A Crime Has Been Committed and the U.S. Attorney is Investigating: How Should Your Organization “Respond Appropriately”?
Does Your Ethics Program Need a Tune-Up?
Article Date: Wednesday, February 16, 2011
Written By: Steven Carr
There are new requirements, effective Nov.1, 2010, instructing corporations and other business organizations on how they must "respond appropriately" to criminal conduct within their ranks. These new requirements were part of a 2010 amendment to the Federal Sentencing Guidelines for Organizations (the "Guidelines"), and the 2010 amendment also provides guidance on steps the organization must take to improve its ethics and compliance program, when a crime or other wrongdoing has been committed and detected. In light of these recent changes, and other developments affecting corporate ethics and compliance programs, the question for your organization is: Does your ethics program need a tune-up?
A Cultural Imperative for Ethical Conduct
A 2004 amendment to the Guidelines (first adopted in 1991) imposed new, tougher requirements and mandated a cultural imperative for ethical behavior and compliance with law by all corporations and business organizations, large and small – even non-profit organizations. All business organizations, particular those dealing with federal agencies, and exposed to risk of non-compliance with federal law requirements, must now devote high-level attention, leadership and sufficient resources to their ethics and compliance programs. These programs should establish an effective, ongoing process that makes ethical conduct an essential element of a successful business plan and successful operations of the organization.
The 2010 Amendment: Leaders with Direct Access, and Responding Appropriately
The 2010 amendment makes some important changes to the Guidelines regarding the sentencing of organizations. Notably, the recent amendment provides encouragement and incentives (by means of potential sentence mitigation) for an organization to adopt a structure that assigns compliance and ethics officers direct reporting obligations and direct access to the governing authority of the organization (e.g., the board of directors). The 2010 amendment also clarifies the remediation efforts required of an effective compliance and ethics program. Finally, the new amendment describes and further clarifies the reasonable steps an organization should take to "respond appropriately" after criminal conduct is detected, and to prevent further similar criminal conduct, including making appropriate changes to its ethics program to address the risk and to prevent the conduct from happening again.
This recent change in the federal law means that your organization should assess whether your current compliance and ethics program meets the new and tougher requirements for such programs. Making sure that your program meets the standards to be considered "effective" could prevent violations of law before they occur, and will help you and your organization mitigate or reduce the punishment for a criminal offense, if the organization is accused or found guilty of a criminal offense.
The important question for the organization, in light of the recent amendment to Guidelines and the new requirements, is whether the compliance and ethics program should be evaluated to appropriately assess the risks of criminal misconduct and to incorporate new processes to address those risks and to prevent and detect violations of law.
Seven Minimum Requirements
The criteria a corporation and other business organizations must follow in order to create "an effective compliance and ethics program" are now more rigorous. There are seven minimum requirements that an organization must meet in order to demonstrate that its compliance and ethics program is "effective." Establishing and maintaining an effective program is essential for an organization seeking to mitigate its punishment (including fines and terms of probation), and to reduce its "culpability score" under the Guidelines for a criminal offense.
The key provision in the Guidelines and the recent amendments is a simple mandate: the organization's leaders and governing body must instill and promote a culture of ethical behavior and knowledgeable compliance with the law. The fundamental purposes of the 2010 amendment are to sharpen the focus on ethical conduct, to improve corporate compliance programs, and to prevent and detect criminal conduct within organizations.
New SEC Rules
Counsel for organizations that are publicly traded and subject to regulation by the Securities and Exchange Commission ("SEC" or "Commission") under the Securities Exchange Act of 1934, as amended, also should be aware of recent changes made by Congress, in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), signed into law last summer. The Dodd-Frank Act included a new Section 21F, by which Congress mandated new whistleblower protections and payments of awards to whistleblowers who report securities law violations. The SEC has proposed Regulation 21F, to adopt new rules and to implement new Section 21F of the Exchange Act, and invited comments on the proposed rules and the whistleblower protection provisions. (See File No. S7-33-10, SEC Release No. 34-63237).
The Committee on Federal Regulation of Securities of the American Bar Association's Section of Business Law, with support from the Committee on Corporate Laws (also a committee of the Business Law section, collectively, the "ABA Committees") provided thoughtful and detailed comments to the SEC in a 32-page letter published Jan. 4, 2011. The ABA Committees' comments encouraged the SEC to adopt a final version of Regulation 21F that will "operate in tandem with, and support and strengthen, the existing matrix of laws, regulations and policies designed to encourage the reporting of serious violations of laws, require the investigation of allegations of wrongdoing, and provide meaningful and effective responses to such allegations."
The Committees also caution the SEC "to be mindful of the potential for harm that an unbalanced whistleblower program may present" including "rewarding and even encouraging wrongdoers, creating incentives (by reason of over-broad anti-retaliation provisions and substantial monetary awards) to bypass or upend effective company programs for the investigation of and response to wrongdoing, and eroding significant attorney-client protections. An unbalanced program could lead to a flood of frivolous and ill-informed whistleblower claims that would require the devotion, at considerable expense, of significant investigative resources by the Commission and the companies implicated. None of these undesirable results would benefit companies, their shareholders or the investing public generally." (Emphasis added.)
So, stay tuned for more developments on Regulation 21F, and how the SEC will respond to these and other comments about the new rules, and to take into account these new whistleblower provisions and protections and how they will affect your organization's ethics and corporate compliance program, including those features of your program that encourage allegation reporting and other internal reporting and compliance systems.
Organizations should consult with knowledgeable legal counsel to design - or to re-design - and to improve, implement and promote an effective compliance and ethics program for your organization, and to make sure your ethics program is up-to-date and in accord with the latest amendments to applicable federal law, the proposed SEC rules affecting public companies, and the 2010 Guidelines amendment.
Steven Carr is a founding member of Ellinger & Carr, PLLC. Steven has counseled corporate and non-profit clients on ethics and corporate governance, drafted and implemented Codes of Ethics and ethics and compliance programs. He can be reached at 919-785-9998 or at firstname.lastname@example.org.
Steven will be presenting a CLE program at the NC Bar Center in Cary on April 1, 2011. You can find more information on the upcoming program at http://www.ncbar.org/cle/programs/810ETH.aspx.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.