cohen also said that a recent enforcement action against a portfolio manager charged with misleading his firm’s CCO sends a clear message that “professionals have an obligation to adhere to compliance policies, and that the Commission will not tolerate interference with CCOs who enforce those policies” (see our blog post about this case). Moreover, he said, investment company boards have a vital responsibility to fulfill their oversight role. He cited a recent case against mutual fund directors charged with failing to fulfill their obligations to fair value assets held by a fund. (For more information on this case, see our recent client alert.)
Cohen also discussed the SEC’s whistleblower program, and said that its purpose is to “bolster, not supplant, the compliance framework in the private sector.” He said that a majority of the whistleblower claims relate to reports first made internally, and this can benefit a company’s overall compliance program.
Cohen outlined the warning signs of inadequate programs that compliance and ethics professions should be looking for, including:
- pushing the envelope and tolerating close-to-the-line behavior
- an overly technical approach to issues of ethics;
- explanations that don’t add up; and
- limiting access of legal and compliance personnel to a company’s senior leadership.
Conversely, Cohen identified several hallmarks of an effective compliance program including:
- proper governance and a strong “tone at the top”;
- a strong ethical culture;
- integrating expectations of integrity, compliance and ethics into a firm’s performance management and compensation systems;
- ensuring that employees believe that they can raise concerns confidentially and without fear of retaliation; and
- keeping pace with developments and leading best practices in the industry.