Top SEC Official Has Encouraging Words About Compliance And Ethics Programs

On October 11, Lorin L. Reisner (left), Deputy Director, Division of Enforcement of the Securities and Exchange Commission, gave the keynote address at the PLI Advanced Compliance and Ethics Workshop 2011 in New York City. With his permission, here are some of the key points Reisner made about C&E programs in that speech; given the source, these should be of interest to boards of directors, senior managers and others responsible for safeguarding the well-being of publicly traded companies.

Government credit for C&E programs.  After noting that it is formal SEC policy to give credit in enforcement decisions for effective C&E programs, Reisner added that there is “another important benefit of good corporate citizenship and effective compliance when dealing with the government.  Every day, our enforcement staff makes judgments about the inferences that are properly drawn from the evidence under investigation.  Of course we are always going to draw the inferences that are most clearly warranted by the evidence. It is only common sense, however, that a company that can demonstrate an effective compliance program and a genuine commitment to the principles of fairness, respect for the law, integrity and professionalism can only benefit when those inferences are drawn. I cannot emphasize enough the level of trust that a genuine commitment to these principles can inspire and the level of distrust that ignoring or merely paying lip service to these principles can yield.” (Emphasis added).

The importance of C&E incentives to program effectiveness.  In considering companies’ C&E programs, Reisner stated, “[i]t is deeds and not words that make a compliance program effective, and deeds and not words that will help you when dealing with enforcement authorities. That means taking a good, hard, critical look at the company and asking whether it actually practices the values that make you proud.  It means that integrity and professionalism drive who gets recognized as excellent. It means making integrity and professionalism part of the promotion, compensation and evaluation processes for a company and taking swift and meaningful action against employees at every level who fail to meet these standards.”  (Emphasis added, and note that the SEC has been in the forefront of stressing the importance of internal incentives to program efficacy since this important speech in 2004 by its then head of enforcement).

Warning signs.  Reisner identified several important  warning signs about a company’s compliance culture:

• “[A] practice of playing it close to the line of what the law allows. …An effective compliance culture identifies and confronts employees, business units or business functions that have an orientation toward walking close to the line and keeps them well within the boundaries.”

• “[A]n emphasis on technical compliance without a more basic commitment to integrity and professionalism.  Instilling professional integrity throughout an organization is not a check-the-box exercise.  Simply meeting the minimum standards required when it comes to professional integrity is not consistent with a culture of excellence,” he cautioned. C&E personnel should also “[b]e on the lookout for people who are overly technical in their approach to issues of ethics and professional responsibility, particularly those who may disparage or diminish the importance of respect for the law and protecting the organization from reputational harm.” Reisner suggested as well that companies be watchful “for unprofessional conduct that may not be unlawful but is just unhelpful or disrespectful to others in the organization. Very often it is those individuals who are most likely to create legal risk.”

• “[E]xplanations that don’t add up.  If someone explains something to you in a way that you don’t understand, don’t accept it. And don’t allow others to be enablers by accepting explanations that don’t make sense. In many ways, one of the important lessons of the financial crisis is that highly sophisticated models that can explain away risk but defy common sense shouldn’t be trusted. Don’t fall into this trap. If something doesn’t look right and can’t be explained to your satisfaction in a simple and straight-forward way it is usually a danger sign.” 

• Finally, Reisner identified as a warning sign an organization’s limiting “the access of legal and compliance personnel to senior leadership of the company. Senior leadership cannot be fully engaged in establishing a culture of compliance, if they are not hearing candidly and regularly from those on the front lines of compliance efforts.” He also warned of the dangers of treating “lawyers and compliance professionals as hallway monitors rather than trusted advisors.”

Conclusion

I believe that Reisner’s remarks contain a treasure trove of information helpful to C&E programs. First, his explanation of the ways in which effective programs matter in the enforcement context is a powerful reminder of how strong C&E efforts can play a life-saving role for some companies. Second, his emphasis on program incentives should encourage the many companies that are still struggling with this challenging C&E program element to forge ahead. Finally, his identification of key warning signs should help inform how every board (or board committee) oversees their respective companies’ C&E programs.

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Jeffrey M. Kaplan, a partner in the Princeton, New Jersey office of Kaplan & Walker LLP, has practiced in the compliance law field since the early 1990’s. He serves as Adjunct Professor of Business Ethics at NYU’s Stern School of Business. He co-authored the Anti-Corruption Compliance Program Benchmarking Survey. Jeff can be contacted here.