Observers believe such a change would result in potentially far-reaching consequences for companies that fall under the purview of the SEC, including private, for-profit hospitals, their directors, officers, and employees.
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At The Wall Street Journal CFO Network's Annual Meeting in June, Securities and Exchange Commission Chair Mary Jo White said she would push to modify the commission's "no-admit no-deny" policy and require more admissions of guilt from defendants when settling enforcement cases.
White's proposal represents a pronounced departure from the SEC's longstanding no-admit no-deny policy under which defendants settle cases without admitting or denying wrongdoing. Currently, the SEC requires such admissions in a narrow array of cases where defendants admit certain facts as part of a guilty plea or other criminal or regulatory agreement.
White told the CFOs that the no-admit, no-deny policy will still be used in the "majority" of cases and that "having 'no-admit, no-deny' settlement protocols in your arsenal as a civil enforcement agency [is] critically important to maintain," according to a Reuters report.
The change comes after recent criticism of the policy from two federal judges and U.S. Sen. Elizabeth Warren (D-MA). Observers believe such a change would result in potentially far-reaching consequences for companies that fall under the purview of the SEC, including private, for-profit hospitals, their directors, officers, and employees.
G. Derek Andreson, a partner at the law firm of Pillsbury Winthrop Shaw Pittman LLP, and an expert on SEC enforcement matters, spoke with HealthLeaders Media about the potential effects of such an SEC policy shift.
HLM: Why is the SEC doing this?
Andreson: The SEC has been on the receiving end of some criticism both from the bench and others concerning the fact that this policy of 'no-admit no-deny' leads to perhaps a policy that is too lenient and that it really behooves both the government and the public to have a policy with a little bit more teeth. They tried to strike the balance here by including this option now, which gives the SEC more teeth certainly on the negotiating table. It remains to be seen what the effects are but it gives them the teeth they're looking for.
HLM: How will the SEC decide when to apply this new policy?
Andreson: You are going to see this policy evolve over time. They are going to be relatively conservative with how they roll it out. They will identify cases where the evidence is particularly egregious or particularly strong and they will certainly choose those initial cases to roll this out and you will see some flexibility built in down the road as it evolves and people become more aware of it.
More importantly, its significance will be at the negotiating table and perhaps give them results that they otherwise wouldn't be able to obtain for fear of simply the SEC pressing this issue.
HLM: Is there a set-in-stone implementation date? Do they require any legislation to do this?
Andreson: This is something that they have the ability to do on their own. It falls within their purview. I am not sure exactly when they are going to begin this process. This is something that I believe was spearheaded by Mary Jo White, a former federal prosecutor and U.S. attorney for the Southern District of New York.
It is consistent with her prosecutorial approach, a little bit more aggressive. It gives them more leverage. They really wanted to give some teeth to an agency that sometimes finds itself needing more leverage.
HLM: SEC commissioners are political appointees. Will we see uneven applications of this policy?
Andreson: Well, sure. Things change. Commissioners come and go and as leadership changes at the SEC the policy may be modified. It may be used more or less depending upon who is there.
But once they lay the groundwork for it and roll it out, presumably in the near future they are going to set certain bench marks. Consistency, particularly in enforcement matters, is one of the most important principles. So you are going to see them try to see some consistency applied through the years. But again it is certainly subject to who is running the show.
HLM: Would forcing some defendants to admit their guilt compel them to fight when they otherwise would have settled?
Andreson: Absolutely. That is one of the anticipated effects that remain to be seen. But you are already seeing some of the commentary out there referencing that fact particularly in parallel investigations where you might have private litigants waiting in the wings watching to see what happens.
Certainly in the case of parallel Department of Justice and SEC matters where admission of wrongdoing in an SEC enforcement matter may well embolden DOJ prosecutors. Perhaps they had shelved the case or perhaps they had hit a wall in the case as far as evidence.
This may embolden them to pursue further that target in particular. It may embolden private litigants to move forward particularly given the heightened procedural processes that they must go through. Having an admission like that certainly gives strength to the case for private litigants or at least their motivation and their conviction going forward.
HLM: Why is it so important for so many of these entities to have no admission of guilt?
Andreson: Without admitting guilt it doesn't give a leg up to private plaintiffs or DOJ. It is simply a neutral factor. That is what was so helpful to them, particularly in these parallel investigations. Now I think it is going to forestall those investigations or cause them to go to trial because if their hand is forced by the SEC to admit it then they are going to have other problems.
HLM: Could other federal regulatory entities, such as the Department of Health and Human Services, look at the SEC policy shift and do the same thing?
Andreson: Any regulatory body out there that relies on the same policy of no-admit no-deny is really going to take note of what the SEC has done and they are going to really pay attention to what effect that policy has in the short term to see how it is playing out.
HLM: What are the implications for investor-owned hospitals?
Andreson: I am not sure I could share observations about the specific effects this may have on that sector. It remains to be seen. They have crafted this new policy. They are getting ready to roll it out. They are going to choose their initial cases carefully and use them as benchmarks.
But I am not sure it is going to have sector specific implications at this point. It's going to depend upon the evidence in the case and how it reaches the conduct is at issue. Those are going to be the driving factors here, not so much the sectors.
HLM: How should businesses prepare as this policy is ramped up?
Andreson: Having an awareness that this new policy is about to be implemented is important. But if they find themselves on the receiving end of an SEC inquiry it certainly behooves them to take a look at what private litigation may ensue from that, whether there is any prospect of DOJ involvement or a parallel investigation by DOJ, and if so how that might be affected by this new policy.
Evaluating for themselves what potentially the evidence is and whether that new policy might be applied to them. The SEC has made clear that in the majority of cases going forward they are not going to be seeking this but that they are going to use this sparingly. We will see if that actually happens.
Secondly, recognize that the SEC has intimated that they are only going to be using this is a small subset of cases, at least initially. Assuming that is the case it is important for hospitals that might be subject to SEC jurisdiction to first and foremost be aware of the policy and second if they find themselves on the receiving end of an SEC inquiry, to do two things.
The first is to ask themselves if there are other agencies or parallel investigations that potentially may ensue, whether it is private litigants or DOJ, and be aware of the effect it may have on the parallel litigation. The second thing is to evaluate what the evidence may be in that case.
How strong is the case? A bit of introspection might be helpful at that point because if they are dealing with facts or evidence that potentially egregious from the perspective of the SEC it may be one of those cases where the SEC throws this new policy out on the table as leverage.
John Commins is the news editor for HealthLeaders.