02/24/2010

Corporate Finance Alert: Proposed Federal Sentencing Guidelines Impact Corporate Compliance Programs

The United States Sentencing Commission (the Commission) has proposed amendments to its Organizational Sentencing Guidelines (the Guidelines) that could affect corporate compliance programs. These proposals address document retention policies, suggest the retention of an independent monitor for oversight and require a truly independent corporate monitor in cases of probation. The Commission also issued for comment whether sentence reductions should be made available to organizations if, among other things, the top compliance officer reports directly to the board level. Public comments to this issue and these proposals are due March 22, 2010.

The Guidelines, first enacted in 1991 and last revised in 2004, provide incentives for organizations to create effective compliance and ethics programs, report violations and cooperate in criminal investigations. To many people’s surprise, the term “organization” includes not only for-profit corporations, but also associations, trusts, pension funds, unincorporated organizations, and non-profit organizations. Under the Guidelines, an organization's punishment for an employee's wrongdoing may be mitigated— in some cases, up to 95% of the potential fine range— if the organization can demonstrate that it had an effective compliance program in place.

The Guidelines set minimum requirements for establishing an effective compliance program. The first proposed amendment would make clear that an organization's executive officers, directors, individuals with a substantial ownership interest and high-level personnel must be aware of the organization's document retention policies and conform those policies to meet the goals of an effective compliance program. Organizations would also be required to periodically assess whether all employees are aware of the organization's document retention policies and that the policies advance effective compliance.

Another proposed amendment would establish the steps an organization should take after detecting criminal conduct. Among the steps are self-reporting, providing restitution and otherwise remedying the harm to identifiable victims, and cooperating with authorities. This amendment also recommends the retention of an independent monitor to ensure (i) adequate assessment of the organization's compliance and ethics program and (ii) the implementation of any necessary modifications to make sure the program is more effective.

The last proposed amendment to the Guidelines would affect the recommended conditions of probation for organizations. As a condition of probation, an organization would be required to retain an independent corporate monitor, agreed upon by the parties or selected by the court. The scope of the independent monitor's role must be approved by the court, and compensation of the monitor must be paid by the organization. This change is in response to controversial monitorship appointments made in the past by individual U.S. Attorneys who, in their discretion, may have appointed supporters or friends as monitors.

Finally, the Commission issued for comment the question: should the Guidelines be amended to provide a reduction in sentencing for an effective compliance program even when executive officers, directors and individuals with a substantial ownership interest are involved in the wrongdoing if (i) the individual(s) with operational responsibility for compliance report directly to board level (e.g., an audit committee of the board of directors), (ii) the compliance program was successful in detecting the offense prior to discovery, and (iii) the organization promptly reported the criminal conduct to the appropriate authorities? Currently, sentence reductions are not available to organizations that have an effective compliance program if executive officers or directors are the wrongdoers. With this issue for comment, the Commission is clearing up the confusion about where chief compliance officers should report: not to the chief executive officer or the general counsel, but to the board of directors.

Comments to this issue and the Commission's other proposed amendments are due March 22, 2010, and the Commission will hold a public hearing on March 18, 2010 to discuss the package of proposed amendments. The Commission is required by statute to submit proposed amendments to Congress by May of each year. If it votes to do so and Congress does not strike them down, the amendments will be effective November 1, 2010.

The Practical and Effective Compliance Program Takeaway is to start planning how to institute changes in your company’s compliance program to meet these new requirements. You may wish to develop senior level training on your document retention programs; investigate the potential to have the Chief Compliance Officer report in some fashion to the Board, Audit Committee or other board committee; and interview potential Independent Compliance Monitors so one is readily available. And, as always, practical and effective compliance programs start with understanding your legal and compliance risks – so if you have not yet completed your organization’s risk assessment, get started on it right away!