Liability of Directors and Officers in the Wake of New Financial Regulations

Legal Compliance Resource
January 2, 2013 — 1,056 views  

The last two decades have brought to light a number of financial and accounting scandals. Large corporations, such as Enron, WorldCom, Countrywide and Bank of America, were revealed to be engaging in less than honest business practices. Shareholders, investors, and ordinary people struggling to pay the bills paid the large price for the intentional mistakes of a few people.

The Congress swarmed to action, first with the Sarbanes-Oxley Act of 2002. This legislation includes provisions that allow for claims to be brought directly against the officers or directors of a corporation for any corporate misdeeds. The officers and directors of a corporation should hold personal liability insurance in addition to any corporate errors and omissions policy in order to protect the officers and directors from any claims filed based on a breach of the fiduciary duty of care emphasized by Sarbanes-Oxley

Some ways to limit liability for corporate governance include creating clear corporate governance guidelines to show accountability in the company. Other ways to limit liability include knowing the company's rights regarding section 404 audits, and knowing when to file certain forms, such as the 8-K report and the SAS 70 form.

Despite the efforts of Congress with the Sarbanes-Oxley act, the 2008 financial crisis hit hard in September of 2008 with the stock market plummeting. Shortly thereafter large companies in the auto and mortgage industries appeared to be on the brink of collapse. Congress enacted the Dodd-Frank Act in 2010 as a complete overhaul regulatory provisions regarding the financial sector.

The Dodd-Frank Act broadly restructured the U.S. markets. Additionally, the legislation included provisions impacting the Securities and Exchange Commission, broadening the agency's powers of investigation and enforcement.

The Dodd-Frank Act included liability for government agency investigative costs. Directors and Officers should consider requesting provisions in their liability insurance policies that include as a coverable expense those investigative expenses. After the Dodd-Frank Act, the liability policy should also include a definition of Loss, and exclusion for personal profit and an Insured versus Insured Exclusion.

Individual prosecutions under both acts have increased significantly in the last few years. To limit the liability of individual officers and directors under the acts, the company needs to have strong compliance programs that are espoused and enforced from the top down. Anti-corruption practices and policies should be routinely discussed, and steps should be in place to ensure that all employees are complying with the programs.


Legal Compliance Resource