Gatekeeper Liability
Question: When gatekeepers - attorneys, accountants, compliance officers – may face personal liability or be under scrutiny?
Answer: Corporate gatekeepers play an important role in company’s corporate governance and legal compliance and in ensuring the integrity of companies and protecting investors. When a company faces legal and regulatory scrutiny, certain individuals within that company may also face personal exposure if the company fails to maintain adequate corporate compliance and if they fail to perform their gatekeeping obligations in relation thereto. Regulatory obligations on gatekeepers are increasing and regulatory attention in enforcement investigations is directed to gatekeeper failures. The instances where an enforcement action would be brought against compliance personnel are as follows[1]:
- where compliance personnel affirmatively participated in misconduct unrelated to the compliance function (for example, manipulation of internal accounting records; falsification of financial results; improper revenue recognition, misleading external auditors; insider trading)
- where they misled or provided false information to the regulators (for example, providing backdated and factually inaccurate compliance review memos to the regulators in the course of an inquiry)
- where there was a wholesale failure by them to carry out their compliance responsibilities (for example, failure to sufficiently address and timely remediate numerous known deficiencies in quality control system; or failure to adopt policies and procedures that actually relate to the company’s business and instead using unrelated organization’s handbook, without tailoring it to its actual business and failure to conduct any compliance training or annual reviews of its program.)
In light of the above, companies’ compliance personnel and other gatekeepers need to make sure they undertake their responsibilities in good faith and based on reasonable inquiry and analysis. Senior management and members of the Audit Committee should pay close attention to compliance red flags and make sure they have been addressed. They cannot be “willfully blind” to red flags signaling potential compliance, accounting fraud, or reporting violations.
[1] Gurbir S. Grewal, Former Director, Division of Enforcement, Remarks at New York City Bar Association Compliance Institute, New York, NY, Oct. 24, 2023: https://www.sec.gov/newsroom/speeches-statements/grewal-remarks-nyc-bar-association-compliance-institute-102423#_ftn14
*The contents of this message, current at the date of publication, are for reference and general informational purposes only and do not constitute legal advice. You should contact your attorney to obtain advice with respect to any particular legal matter. You should not act or refrain from acting on the basis of information in this publication without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.
Question: When gatekeepers - attorneys, accountants, compliance officers – may face personal liability or be under scrutiny?
Answer: Corporate gatekeepers play an important role in company’s corporate governance and legal compliance and in ensuring the integrity of companies and protecting investors. When a company faces legal and regulatory scrutiny, certain individuals within that company may also face personal exposure if the company fails to maintain adequate corporate compliance and if they fail to perform their gatekeeping obligations in relation thereto. Regulatory obligations on gatekeepers are increasing and regulatory attention in enforcement investigations is directed to gatekeeper failures. The instances where an enforcement action would be brought against compliance personnel are as follows[1]:
- where compliance personnel affirmatively participated in misconduct unrelated to the compliance function (for example, manipulation of internal accounting records; falsification of financial results; improper revenue recognition, misleading external auditors; insider trading)
- where they misled or provided false information to the regulators (for example, providing backdated and factually inaccurate compliance review memos to the regulators in the course of an inquiry)
- where there was a wholesale failure by them to carry out their compliance responsibilities (for example, failure to sufficiently address and timely remediate numerous known deficiencies in quality control system; or failure to adopt policies and procedures that actually relate to the company’s business and instead using unrelated organization’s handbook, without tailoring it to its actual business and failure to conduct any compliance training or annual reviews of its program.)
In light of the above, companies’ compliance personnel and other gatekeepers need to make sure they undertake their responsibilities in good faith and based on reasonable inquiry and analysis. Senior management and members of the Audit Committee should pay close attention to compliance red flags and make sure they have been addressed. They cannot be “willfully blind” to red flags signaling potential compliance, accounting fraud, or reporting violations.
[1] Gurbir S. Grewal, Former Director, Division of Enforcement, Remarks at New York City Bar Association Compliance Institute, New York, NY, Oct. 24, 2023: https://www.sec.gov/newsroom/speeches-statements/grewal-remarks-nyc-bar-association-compliance-institute-102423#_ftn14
*The contents of this message, current at the date of publication, are for reference and general informational purposes only and do not constitute legal advice. You should contact your attorney to obtain advice with respect to any particular legal matter. You should not act or refrain from acting on the basis of information in this publication without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.
