The Blind Men and the Elephant: How In-House Counsel Might See Dodd-Frank Differently
Ellie Garfinkle, Corporate Legal Solutions Consultant, Lexis-Nexis
In the old story, a group of men, each blind from birth, approach an elephant and grab hold of whatever is before them; one feels the elephant’s side and muses that the elephant is like a wall, while another catches the trunk and observes that an elephant resembles a snake. Each of the others has similar reactions. The point of the story, of course, is that the elephant is so big that the whole of it can’t be understood by focusing on any single part.
The Dodd-Frank Act is a little like that.
Dodd-Frank, named for Congressional champions Sen. Chris Dodd (D–CT) and Rep. Barney Frank (D–MA), is the sprawling federal statute signed into law by President Obama in July 2010 that, by its formal title, seeks “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”
The size and scope of the law virtually guarantee that in-house counsel faced with ensuring their respective companies’ compliance will experience Dodd-Frank differently depending on the space the company occupies in the financial system.
“What’s important to in-house counsel may depend on where you’re the in-house counsel,” says Barry J. Mandel, a partner with Foley Lardner in New York, where he is chair of the Securities Enforcement & Litigation Practice and a member of the Securities, Commodities & Exchange Regulation Practice. “You can be an inside counsel at any kind of company and be affected by this, or even more so, in almost any kind of financial services. So if you’re an inside counsel at a brokerage firm, maybe the hedge fund changes don’t mean that much to you. But if you’re an inside counsel at a hedge fund — man, it’s big time.”
On a macro level, Mandel thinks that a prime concern for many in-house counsel, regardless of where they practice, will be Dodd-Frank’s whistleblower provisions, which create incentives and additional protections for whistleblowers to unearth a company’s misdeeds.
Both the Commodity Exchange Act (7 U.S.C. §1 et seq.) and the Securities Exchange Act of 1934 (15 U.S.C. §78a et seq.) already contained procedures by which whistleblowers could bring such wrongdoing to light, but Dodd-Frank expands those procedures to include potential rewards for the whistleblower.
Mandel worries that these new amendments could go too far.
“Up until now, whistleblowers essentially tended to go, anonymously or otherwise, internally through hotlines or make themselves visible [in other ways] if they wanted to,” Mandel says. “They also obviously could go to any government agency outside of those avenues, but they didn’t necessarily face the opportunity to get a big check. The creation of this new incentive, to be able to go the SEC [Securities and Exchange Commission] or the CFTC [Commodity Futures Trading Commission] and get a very big check if something comes out of the issues on which they’re blowing the whistle, incentivizes these people to go directly to the government and not internally, which means it doesn’t give a company which is interested in finding out about problems and fixing them [an opportunity to rectify the problem]. It provides the incentive to go around the company to the government, and the next thing the company knows, instead of having the ability to fix the problem, it’s now subject of investigations. . . . And that creates a complication for ‘good citizen’ companies that people didn’t have to worry about quite as much before. It really puts them in a very complicated situation.”
Another potential hot button Mandel sees is the fact that Dodd-Frank empowers the SEC to ban or limit the use of arbitration in customer-broker disputes. While the SEC has shown little inclination to do so, the agency has not ruled out such a move.
And should that happen, Mandel warns, in-house counsel — depending on where they touch the Dodd-Frank elephant — could be faced with a lot more work.
“If they exercise that authority, that would dramatically change the resolution of disputes between brokers and customers in the financial services industry, and that would certainly be a focus of inside counsel,” Mandel says. “Right now the trend is heading to make what some people are saying is a not-sufficiently-fair process into a fairer process. . . . But this would now go way, way further if they decide that customers have the right to go to court despite agreements between the customers and the firms, and the next thing you know there could be lots and lots of litigation in the state courts.”
For more information on LexisNexis Compliance Solutions, visit www.lexisnexis.com/comp.