BEST PRACTICES

Today, we address the 10 implications for a firm that faces an enforcement action as a result of a failure to implement a competent compliance program (either intentionally or unintentionally).

1

Financial Penalties

The most obvious direct consequence of an enforcement action includes the financial penalties that the SEC can impose. These can include fines, interest, and restitution for “ill-gotten gains” going back several years.

2

Industry Bars

Rarely does an SEC action not name one or more of the firm’s principals. And, if successful, the penalties usually include fixed or permanent industry bars, thereby precluding you from making a living in your chosen field. If the permanent bar includes a firm principal, it could mean the end of the firm itself.

3

Lost Management Time

Responding to, and defending, SEC enforcement actions consumes hundreds of hours of management time dealing with lawyers, assembling materials, meeting with employees, and testifying. This is time lost to the productive activities required to run your business.

4

Defense Costs

The costs of lawyers retained at high hourly rates to defend enforcement actions very often far exceed any fines or disgorgement that the SEC imposes.

5

Reputation

Competitive (dis)advantage: Don’t think your competitors won’t highlight a public enforcement action during every RFP and competitive client situation. Additionally, many institutional investors automatically disqualify money managers with a regulatory record.

6

Impact on Commercial Value

A potential buyer will discount a firm’s equity value because of public regulatory issues that could impact its long-term competitiveness.

7

Criminal Prosecution

The SEC has the power to refer cases to the Department of Justice. As a result of such referrals, especially when fraud or misuse of asset is alleged, the DoJ has prosecuted and imprisoned many financial executives.

8

Increased Examination Focus

Once the SEC has brought an action, expect the staff to appear for regulatory exams on an accelerated, if not continuous, cycle. It’s the SEC’s job to weed out recidivists.

9

Insurance Costs

Following an enforcement action, E&O and D&O rates will rise significantly, assuming you can even obtain such coverage.

10

Hiring

In the war for talent, a bad reputation will repel the best and brightest who have multiple opportunities.