May 23, 2022

Volume XII, Number 143


May 20, 2022

Subscribe to Latest Legal News and Analysis

Three Things to Know About Dodd-Frank

Complying with the Dodd-Frank Wall Street Reform and Consumer Protection Act is sure to keep corporate legal teams and compliance officers on their toes in the coming year. But public company risk managers should also be acting on key provisions of the bill. Of the many new requirements emanating from Dodd-Frank, several will be spurring fresh dialogue at upcoming D&O renewals and present opportunities for risk managers to position their companies ahead of the curve when it comes to executive liability risk. There are three major considerations.

1. Whistle-Blower Incentives

Section 922 of Dodd-Frank adds to Sarbanes-Oxley Act's requirement for public companies to establish whistle-blower programs. It directs the U.S. Securities and Exchange Commission to create a program that incentivizes individuals to report potential violations of securities laws directly to the SEC. The SEC's response, proposed Regulation 21F under the Exchange Act, would encourage whistle-blowers with the prospect of a hefty financial payout, offering a potential reward of 10% to 30% of the amount the SEC ultimately recovers via enforcement action. 

The new incentive coincides with heightened enforcement activity by the SEC on a number of fronts. The anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA), for example, were the basis for 74 enforcement actions by the Department of Justice or the SEC in 2010-an 85% increase over 2009. Indeed, eight of the largest-ever FCPA settlements occurred in 2010. With increasing globalization of business and the lingering strains of the recent recession, it is reasonable to expect increased whistle-blower activity in this area of seemingly low-hanging fruit. After all, there will usually be more than one individual within an organization who is aware of a bribe changing hands.

Securities class actions triggered by bribery scandals have been rare, but notable. After Halliburton paid the largest FCPA settlement to date for a U.S. company ($559 million) in January 2009, plaintiffs' lawyers brought suit on behalf of shareholders alleging that the company's revenue and earnings expectations were predicated on being able to pay bribes. In the absence of that ability, claimed the plaintiffs, the company was misleading shareholders and regulators.

The SEC's whistle-blower program may seem destined to unleash a flood of securities claims, but the exposure is tempered by practical considerations. How many reported cases will be valid? How many will the SEC have the resources to investigate and prosecute? Still, the issue should be proactively addressed at the highest levels of an organization. Risk managers are wise to be in the thick of it, working with the board, legal and compliance teams to ensure that the company has a sound program in place to encourage individuals to report violations internally.

The whistle-blower issue also serves as a timely reminder that there is no substitute for prevention. It also makes sense to reach out to human resources teams to re-evaluate-and if necessary, reinvigorate-programs that promote a corporate culture of integrity. Employees who are content with the workplace and feel that they are treated fairly are less likely to commit fraudulent acts in the first place. 

2. Compensation Clawbacks 

Provisions for recouping ill-gotten executive gains have been on the books since Sarbanes-Oxley, but Dodd-Frank has promised to up the ante dramatically. Section 304 of Sarbanes-Oxley calls for the SEC to dig into CEO and CFO pockets and clawback compensation issued after a misconduct-driven earnings restatement in the year following the first improper statement. Recent court judgments have also confirmed that clawback can be sought even where the CEO or CFO is not alleged to have participated in any wrongdoing. 

Section 954 of Dodd-Frank calls for any company restating earnings to recover any excess incentive-based compensation given to any current or former executive officer in the last three years, regardless of whether that compensation was ill-gotten or awarded inadvertently. Dodd-Frank also puts the onus on the company itself to handle this tricky task.

While an enforcement date is yet to be set, prudent risk managers will nevertheless be moving forward in concert with their boards and compensation committees to develop workable policies for retrieving compensation. Any progress in implementing policies and procedures to handle these actions would certainly be viewed positively by D&O underwriters and be noteworthy at a D&O underwriting presentation.

Further, the continued focus on clawback procedures spotlights a broader concern about a short-term perspective on compensation issues and the need to compel companies to take a longer view. D&O underwriters will be encouraged by evidence that executive compensation is more closely aligned with long-term shareholder interests.

3. Say on Pay 

The SEC has issued final rules on the "say on pay" provisions of Dodd-Frank. These new regulations give shareholders the ability to cast advisory votes on executive compensation and golden parachute arrangements. As the first say on pay (and say on frequency) votes play out, the governance world-including D&O underwriters-is taking note. Risk managers should watch closely and become intimately aware of how their companies are handling this new measure. These rules not only establish a new governance responsibility; they open a new avenue of dialogue with shareholders-one with the potential to enrich or erode relationships. Developments here can be a barometer of a company's rapport with its shareholders. If and when these developments point to positive investor relationships, they would certainly merit a mention at renewal. 

While many may see this and other layers of regulation as more hoops to jump through, others will see them as a brass ring of opportunity. From the vantage point of the risk manager, changing governance mores are a fresh chance to differentiate a company in presentations to D&O underwriters and demonstrate forward-looking risk management practices.


Marc London is a management liability underwriter with Beazley Group.

Risk Management Magazine and Risk Management Monitor. Copyright 2022 Risk and Insurance Management Society, Inc. All rights reserved.National Law Review, Volume I, Number 102

About this Author

Risk Management Magazine is the premier source of analysis, insight and news for corporate risk managers. RM strives to explore existing and emerging techniques and concepts that address the needs of those who are tasked with protecting the physical, financial, human and intellectual assets of their companies. As the business world and the world at large change with increasing speed, RM keeps its readers informed about new challenges and solutions.

Risk Management Magazine is delivered monthly to 17,000 readers. It is published by the Risk and Insurance Management Society, Inc. (...