Sarbanes-Oxley Executive Compensation Clawbacks Continue

Yesterday, the U.S. Securities & Exchange Commission (“SEC”) announced another successful “clawback” of executive compensation under the Sarbanes-Oxley Act of 2002. James O’Leary, former Chief Financial Officer of Atlanta-based Beazer Homes USA, was forced to return over $1.4 million in bonus payments and stock sale profits that he made as a result of fraudulent financial reporting in 2006. What is somewhat unique about the case is the fact that the CFO was not implicated in any wrongdoing other than certifying that the financial statements were accurate. The individual who is being criminally prosecuted for the fraud is the Chief Accounting Officer who reported to the CFO during the time period in question.

“Section 304 of the Sarbanes-Oxley Act encourages senior management to take affirmative steps to prevent fraudulent accounting schemes from occurring on their watch,” said Rhea Kemble Dignam, Director of the SEC’s Atlanta Regional Office. “O’Leary received substantial incentive compensation and stock sale profits while Beazer was misleading investors and fraudulently overstating its income.”

This announcement comes on the heels of a related clawback from the CEO of Beazer Homes that totaled more than $6.4 million. Again, in this case, the CEO was not implicated in any criminal wrongdoing. The SEC’s enforcement approach regarding both the CEO and the CFO in this case serve as a reminder to senior executives to ensure their annual certifications are accurate. The only way to know is to have a strong risk and control program in place. Wheelhouse Advisors can help. Visit to learn more.


SEC Launches Office of the Whistleblower

Just more than a year after the Dodd Frank Wall Street Reform and Consumer Protection Act was signed into law, the Securities & Exchange Commission (“SEC”) has established a new office to handle one of the major provisions of the act.  The Office of the Whistleblower was publicly launched last week.

To aid in the submission of whistleblower tips, the new office has created a website that provides details on how whistleblowers should provide information and what whistleblowers should expect. According to the website the SEC, “… is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected.”

Potential whistleblowers are encouraged to report their issue through a company’s internal compliance program before contacting the SEC.  In fact, according to the final rules, the SEC will consider increasing the overall award amount if the whistleblower utilizes the internal compliance channels.  The following is an excerpt from the SEC’s whistleblower rule book.

Participation in internal compliance systems. The Commission will assess whether, and the extent to which, the whistleblower and any legal representative of the whistleblower participated in internal compliance systems. In considering this factor, the Commission may take into account, among other things:
(i) Whether, and the extent to which, a whistleblower reported the possible securities violations through internal whistleblower, legal or compliance procedures before, or at the same time as, reporting them to the Commission; and
(ii) Whether, and the extent to which, a whistleblower assisted any internal investigation or inquiry concerning the reported securities violations.

Companies should use this opportunity to communicate the importance of reporting issues through internal channels before reporting to the SEC.  For those companies that do not have a well constructed compliance program, now is the time to build one.

SEC Proposes New Credit Rating Rules

This week, the U.S. Securities and Exchange Commission (”SEC”) issued proposed rules that will have a great impact on the integrity of credit ratings going forward. The quality of credit ratings were highly suspect in the aftermath of the financial crisis of 2008. Many of the greatest losses incurred by financial institutions, municipalities and pension funds resulted from investments in securities that were touted as “investment grade”. However, as we know now, those investments were anything but. Now, the SEC will require Nationally Recognized Statistical Rating Organizations (”NRSROs”) like Moody’s and Standard & Poors to adhere to stricter controls and disclose more information about how the ratings are derived. The SEC issued the following statement supporting the approval of these new rules.

“In passing the Dodd-Frank Act, Congress noted that credit ratings applied to structured financial products proved inaccurate and contributed significantly to the mismanagement of risks by financial institutions and investors,” said SEC Chairman Mary L. Schapiro. “Our proposed rules are intended to strengthen the integrity and improve the transparency of credit ratings.”

Under the SEC’s proposal, NRSROs would be required to:

1. Report on internal controls.
2. Protect against conflicts of interest.
3. Establish professional standards for credit analysts.
4. Publicly provide – along with the publication of the credit rating – disclosure about the credit rating and the methodology used to determine it.
5. Enhance their public disclosures about the performance of their credit ratings.

Let’s hope these rules help to restore integrity to the marketplace and help investors better understand the risks involved in a given investment.

SEC Seeks to Shed Light on Foreclosure Crisis

The U.S. Securities & Exchange Commission (“SEC”) has entered the foreclosure fray by requiring publicly traded financial services companies to disclose their estimated risk of foreclosure related losses. Here’s what Bloomberg Business Week reported on the recent SEC actions.

Lenders must disclose circumstances that they “reasonably expect” to have an “unfavorable impact” on financial results, the SEC said in a letter posted on the agency’s website today. The letter was sent because of “concerns about potential risks and costs associated with mortgage and foreclosure-related activities,” the SEC said. Federal regulators and attorneys general from all 50 states are investigating whether loan-servicing companies used improper procedures during foreclosure proceedings, including so-called robo-signers who didn’t check documentation. Investors such as Pacific Investment Management Co. have demanded that banks buy back faulty loans that were bundled into bonds.

These forced disclosures will shed more light on the potential dollar impact of an operational risk that was neither fully anticipated nor proactively managed.

New SEC Rules Are a Sign of the Times

According to a report today in the Wall Street Journal, the Securities and Exchange Commission is set to issue new disclosure rules for companies looking to reduce debt levels at the end of each quarter simply for reporting purposes. Inquiries into the use of repurchase agreements by financial services companies have revealed the widespread practice of reducing debt levels artificially.  Here is what the WSJ has discovered.

Federal regulators are poised to propose new disclosure rules targeting “window dressing,” a practice undertaken by some large banks to temporarily lower their debt levels before reporting finances to the public.

The Securities and Exchange Commission is scheduled to take up the matter at a meeting Friday and is expected to issue proposals for public comment. The action follows a Wall Street Journal investigation into the practice, which isn’t illegal but masks banks’ true levels of borrowing and risk-taking.

A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.

New rules like these are certainly a sign of the times and companies must be prepared for more to come.  To learn how Wheelhouse Advisors can help you prepare, visit

ERM Growing as an Accepted Practice

This year, the US Securities and Exchange Commission instituted new disclosure rules requiring public companies to inform their shareholders about the role of the board of directors in overseeing risk management. A major US law firm recently reviewed annual proxy statements of S&P 500 corporations to determine the extent and nature of risk management across various industries. One of the more interesting findings in the review was the number of companies who are employing Enterprise Risk Management programs to help manage their risks. Here is what they reported.

In the wake of the financial crisis, many companies have implemented more comprehensive and integrated risk management programs, and boards of directors have expanded their risk oversight to encompass not just the legal and financial risks that audit committees have traditionally overseen, but also the full panoply of risks that a company may face.  Enterprise risk management (ERM) is the current buzzword applied to a top-down holistic approach to risk management.  It addresses all of an enterprise’s risks—including operational, financial, strategic, compliance and reputational risks—under one umbrella, in contrast to the more traditional “silo” approach in which each operating function or division tackled risk independently.  ERM is not focused simply on risk reduction.  Rather, it encompasses an assessment of both upside and downside risks and, thus, helps inform the strategic planning process.  Indeed, to make informed decisions about the company’s strategic direction, the board must have a full understanding of all of the major risks involved.

Fifty-four percent of surveyed companies expressly used the term “enterprise risk management.” Sample disclosures are set forth below:

American Express Company:  “The Company relies on its comprehensive enterprise risk management process (ERM) to aggregate, monitor, measure and manage risks.  The ERM approach is designed to enable the Board of Directors to establish a mutual understanding with management of the effectiveness of the Company’s risk management practices and capabilities, to review the Company’s risk exposure and to elevate certain key risks for discussion at the Board level.  The Company’s ERM program is overseen by its Chief Risk Officer who is an executive officer of the Company and a member of the Company’s most senior management.”

Express Scripts, Inc.:  “In order to assist the board of directors in overseeing our risk management, we use enterprise risk management (“ERM”), a company-wide initiative that involves the board of directors, management and other personnel in an integrated effort to identify, assess and manage risks that may affect our ability to execute on our corporate strategy and fulfill our business objectives.  These activities entail the identification, prioritization and assessment of a broad range of risks (e.g., financial, operational, business, reputational, governance and managerial), and the formulation of plans to manage these risks or mitigate their effects.”

With more than half of the companies relying on ERM, the review shows that ERM is growing as an accepted practice beyond just financial services companies. If your company is looking to implement or simply improve your ERM program, Wheelhouse Advisors can help. Visit to learn more.

New SEC Rules Require Enhanced Risk Management Disclosure

This week, the U.S. Securities and Exchange Commission (“SEC”) issued new disclosure rules that will have a significant impact on corporate governance and risk management practices at all U.S. public companies.  The rules become effective February 28, 2010 and require enhanced public disclosure of the following:

  • The relationship of a company’s compensation policies and practices to risk management.
  • The background and qualifications of directors and nominees.
  • Legal actions involving a company’s executive officers, directors and nominees.
  • The consideration of diversity in the process by which candidates for director are considered for nomination.
  • Board leadership structure and the board’s role in risk oversight.
  • Stock and option awards to company executives and directors.
  • Potential conflicts of interests of compensation consultants.

For some companies, these new rules will have minimal impact based on their enhanced risk management practices.  However, for others, it may mean a great deal of work must be completed in the next several months.  If your company needs assistance implementing cost-effective, practical risk management solutions, email us at or visit to learn more.