Has the SEC Made Orange the New Black for Corporate Officers?

prison jumpsuit

If you are the chief compliance officer today of a hedge fund, the title of this blog may only bring thoughts of prison jump suits replacing classic business dress, as opposed to Netflix’s new hit series.  Unfortunately for CCO’s, many regulators think the same.

SEC Prosecutions Skyrocketing

Emboldened with statistics such as US Attorney Preet Bharara’s win record of 85-1 prosecuting insider trading cases, the SEC has brought close to 800 cases in 2013—the largest sector targeted being investment advisors.

And this is just the beginning.  Insider trading is no longer the primary focus, as the SEC turns to:

  • valuation issues
  • fund fees and expenses
  • investor communication
  • even cyber security

As a result, the year 2014 is shaping up to become one of the most difficult for CCO’s to navigate.

Compliance Officers’ Role in Preventing Fraud

Long considered an “ally” of the SEC as well as a firm employee, today’s CCO must be able to identify existing as well as emerging compliance trends.

The SEC views the CCO’s primary role to prevent fraud, improve overall compliance, and monitor industry risk and guide firm policy. Therefore, any exam process, whether informal or formal, will put the CCO in the forefront of explaining the firm’s policy for a host of issues:

  • accounting and expenses
  • marketing materials
  • research process
  • trading and brokerage
  • cyber security

When a Formal Investigation Commences

While robust compliance programs will always be the best prevention against a formal investigation, what happens when those programs fail? A professional liability program will be the first line of defense and could be the difference between the ability to respond vigorously to the charges or not.

Just as CCOs must be well versed in their compliance program, it is absolutely essential that CCO’s be well versed about their insurance coverage’s. For example, the SEC’s view of accountability has evolved from a no-admit/no-deny policy, to requiring admission by some parties who have pled guilty.

Could this have an impact on the coverage afforded in your professional liability insurance policy? Absolutely! Conduct exclusions negate coverage for deliberate fraudulent or criminal acts and personal profit or remuneration in which insureds were not legally entitled. If your policy doesn’t include final adjudication language, coverage could be compromised early in the process.

Admitting Guilt

What happens after an admission of guilt? If your policy is not properly structured, cessation of coverage and a claw back of defense costs. More importantly, any civil suits related to formal investigations could be excluded. Coverage exclusions could even extend to the entity if any of the guilty parties are from the C Suite.

The best line of defense is an annual comprehensive analysis of the firm’s insurance program as your internal risks change. Your policies and coverage must evolve to the changing regulatory landscape. This could be the one thing that keeps you in black.


Guest blogger Nicole Segal is Senior Vice President, Financial Institutions Group, based in New York, where she She focuses on insurance products designed for hedge funds, private equity firms, banks, insurance companies, broker/dealers, and service providers.

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