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2012 Will Be Another Busy Year in Regulation and Compliance

Reese Darragh | January 3, 2012

Amidst holiday cheers and winter chills, lawyers and some former staff members of the Securities and Exchange Commission and the Justice Department confirm that 2012 will be yet another busy year in regulation. For compliance professionals who want to update their checklists, here are the experts' thoughts on what to expect from both agencies next year.

Dodd-Frank Act

If Dodd-Frank kept you guessing on the upcoming rulemaking proposals this year, the trend will continue well into the first half of 2012.

The SEC has announced its intention to finish rules on executive compensation even though Dodd-Frank does not specify a mandatory deadline on that front. The forthcoming rules will include specified clawback policies, new disclosure requirements for executive pay ratios, rules on employee and director hedging, and the relationship between executive compensation and company performance.

“We will most likely see the proposed rules on this issue come February or March and I expect them to be finalized end of next year,” says David Scileppi, leader of the securities & corporate governance practice at law firm Gunster.

Related to executive compensation, he adds, the SEC has also indicated that the independence of proxy advisory firms will be another focus next year.

SEC Chairman Mary Schapiro gave a speech in November confirming that the SEC shared many of Corporate America's concerns about the influence of proxy advisory firms' voting recommendations and potential conflicts of interest, particularly with say-on-pay voting. “The staff is working on recommendations pertaining to proxy advisory firms, and while I can't guarantee our timing in light of all that we have on our plate, I hope we can address concerns over their role, including disclosure of conflicts of interest and the information upon which they base recommendations, by the end of the year or early in 2012,” she said.

Also on the SEC's agenda are rules on security-based swaps in the derivatives market and market oversight—including the Volcker Rule, which prohibits banks from profiting through proprietary trading activities unless permissible by the rule, and a separate set of rules to address concerns on trading activities and banks' ownership in private equity and hedge funds. Comments on the proposed Volcker Rule are due by Jan. 13.

There's also the matter of the conflict-minerals rule included in Dodd-Frank.  Initially drafted to require additional disclosures by companies that used certain minerals mined from Central Africa, the rule proves to be so far-reaching that almost all companies that use materials containing traces of those minerals will have to comply with the additional reporting requirement. Business lobbyists and academic studies have both estimated the compliance costs could run into the billions, compared to the SEC's estimate of only $71 million.

Worse news: “The SEC is really going to be bogged down in their rule implementation timeline because of the cost-benefit analysis,” Scileppi says. The requirement for a cost-benefit analysis had already delayed other SEC rulemakings to date. Although most of the remaining rules are mandated by Congress and cannot be easily challenged in court, Scileppi says the SEC still has to weigh in on the costs and benefits of all these rules.  

Independent Directors of Public Companies

The roles and responsibilities of independent directors of public companies will be on the SEC's radar following high-profile cases this year where some named directors were either involved in insider trading or ignored significant red flags and involvement in insider trading cases.

Back in March, the Commission brought a cease-and-desist administrative proceeding against Rajat Gupta, an independent director at Goldman Sachs and Proctor & Gamble until his resignation. The agency alleged that Gupta was engaged in insider trading by disclosing material non-public information to Raj Rajaratnam, founder of Galleon Management, who was convicted of insider trading himself this year.

In another complaint filed by the SEC in February, three former independent directors of military contractor DHB industries were alleged to have facilitated DHB's securities violations through their willful blindness to red flags signaling fraud from 2003 though 2006.

Based on these cases, Eric Sussman, partner and co-chair of the regulatory enforcement and white-collar litigation practice at law firm Kaye Scholer says, “I think what the SEC will do is to enforce responsibility of independent directors of public companies next year.”


Like 2011, many will follow the development of the SEC's Office of the Whistleblower with intense interest on the assignment of the first bounty award. Though the office did provide some data to the public on the cases filed by tipsters to the SEC in its annual report released in November, no bounty payment has been awarded to date. The office reported a total of 170 tipsters who are eligible for rewards, probably sometime this year.

“In 2012, there will be more litigation and enforcement activities on FCPA cases, and we will see a major push within the DoJ on cases like this.”

—Ernest Badway,
Fox Rothschild

The SEC guideline is to accept cases where wrongdoers are fined no less than $1 million. Tipsters stand to earn awards ranging from 10 to 30 percent of the fine. “The SEC is looking for whistleblower case to award a big bounty to attract more cases from tipsters,” Sussman says. He expects more FCPA-related cases will be filed by whistleblowers next year. Those cases generally involve large sums of award. For now, he says companies remain vigilant of possible FCPA violations.

Insider Trading and Enforcement

Insider trading will get plenty of the spotlight this year, too. Observers expect more emphasis will be given to hedge fund and consulting firms next year while the SEC will continue its investigations and enforcement actions on cases related to the financial crisis. (Such as the charges filed against former Fannie Mae and Freddie Mac executives issued just last month.)

Richard Morvillo, partner at law firm Schulte Roth & Zabel and former branch chief with the SEC Division of Enforcement, says 2012 is not going to differ fundamentally from 2011, as both the SEC and Justice Department have a number of unfinished issues in the pipeline.

“There has been a published report saying that they have been looking at cases from the financial crisis. They made clear that there are still working on those cases,” he says.

Sussman notes that accounting fraud has always been the SEC's bread and butter. “To the extent that funds were misused, I think the DoJ will take the lead on investigating criminal cases like that,” he says.

On the recent move by U.S. District Court Judge Jed Rakoff decision to reject a $285 million settlement between Citigroup and the SEC—a ruling the SEC has decided to appeal—Badway says, “The SEC is going to start looking for more authority following Rakoff's decision to reject the settlement with Citigroup.” He adds that it is probable that the SEC will want to bring those settlement cases to the administrative court level instead if it gets approval to do so in the coming year.

Compliance Program Matters

Despite the complexity of all the regulations in 2012, one seasoned SEC and Justice Department observer offers a simple solution to it all. “Whether it deals with whistleblower, bribery, insider trading, fraud, or other subjects, the focus of both agencies is on the operations of your compliance program,” says Michael Mann, partner at law firm Richards, Kibbe & Orbe and former associate director of the SEC's enforcement division.

Given the market instability at this point, particularly in the financial system, both agencies will be paying a lot of attention to trading, disclosure, and compliance, Mann says. “Regulators are going to worry about businesses cutting back on the non-performing or revenue-generating side of business, compliance being one of them. They are sending out the message that is the area you want to invest in,” he says.