Early this month, the House of Representatives passed the Financial Choice Act of 2017 (the “FCA”). This bill extensively amends the Dodd Frank Act that was enacted in 2010 after the financial crisis. It now goes to the Senate, where more debate and publicity will likely occur. The most significant change proposed in the FCA which would impact companies, is curbing of the SEC’s powers.
The FCA would essentially eliminate the ability of the SEC to use its own administrative courts to try corporate and individual defendants, rather than federal courts. The SEC had of late, been trying civil actions through administrative proceedings. And given the home court advantage with their own judges, it was not surprising the SEC had a 90% win rate.
The FCA would also eliminate the SEC’s power to bar individuals from serving as a director or officer of any public company.
The proposed FCA also eliminates the Chevron doctrine. That doctrine, first set out by the United States Supreme Court in a case between Chevron and the EPA, provides the basis for courts to defer to an agency’s interpretation of the laws they administer. Therefore, in any ambiguity of securities laws or rules issued by the SEC, the SEC’s interpretation will not be given deference should this part of the FCA become law.
Ironically, the United States Supreme Court may weigh in on the Chevron doctrine before Congress acts through FCA legislation. The newest member of the Court, Neil Gorsuch, was critical of the Chevron deference to agencies while he was an appellate judge. Justice Gorsuch has hinted its “days may be numbered” in the very last ruling of the Supreme Court’s term in Matthis v. Shulkin.
What is the impact to companies and their D&O insurance? It would appear risk to companies would decrease with a less powered agency, and D&O pricing should come down.
Surprisingly, ratings of companies will likely not be impacted as D&O insurance companies price primarily on likelihood of a suit by shareholders, employees, and whistle-blowers. There are two reasons for that rationale. First, data for those kinds of suits are more readily available. Second, the cost to defend and settle a shareholder suit, is generally greater than costs relating to an SEC action.
Note that the defense of a parallel SEC investigation attendant to a shareholder suit depletes a company’s D&O insurance much quicker.
While the SEC’s broader enforcement powers may be hampered by Congress or the Supreme Court, it is likely to focus keenly on prosecuting non-controversial cases, such as insider trading and fraud tipped by whistle-blowers. (Regarding insider trading and whistle-blowers, we discussed this at a recent Women’s General Counsel Network event. Click here for more information.) Differences in D&O policy terms can impact the funding of defense costs, and even whether the D&O policy can be nullified. In addition to having a skilled broker position a company’s risk with D&O insurers to achieve cost efficiencies, it is just as important to have a skilled broker negotiate terms to maximize insurance protection for directors and officers at a time when these individuals need it the most.
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