Insurance Trend Alert: Recent Trends and Developments in Banking & Finance

June 13, 2014

I recently participated in a “virtual roundtable” with six other experts from across the globe on recent changes within the Banking & Finance industry.  My fellow panelists and I addressed hot topics in the industry, such as recent regulatory changes and developments within relevant jurisdictions, and analyzed wide reaching issues across the global market.  You can visit the virtual round table HERE, or download a PDF transcript of the discussion HERE.

Summarized below are some of the more interesting trends that I see and their implications for both D&O insurance and carriers who are offering cyber coverage.

For trends over the next 12 months in the Banking & Finance industry in the U.S., I expect that there will be more U.S. Securities & Exchange Commission (“SEC”) enforcement activity.  At least, that is the signal that is coming out of the SEC.  In October of 2013 SEC Chair, Mary Jo White, commented on the enhanced role of the enforcement division of the SEC: “We are focusing on deficient gatekeepers – pursuing those who should be serving as the neighborhood watch, but who fail to do their jobs.”  That sentiment was echoed by Enforcement Division personnel on panels at the Professional Liability Underwriter Society (PLUS) D&O Symposium and the Mutual Funds & Investment Company Management (MFICM) Conference both earlier this year.  As a result, trend watchers in the industry are tracking what implications that stated enforcement emphasis will have on companies doing business in the U.S. as well as companies that underwrite D&O coverage.

At the same time, we see a marked increase in global regulatory enforcement, driven in part by growing international cooperation.  That cooperation is facilitated by better communication among law enforcement agencies and regulators from different countries.  Also, the increase is probably influenced by the U.S. Federal Bureau of Investigation and other U.S. law enforcement presence abroad.  For example: In 2013, there was a significant increase in FCPA enforcement actions with more cases being brought by the DOJ and SEC than in 2012; the Wall Street Journal recently reported that the U.S. Attorney General has been in discussions with government officials from Switzerland and France “weighing in on behalf of their home-country banks,” for trying to evade U.S.  law.  [Attorney General Holder Tightens the Squeeze on Banks Justice Department Makes Push to Pursue Wall Street for Past Conduct,” The Wall Street Journal, 13 May 2014].  Likewise, other countries have stronger anti-corruption legislation than ever before, such as Corruption of Foreign Public Officials Act (Canada); 8th Amendment to the Criminal Law in China; Italy’s Law 231; Brazil – Law 12.846; and UK Anti-Bribery Act; and there is an increase in scrutiny of third-party intermediaries — in 2011 and 2012, every FCPA action brought involved the use of third-party intermediaries (either US based or foreign), leading to liability exposures for the target company and the third-party intermediary.

Also, from a regulatory/enforcement perspective, increased cross-border activity means increased cross-border regulatory and enforcement scrutiny.  We see examples of this in anti-corruption enforcement in countries such as the U.S., Canada, Germany, the United Kingdom and Switzerland.  For instance, the U.S. applies expansive jurisdictional concepts to enforcing the FCPA: foreign nationals and organizations may have “aided and abetted” or acted as an agent of a US issuer can be held liable under the FCPA.  Moreover, there is an increase in scrutiny of third-party intermediaries: in the past two years, the vast majority of FCPA actions brought involved the use of third-party intermediaries (either U.S. based or foreign), leading to liability exposures for the target company and the third-party intermediary.  Nor is this increase in extraterritorial reach and enforcement cooperation limited to the anti-corruption, terrorist financing, or money laundering; rather, it extends to export control, trade sanctions, banking and privacy, antitrust, and the environment.

This approach is consistent with a growing move towards the extraterritorial reach of U.S. regulators to Europe.  The Wall Street Journal recently reported that the U.S. Attorney General has been in discussions with government officials from Switzerland and France “weighing in on behalf of their home-country banks,” for trying to evade U.S. law.  [Attorney General Holder Tightens the Squeeze on Banks Justice Department Makes Push to Pursue Wall Street for Past Conduct,” The Wall Street Journal, 13 May 2014].

This trend builds on activity in 2013, when The New York Times reported that the SEC was “wielding broader powers” by visiting hedge fund managers in London, asserting its jurisdiction (under Dodd-Frank).  ["Wielding Broader Powers, S.E.C. Visits Hedge Funds in London”, The New York Times Dealbook, 17 September 2013] A similar article, [Complying with U.S. Tax Evasion Laws is Vexing for European Banks”, The New York Times, 16 September 2013] reported on problems non-U.S. banks are having complying with a new U.S. law, the Foreign Account Tax Compliance Act.

The extraterritorial trend is not limited to U.S. laws: Taiwan’s financial regulator announced in early May 2014 that it filed a formal complaint with prosecutors against a U.S.-based short seller, Glaucus Research Group California LLC.  The complaint arises out of Glaucus’s allegations that a Taipei-listed company misstated its financials.  The Wall Street Journal reports that Glaucus is expected to face criminal and civil cases.  [Taiwan Regulator Files Complaint Against Short Seller Glaucus,” The Wall Street Journal, 13 May 2014.]

Both of these developments – increased SEC scrutiny & increased international harmonization and cooperation on financial regulatory issues — could lead to possible increased risk of liability for corporations and their officers and directors.