January 03, 2014 Articles

Navigating Insurance Minefields in SEC Enforcement-Action Settlements

Two recent shifts will test even state-of-the-art directors' and officers' policies

By Eric G. Barber and Charles W. Mulaney

Two recent shifts in policy by the Securities and Exchange Commission (SEC) will test even state-of-the-art directors’ and officers’ (D&O) insurance policies and will require those negotiating settlements with the SEC to have a firm grasp of the operation of some key D&O insurance provisions. First, in June 2013, SEC Chair Mary Jo White announced that the SEC may not enter into no-admit-no-deny settlements in cases involving “widespread harm to investors” or “egregious intentional misconduct.” This is a deviation from the policy of not requiring admissions of wrongdoing unless there was an underlying criminal conviction. The JPMorgan “London Whale” and Philip Falcone-Harbinger Capital settlements confirm that the SEC will follow this policy with future settlements. The second shift—and equally important for D&O insurance issues—was announced by White on September 26, 2013. This slightly more subtle shift will have the SEC pursuing more enforcement actions against individuals in an effort to deter future violations of the law. These two policy shifts may have a serious impact on companies’ and individuals’ ability to tap into their D&O insurance policies for the defense of enforcement actions and civil litigation.

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