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SEC will Only Target Corporate Directors in the Most Egregious Cases

By Erwin J. Shustak, Esq.  of Shustak Reynolds & Partners, P.C. posted on Friday, February 19, 2016.

The Securities and Exchange Commission (SEC) has announced that it will focus enforcement cases on corporate directors rarely and only in the most egregious cases, where there is clear evidence of director misconduct.

Lara Shalov Mehraban, associate director in the SEC’s  New York Regional Office, said “Enforcement isn't second guessing good-faith decisions by the board, but rather bringing cases where directors have either taken affirmative steps to participate in fraud or enabled fraudulent conduct by unreasonably turning a blind eye to obvious red flags,” Feb. 10 at a Practising Law Institute conference in New York.

While recent SEC enforcement cases have involved directors, Mehraban said such cases aren't common and shouldn't concern corporate directors and officers faithfully carrying out their mandates.

“The bottom line here is that cases against directors are rare. In my opinion, it's because directors in most cases are embracing their responsibilities and carrying them out with appropriate rigor,” Mehraban said. “In general, the cases that enforcement brings are against directors where there is a significant departure from normal corporate governance and appropriate conduct,” Mehraban added.

“Outside directors serve as key gatekeepers. It's critical that when a director learns information suggesting that company filings are materially inaccurate they take concrete steps to learn all of the relevant facts and ensure that the company cease filing annual and quarterly reports until they are satisified with the accuracy of the filings,” Mehraban said.

In a November speech in New York, Deputy Enforcement Director Stephanie Avakian said gatekeepers—including compliance officers—who perform their responsibilities diligently, in good faith and in compliance with the law need not fear enforcement actions .

Mehraban also said the SEC is closely monitoring corporate governance developments involving internal accounting controls and cybersecurity for possible violations of securities laws. “Clearly companies can be victims of cyber attacks,” she said. Where companies might find themselves in trouble with the SEC enforcement unit is if they “fail to take reasonable steps to protect their customers information from cyber attacks or where their cyber-related disclosures are materially false or misleading," Mehraban said.

Shustak Reynolds & Partners, P.C. focuses its practice on the securities industry and matters affecting broker-dealers, registered representatives and the financial services sector. For more information, contact Erwin J. Shustak, managing partner, at [email protected], or call 800.496.5900 for a free consultation.

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