In the wake of the financial meltdown, mortgage servicing companies and lenders, banks and brokerage houses, any business that had anything to do with the securitization debacle suddenly became the object of intense regulatory scrutiny. Every investigation poses a risk to the company and its directors and officers. Enron is just one example.
The passage of the Dodd-Frank Act added a new consideration for financial services companies: whistleblowers. Under the law, a whistleblower is entitled to a share of the fines collected by the Securities and Exchange Commission from companies engaged in wrongdoing. It is an interesting incentive for employees, and one that should move companies to review their directors and officers insurance policies.
Whistleblowers aren't alone, of course. State and federal regulatory agencies like the SEC, the U.S. Department of Justice, and states' attorneys general can initiate an investigation that can derail business operations and take a sizeable bite out of the bottom line. That is, if it's done right. If a business handles the investigation casually or sloppily, though, the results can be dire, even if the company hasn't violated any laws or rules.
At the end of a long inquiry, if wrongdoing is found, a company and its directors and officers may face fines and penalties, criminal charges, or civil lawsuits -- alone or in combination. The question each company needs to ask, then, is whether the D&O policy will cover the investigation and any possible consequences.
D&O policies have changed to meet the Dodd-Frank challenges. We'll get into more detail in our next post.
Source: PropertyCasualty360.com, "Dodd-Frank & Corporate Investigations," Paul A. Ferrillo, Oct. 20, 2011