Kerstetter introduced the panel by saying that there are multiple topics that they could talk about surrounding the issue of governance, but he would start with the SEC. He said that people thought Mary Shapiro would be just a placeholder, but she's been upfront, particularly with enforcement. Cutler, having worked at the SEC in the past, had a unique perspective and wanted to give the audience a sense of where enforcement is going. First, he said there is a more prosecutorial bent than ever before, because of the personnel makeup. He said this would change the shape of the SEC and make them more attuned to cooperation, such as rewarding the first person in the door. He also said it meant they would be rapping people hard and would be less attuned to what securities enforcement defense lawyers have paid attention to for a living. As a result, there would be more negotiating room around the edges. Secondly, there will be an emphasis on speed. Over the last few years, they have let cases drift, tempered by what Judge Rakoff did with the Bank of America case. Third, there will be more power of and to the staff, which means less checks & balances. Fourth, there has been a move on the part of the enforcement division to specialize and fifth, there is more of a focus on individuals. Before, they used to hold companies responsible, but not individuals, which is changing. Cutler pointed out that the SEC will now see everything they do through the prism of Madoff and Bear Stearns, as well as from an agency that wasn't sure it would even exist anymore nine months ago. Wilczynski said that with respect to the current environment, it's fair to say that they'll be active in the next few years, but he's seeing mixed signals. With the reorganization taking place, slots aren't being filled aggressively. So though they're active, the reorganization is slower than expected and there is an impact offset by the public record. In the last five years or so, the number of formal orders that the commission issued was about half of the 450 orders that have already been issued in 2009. It doesn't feel that busy, but in public, they seem to be fully geared up, while in reality, there are still reorganization issues slowing things down. 2010 will be much busier.
Kerstetter said that he planned to cover both enforcement and compensation during the discussion, and asked what preventative things GCs could do and the practical side of what happens when the SEC is investigating the company. Knight said that there's four things to focus on. The first is the relationship between the GC and the internal auditor. The GC wants someone in that position who is independent, experienced and tough, so they can prevent problems from getting out of hand. The internal auditor should be as tough as the SEC would be. Secondly, accountability. There are rule-driven markets because of technology, so in his company, they take every rule and assign it to a human being. It takes time and budget, but people need to feel as though they own that rule. Third, the GC relationship with the board. GCs should work to build that, because even though it's hard to make the time, it will serve them well when there's a problem. The most important piece is fourth, having the right tone at the top. He encouraged the GCs to make sure that the people who run the organization get it and demonstrate that compliance is a top priority. Agencies look at whether a problem is endemic or isolated. Vanya said in terms of when there's an investigation, he would talk about how things have changed. In particular, he said there's no longer much difference between the Department of Justice and the SEC, except that the DOJ can send people to jail. He talked about the things that could flow from changes at the SEC, including amnesty for individuals, which could create a whole new species of whistleblowers. In the past, there have been two types: innocent employees who find out about an issue and report it and those who are disgruntled former employees. Now, there will be those who are involved who want lenience/amnesty as the first to report. This could be problematic for GCs, who won't likely know about these people until they hear from the SEC. A second issue that may flow from the changes is a risk of less control over what's presented to the SEC. With the new kind of whistleblower, they will likely bring documents directly to the SEC versus having the GCs prepare them first and present their story. Third, in the past, the informal request for document production could be delayed. But now, they're on a tight schedule, so GCs will have to be geared up and prepared to move. Now, if the informal request is delayed, they can issue a formal request. Fourth, there will be more non-traditional procedures being used, which will have an impact on internal investigations. Historically, the SEC has encouraged internal investigations, but now, Vanya thinks that will change and the SEC won't put much weight in what an independent committee would find. Lastly, the Bank of America case was briefly mentioned earlier and Vanya said that Judge Rakoff talked a lot about "the lawyers." It wasn't clear if he was talking about just outside counsel, or also GCs. Cutler asked the question of whether the prosecutorial bent would still be as strong 2-3 years from now and said that companies should have a human face.
Mike McAlevey said that historically, enforcement has been a priority for the SEC and he worries about changes to the Securities Act, like aiding/abetting liability having the word "reckless" added to it, which expands it. He asked if the SEC enforcement division felt that they needed to do that. Cutler said yes, that it has been on their wish list for a decade. He said that they should pay attention to the Dodd bill, that there are a "lot of ornaments on that Christmas tree."
Kerstetter then moved on to the topic of compensation, saying that it's a lightning rod topic this days and nobody is happy without a pound of flesh. He asked what GCs should do to help committees weather this storm. Knight advises them to think about the coming changes and which ones they can get out ahead of. Cutler said that he's been having a lot of conversations about how compensation will induce excessive risk and how to prevent that. He also talks about how the concept of how risk is affected by the compensation process. At his company, for those whose compensation is disclosed, they must be the leaders of the business units and he's seen companies trying to manipulate those. He also said that GCs should pay attention to who they consider proxy-eligible because agencies will be paying close attention. Vanya suggested that they make sure the committee is funded to hire independent consultants, counsel and a PR firm. Cutler added that whatever lull there is in terms of legislative activity, forget about it come January when bonuses are announced. Wilczynski said that in an environment with a backlash from the public, companies need to be prepared, do their due diligence, and have consultants, counsel and a process to point to when questions are asked.
Kerstetter finished with a final question to each of the panelists about what concerns them the most. Wilczynski said keeping track of the internal compliance program and making sure that it's as airtight as possible. Knight answered that tight restrictions affect capital formation process, which is at the heart of job creation, so legislators should think about the real impact of the changes. Cutler echoed Ed and said to think back to two years ago and reform was about the competitiveness of the US - that issue still lurks and people shouldn't lost sight of what's happening in bills in private litigation. Vanya said that his concern is that there's an overreaction to what happened, so legislation could be overbearing and put companies through hoops. He expects to see some ridiculous legislation.