Public companies in the United States are subject to a laundry list of federal laws and regulations. The U.S. Securities and Exchange Commission (SEC) is responsible for enforcing these laws and regulations, and it routinely pursues investigations and enforcement actions targeting companies (and individuals) suspected of non-compliance.

With this in mind, SEC compliance is essential. From blue-chip multinational corporations to microcap companies, all publicly traded companies need to make SEC compliance a priority. Those that do not face substantial risks, and it is only a matter of time until they come under scrutiny.

“SEC compliance presents several challenges for publicly traded companies. Not only must these companies develop and implement custom-tailored compliance programs, but they must also execute under these programs on an ongoing basis. Monitoring, enforcement, and remediation are key aspects of SEC compliance as well, and the SEC expects to see that publicly traded companies are taking proactive steps to avoid violations and prevent harm to investors.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

What does it take to maintain SEC compliance? The answer to this question is different for different companies. While all publicly traded companies have the same general obligations under federal securities laws and regulations such as the Securities Act of 1933 and Regulation Fair Disclosure (Regulation FD), companies must tailor their compliance efforts to the unique aspects of their business, and they must ensure that their SEC compliance programs facilitate compliance within their particular organizational structure and corporate culture.

With this in mind, here are 10 important facts about SEC compliance for executives of publicly traded companies:

1. SEC Compliance is an Ongoing Process

The first thing company executives need to understand about SEC compliance is that it is an ongoing process. While companies need to adopt comprehensive Codes of Conduct, policies, and procedures, this is just the first step on an endless road. By approaching SEC compliance from this perspective, company executives can frame their mindset appropriately, and they can make compliance the cultural (rather than transactional) priority that it needs to be.

2. There are Several Aspects to SEC Compliance

It is also important to understand that there are several aspects to SEC compliance. While registering with the SEC and submitting Form 10K, Form 10-Q, Form 8-K, and proxy statements as required is a major aspect of compliance for publicly traded companies, compliance goes far beyond making all requisite filings. Publicly traded companies must address various other aspects of compliance both internally and externally. Here are just a few examples:

• Corporate Finance Controls – Publicly traded companies are subject to exhaustive and stringent corporate finance regulations. Companies must implement adequate internal controls, engage independent auditors, and extensively document all regulated corporate financial transactions.
• Marketing and Sales Practices – When marketing and selling their securities, publicly traded companies must be very careful to avoid prohibited statements and sales practice violations. Companies must also ensure that their third-party brokers and other representatives maintain strict compliance. This applies to all marketing and sales channels—including all social media platforms.
• Insider Trading – The federal insider trading laws and regulations are extraordinarily complex. They impose penalties (civil or criminal) for more individuals in more circumstances than most company executives realize. Preventing insider trading is a key element of SEC compliance, and companies that fail to implement appropriate controls can face sanctions along with the individuals involved.

3. An Effective SEC Compliance Program Will Have Several Components

Due to the breadth and complexity of companies’ compliance obligations, an effective SEC compliance program will have several components. All of these components need to be custom-tailored to the company’s specific risks and needs. As outlined by the SEC working in collaboration with the U.S. Department of Justice (DOJ), some of the key components of an effective legal and regulatory compliance program include:

• Senior Management Commitment to Compliance
• Internal Corporate Oversight Structure
• Code of Conduct
• Compliance Policies and Procedures
• Initial and Ongoing Compliance Training Programs
• Internal Reporting Mechanisms for Compliance Violations
• Internal SEC Compliance Monitoring and Auditing
• Enforcement and Remediation
• Discipline for Non-Compliance and Incentives for Compliance
• Documentation of Initial and Ongoing Compliance Efforts

4. Publicly Traded Companies Must Monitor and Enforce SEC Compliance

As indicated in the list above, monitoring and enforcement are key aspects of SEC compliance. When it comes to meeting publicly-traded companies’ statutory and regulatory obligations, simply putting a compliance program in place is not enough. Companies must assess the efficacy of their SEC compliance programs on an ongoing basis, and they must promptly remedy any compliance violations without prompting from the SEC (or other authorities).

Publicly traded companies must assign a compliance officer who holds primary responsibility for overseeing their SEC compliance programs. Large companies will need to employ compliance teams, and they will typically need to work with outside SEC compliance counsel and consultants as well. These teams should follow delineated processes and protocols for examining and assessing compliance, and they should impose appropriate means of enforcement as necessary. Depending on the circumstances surrounding an SEC compliance violation, appropriate enforcement could range from a reprimand and additional training to immediate termination of employment and public disclosure.

5. Maintaining Compliance Won’t Necessarily Avoid SEC Scrutiny

Maintaining compliance does not necessarily insulate publicly traded companies from facing SEC scrutiny. The SEC regularly examines companies’ public filings, and it reacts to media coverage as well as tips received from whistleblowers and other agencies.

As a result, when addressing compliance, publicly traded companies need to keep the possibility of facing SEC scrutiny in mind. Their compliance documents should include protocols for responding to inquiries from SEC agents, and they should have their SEC compliance counsel on standby to communicate on their behalf as necessary.

6. Maintaining Compliance and Demonstrating Compliance are Equally Important

This brings us to another key point: Maintaining compliance and being prepared to demonstrate compliance are equally important. When facing SEC scrutiny, the onus is on the company to prove that its compliance efforts are both sufficient and effective. If a public company cannot affirmatively demonstrate compliance, this usually leads to an adverse presumption—and this, in turn, can lead to a formal SEC investigation.

To demonstrate compliance, companies need to do more than maintain documented compliance programs. They must also document their compliance efforts on an ongoing basis. This includes, among other things, documenting (i) compliance program implementation, (ii) compliance training, (iii) compliance audits and monitoring efforts, (iv) compliance violation remediation efforts, and (v) other proactive steps taken to assess the company’s obligations and maintain compliance.

7. Companies and Their Executives Can Face Consequences for Non-Compliance

SEC compliance violations can have consequences for companies and their executives. In administrative enforcement proceedings, the SEC can impose sanctions including civil monetary penalties, disgorgement, cease-and-desist orders, suspensions and revocations, and bars from association with the securities industry. It is not unusual for financial sanctions in these cases to climb into the tens of millions of dollars (if not more). In civil and criminal cases prosecuted by the DOJ, companies, and individuals can face substantial fines, and individuals can face federal imprisonment if accused of criminal securities law violations.

8. SEC Compliance Requires a Custom-Tailored and Systematic Approach

SEC compliance is not a one-size-fits-all proposition. It requires a custom-tailored approach, and company leaders must work with their outside consultants and counsel to develop Codes of Conduct, policies, and procedures that will prove effective in light of their companies’ unique characteristics and risks.

It requires a systematic approach as well. From training programs conducted during employee onboarding to regularly scheduled SEC compliance audits, companies need to have systems in place that are designed specifically to meet (and document that they have met) their statutory and regulatory obligations.

9. Certain Transactions and Events Can Trigger Additional Compliance Obligations

Another important fact to keep in mind about SEC compliance is that certain transactions and events can trigger additional compliance obligations. For example, publicly traded companies will need to seek SEC approval for certain mergers and acquisitions, and they will need to respond proactively to hostile takeover bids and other events that have potential implications for shareholders. Understanding when these types of obligations arise is essential for publicly-traded company executives.

10. The SEC Expects Compliance as a Baseline

Finally, publicly-traded company executives need to understand that maintaining an effective SEC compliance program is not “going above and beyond” the call of duty. Rather, it is the baseline. While maintaining SEC compliance might not be high on an executive’s list of priorities from a business perspective, it is essential for protecting the company’s assets and investors. The SEC expects all publicly traded companies to maintain effective compliance programs, and it penalizes those that do not.

If you run a publicly-traded company, SEC compliance will be a part of your daily life. By embracing this obligation rather than sweeping it aside, you can maximize value for your company’s shareholders while protecting yourself, your colleagues, and your company from substantial risk exposure.