When corporate misconduct comes to light, the Securities and Exchange Commission (SEC) and/or Department of Justice (DOJ) may require companies, broker/dealers, investment advisers and others to engage a compliance monitor as part of a settled enforcement action. But what can an organization expect when the SEC or DOJ impose a monitor? And how will the appointment of a monitor impact a company’s day-to-day operations?

In “SEC and DOJ-Imposed Monitors,” Chapter 8 of PLI’s SEC Compliance and Enforcement Answer Book (2023 Edition), Jonny Frank, Midori Knowles, and Kathleen Nolan provide real-world insight into what companies can expect when working with a monitor. The chapter also addresses SEC and DOJ guidance for determining whether to impose a monitor, the monitor’s responsibilities, and other terms of the monitor’s engagement.

Please review the below summary of insights from the chapter. For a full version of the chapter: you can download a free digital copy if you or your firm have a PLI Plus subscription, or you can purchase a hard copy or e-reader here. or contact the author directly: jfrank@stoneturn.com.

What is a Corporate Compliance Monitor or Independent Consultant?

• An independent third party who assesses and monitors a company’s adherence to the compliance requirements of an agreement designed to reduce the risk of recurrence of the company’s misconduct.
• Independent compliance monitors have a more expansive role than independent compliance consultants, as consultants are typically imposed in civil cases, and monitors are generally imposed in criminal and civil cases.

When are Corporate Compliance Monitors or Independent Consultants Imposed?

• The SEC and DOJ consider similar factors when deciding whether to impose a monitor as they do in determining whether to file criminal charges or enforcement proceedings. Factors include the seriousness of the offense, duration of misconduct, history of similar misconduct, pervasiveness across geographic and product lines, the company’s risk profile, the quality of the compliance program at the time of misconduct, the adequacy of the remediation measures, and the implementation and testing results of the compliance program.

Compliance, Remediation, and Self-Monitoring Programs

• DOJ guidance on the evaluation of a corporate compliance program, which the SEC has implicitly adopted, directs prosecutors to several evaluation factors regarding remediation.
• Neither the SEC nor the DOJ has issued detailed standards for effective remediation, although some guidance appears in DOJ and SEC settlement agreements, referring to remediation as a basis for a reduced penalty.
• The company and counsel must demonstrate the effectiveness of remediation and corrective measures to the government. Root cause analysis forms the foundation of effective remediation because it explores the underlying causes and key factors of a misconduct occurrence. The analysis establishes a company’s undertaking of seeking out the source of misconduct, assessing the appropriateness of corresponding discipline, enhancing related policies and controls, and conducting targeted follow-up auditing.

Voluntary Monitor (Reactive vs Proactive)

• Voluntary, or self-imposed, monitors are independent third parties a company selects to oversee and evaluate the design and operating effectiveness of the remediation and corporate compliance program. The company selects the monitor.
  • Reactive voluntary monitoring refers to hiring a third party to demonstrate the effectiveness of remediation and compliance programs as part of government settlement discussions. It may be under regulatory scrutiny or examination by law enforcement.
  • Proactive voluntary monitoring is where a third party is hired as an independent compliance monitor before misconduct occurs to test and validate the design and operating effectiveness of the compliance program.

Scope & Authority of Monitors

• SEC orders or DOJ plea agreements imposing an independent compliance consultant typically define the monitor’s role. They often direct monitors to determine whether a company’s policies, processes, and controls provide reasonable assurance of compliance with the violated law or rule that gave rise to the order.
• The role of an independent compliance monitor, imposed as a part of parallel DOJ criminal and SEC civil proceedings, tends to be more expansive.

Selection of Monitors

• The SEC often allows a company to use a consultant previously engaged by the company and most commonly allows the selection of a monitor “not unacceptable” to the SEC. SEC enforcement action orders typically require monitor candidates to be sufficiently independent to ensure effective and impartial performance, and do not provide the company with the authority to terminate the monitor without SEC permission.
• The DOJ appoints individuals, not firms, to serve as monitors. The government has the authority to decline a monitor candidate whose relationship with the company would cause a reasonable person to question the monitor’s impartiality.

Monitor Obligations

• The SEC typically requires the monitor to make recommendations for changes or improvements to the company’s policies and procedures.
• The monitor’s primary responsibility is to assess the company’s compliance with the terms of the agreement that are specifically designed to address and reduce the risk of recurrence of the company’s misconduct, including evaluating internal controls and corporate ethics and compliance programs.
• DOJ settlement agreements typically allow for the monitor to conduct procedures to understand the facts and circumstances surrounding violations that may have occurred, but it is not the monitor’s mandate to investigate historical misconduct.
• Monitors conduct their evaluations based on their backgrounds and experience, often applying white-collar criminal defense and risks and controls backgrounds and specialized training.

Company Obligations

• Cooperation with the monitor includes providing the monitor with information documents, records, facilities, and employees, as reasonably requested by the monitor.
• DOJ prosecutors consider the company’s failure to implement the monitor’s recommendations in deciding whether the company is in breach of the agreement.
• Many SEC orders require the company to certify it has implemented the monitor’s recommendations.

Monitor Reports

• The monitor’s reports often describe the monitor’s review, procedures performed, conclusions reached, and the monitor’s recommendations.

Duration of Monitorship

• Prosecutors and regulators impose monitorships that last from less than a year to seven years.
• The criteria for considering the duration of a monitor’s term consist of the nature and seriousness of the underlying misconduct, the pervasiveness and duration of misconduct, the company’s history of similar misconduct, the corporate culture, the scale and complexity of the company and its remedial measures, and the stage of design and implementation of remedial measures at the commencement of the monitorship.
• Extension and early termination of a monitorship can be allowed and considered at the DOJ’s discretion. SEC orders typically include similar provisions.

If you have any questions or would like to find out more about this topic please reach out to Jonny Frank, Midori Knowles or Kathleen Nolan.

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