As Compliance Week 2011 came to a close last week, one common theme among several keynote speakers quickly emerged: the need for government and industry to work together in combating corporate misconduct.
That was the overarching message delivered in separate keynotes by Preet Bharara, U.S. attorney for the Southern District of New York, and Richard Cordray, assistant director for enforcement at the Consumer Financial Protection Bureau. Enforcement authorities and companies have the same basic goal, “which is to ensure compliance with the laws,” said Cordray.
Bharara, who spoke on May 24, focused on the importance of corporate culture. Compliance officers are expected to practice the principles of “integrity, honesty, and fair dealing” constantly, he said.
Too often, he said, companies only aspire to “doing merely the minimum required to avoid an enforcement action or a criminal charge, rather than focus affirmatively on doing the right thing.”
Bharara said numerous times his office has uncovered executives straying too close to outright misconduct, because they believed they were not breaking the letter of the law. He declined to offer specific examples, because “it would be very bad practice to try to emulate those people.” He stressed such people mostly avoided charges because of a lack of evidence or some fine point of law; had circumstances differed just a whisker, he continued, those people would have faced much more uncomfortable outcomes.
Bharara's core theme was that too often, corporate executives wrongly assume that all employees understand the importance of integrity, just because the bosses do. Not so, he said; executives must pound home the message of proper conduct time and again. “Profound personal integrity, repeatedly demonstrated and openly valued, is absolutely critical,” he said.
“The best-conceived compliance programs and practices and policies in the world will be too weak to scathe off scandal if the core principles are not internalized, if there is not from the top a daily drumbeat for integrity,” said Bharara. Nor should it matter whether the wrongdoer is a great earner for the company. “No person is more valuable than the institution itself,” he said.
In response to one complaint that not enough has been done to bring up Wall Street executives responsible for the financial crisis on criminal charges, Bharara responded that his office does not believe in fishing expeditions just to placate public unhappiness.
“We don't have the time, energy, resources, or inclination to push the envelope on criminal liability,” he said; only those who knowingly break the law will be targeted—not those who, in good faith, came close to crossing the line. “We bring specific charges against specific individuals.”
“We should be fearless in bringing righteous cases no matter the public outcry, and should be fearless in walking away from cases no matter the public outcry,” Bharara continued. “Our goal is not to win, but to do the right thing for the right reasons and in the right way—in a word, to do justice.”
“Our goal is not to win, but to do the right thing for the right reasons and in the right way—in a word, to do justice.”
—Preet Bharara,
U.S. Attorney,
Southern District of New York
He added, however, that “every one should be assured that appropriate resources, the appropriate brains, and appropriate investigators are applying themselves—and have applied themselves—since the beginning of the problem to try to figure out whether a crime has been committed.”
Bharara also addressed a major new point of the U.S. Sentencing Guidelines: that a company's top compliance executive should ideally report directly to the audit committee. He said his view is that so long as a strong compliance role exists, that person's specific boss is a smaller detail. Most important, he said, is whether the compliance officer can speak freely to all authorities within the company.
“Every determination or assessment we make about whether a business organization has complied with a deferred-prosecution agreement is made on a case-by-case basis,” he explained. “However, it would be wise to have a compliance officer with reporting authority to people who are in position to do something about ethics and
integrity at the company.”
CFPB Objectives
While Bharara discussed ways in which companies can remain in compliance with the law, Cordray discussed how companies can work together with his new agency, created by the Dodd-Frank Act just last year.
Among many questions from the audience, Cordray first addressed the most glaring question about the CFPB: who its first leader will be, or whether it will have a leader at all. The Obama Administration has named Elizabeth Warren a temporary adviser to help get the agency off the ground, but any full-time director will need Senate approval, and Republicans have all but promised they will not support Warren under any circumstances. The agency is supposed to come into formal existence by July.
Cordray dismissed any concern about the agency's lack of a current full-time director. “We expect that we will have a director,” he said. Even without one, he added, Dodd-Frank authorizes that responsibility to fall under the Treasury Secretary, which is how the CFPB is operating in its formative phase, he said.
“The best-conceived compliance programs and practices and policies in the world will be too weak to scathe off scandal ... if there is not from the top a daily drumbeat for integrity,” said U.S. Attorney for the Southern District of New York Preet Bharara.
Cordray also downplayed talk in Congress of stalling the CFPB's debut until December, delaying its ability to issue rules, or even replacing the full-time director post with a multi-person commission—all ideas now floating around Capitol Hill. Criticism, praise, and changes in the law will come and go, Cordray said, but “we are building for the long term.”
The CFPB is housed within the Federal Reserve System and is charged with ensuring that banks are transparent enough that consumers understand the products and services they offer. To that end, the Bureau gets 10 percent of the Federal Reserve's overall budget. Cordray did not give a precise amount, but estimated that it is “roughly half” of the Securities and Exchange Commission's $1.2 billion budget. (The SEC budget, however, is at the mercy of annual appropriations from Congress.)
Cordray also discussed several core missions of the CFPB as enumerated by the Dodd-Frank Act, and how they might apply to sellers of financial products. Among those missions:
Reduce unwarranted regulatory burdens by identifying and addressing outdated, unnecessary, or unduly burdensome regulations. The CFPB plans to adopt the same regulations as other federal banking agencies around consumer protection.
Speaking at CW's annual conference, Richard Cordray, assistant director for enforcement at the Consumer Financial Protection Bureau, said, "We're counting on ethics and compliance officers to be important partners in our efforts to protect American consumers.”
“Better regulation does not necessarily mean more regulation; it typically means clearer regulation,” Cordray said. “Harmonizing and simplifying existing regulations is one way we can achieve this objective.”
Enforce consumer financial law without regard to status of financial services providers. Dodd-Frank gives the CFPB supervisory authority over both bank and non-bank providers, a first for regulatory oversight. This will allow banks and non-banks to compete “directly, freely, and fairly,” Cordray said.
The non-bank sector consists of tens of thousands of companies that have never before been supervised by any federal agency, and often not at the state level either, Cordray said. “That is why it is critical that the Consumer Bureau retains its independent funding model, a model that will allow it to respond rapidly and appropriately to legal violations and changes to the marketplace over time,” he said.
On the matter of sanctions, the CFPB differs from the SEC and Justice Department in that it has supervisory authority, which allows the agency to strike a settlement deal without filing a lawsuit. “Supervisory authority, if used effectively, can be an effective way to achieve compliance with the law without necessarily having to file lawsuits,” Cordray said, in that it allows for dialogue on what is being done correctly and what is not.
Ensure that markets for consumer financial products and services operate transparently to facilitate access and innovation. To this end, the CFPB has a research markets and regulations division, which will track market developments, practices, successes, and failures and make market data accessible to companies and consumers.
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