This article was reprinted with permission from Tom Fox’s FCPA Compliance and Ethics Blog.
It was once observed that all western philosophy is but a mere footnote to the works of Plato. However, others believe that his student, Aristotle, merits equal standing. I recently read a review of the new book by Arthur Herman “The Cave and the Light” in the Wall Street Journal (WSJ) by reviewer Roger Kimball. In his review, Kimball said that the book seeks to “explain the metabolism of history with a single master idea: the perpetual struggle or ‘creative tension’ between the ideas of Plato – which he says emphasize the idea at the expense of the actual – and those of Aristotle, whose philosophy remains rooted in experience and everyday life.”
I thought about this dichotomy when I recently came across the Words of Wisdom (WOWLW) blog, which is penned by the Capital Markets Group of the law firm of Latham & Watkins. As stated in the FCPA Guidance, “A company’s code of conduct is often the foundation upon which an effective compliance program is built.” As the Department of Justice (DOJ) has repeatedly noted in its charging documents, the most effective codes are clear, concise and accessible to all employees and to those conducting business on the company’s behalf. The WOWLW blog took a different tack and reviewed the requirements of the Securities and Exchange Commission (SEC) for a code of conduct.
Under SEC regulations, it is a requirement under Form 10-K, Reg S-K Item 406 that a company must disclose whether it has adopted a code of ethics that applies to the company’s principal executive officer, principal financial officer, principal accounting officer, controller or persons performing similar functions. If the company has not adopted such a code of ethics, it must explain why not in writing. As WOWLW noted, “Unsurprisingly, almost all public companies have adopted a code of ethics within the meaning of the SEC regulations.”
The article details the required content to be found in a code of conduct. It said that “Item 406(b) defines a ‘code of ethics’ to mean written standards reasonably designed to deter wrongdoing and promote:
- honest and ethical conduct (including matters regarding “actual or apparent conflicts of interest between personal and professional relationships”);
- full, fair, accurate, timely and understandable public disclosure;
- compliance with applicable laws and regulations;
- prompt internal reporting of violations and
- accountability for adherence to the code.”
This requirement also “specifically contemplates that companies may bifurcate their codes of ethics for this purpose:
- a company ‘may have separate codes of ethics for different types of officers’ and
- a code of ethics ‘may be a portion of a broader document that addresses additional topics or that applies to more persons’ other than the officers required to be covered.”
The article noted that a compliant company is able to disclose its codes of conduct in one of three ways, stated as follows:
- file the code as an exhibit to the Form 10-K;
- post the code on the company’s website (disclosing that fact and the Web address in the Form 10-K)
- or expressly undertake in the Form 10-K to provide a free copy upon request and explain how to make a request.
Moreover, businesses which have bifurcated their codes of ethics as described above are only required to “file, post or provide the portions of a broader document that constitutes a code of ethics” and made applicable to covered officers.
The SEC also requires certain disclosures of amendments and waivers to codes of conduct. Specifically, “Item 5.05 of Form 8-K requires companies to disclose within four business days any amendment or waiver of the Item 406 code of ethics, either:
- via Form 8-K filing or
- on the company’s website, so long as the company previously stated in its most recently filed Form 10-K both the company’s intention to disclose any amendment on its website and the website address (in this scenario, the information must remain posted to the website for at least 12 months, and the company must retain the information for another five years).”
This requirement for disclosure does not reach to “technical, administrative or other non-substantive amendments. In addition, companies must disclose amendments to or waivers of their codes of ethics only if specifically required by Item 406(b) (i.e., as one of the five subjects listed above) and applicable to the covered officers” in the company.
Interestingly, if there is an implicit waiver of a company’s code of conduct, it must also be reported: A waiver regarding a code of conduct is required “as the approval by the company of a material departure from a provision of the code of ethics. This also includes ‘implicit waivers,’ defined under Instruction 2(ii) of Item 5.05 as a failure to act within a reasonable time after an executive officer knows of a material departure from the code of ethics. Implicit waivers, as with express waivers and amendments, require disclosure only if related to the covered officers and the provisions specifically referenced in Item 406(b). Companies may also disclose implicit waivers via website if they satisfy the requirements described above. Of course, codes of ethics sometimes describe situations where board approval is specifically contemplated, and an approval process in accordance with the provisions of the code would not constitute a ‘departure’ that would implicate a waiver.”
In addition to the SEC disclosure requirements, both NASDAQ and NYSE listing rules require listed companies to have a code of conduct whose scope is broader that the code of ethics for the purposes of SEC reporting.
Kimball’s review of The Cave and the Light points out the ongoing tension between Plato’s spirituality and Aristotle’s pragmatism. I think the dichotomy between the FCPA Guidance and the SEC regulations as set out by WOWLW points to a more unified thesis. Kimball ends his piece by noting that Aristotle’s sentiments are around the future and not the past. But he adds that in the allegory of the caves, Plato stated that those who leave the cave must return. The same may be said for the codes of conduct the Latham & Watkins Capital Markets Group has discussed.
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