Minimizing Legal & Compliance Risks: Strategies for Multinational Financial Services Firms Operating in the U.S.

May 25, 2010

Stewart Scott
, Executive Vice President, Chief Compliance Officer and Compliance Counsel, Daiwa Capital Markets America Inc.
William Milani, Member of the Firm, Epstein Becker & Green P.C.
Robert Reif, Member of the Firm, Epstein Becker & Green P.C.
Robert Groban, Jr., Member of the Firm, Epstein Becker & Green P.C.
Michael Levine, Member of the Firm, Epstein Becker & Green P.C.

A distinguished panel of attorneys met at Japan Society to review current issues in corporate compliance with particular emphasis on the securities industry.

Compliance Program Overview
It's a given that corporations are obliged to comply with federal, state and local laws, including the laws of the state in which they are incorporated, Bob Reif of Epstein Becker & Green said. Compliance programs are designed to aid the corporation in fulfilling these legal obligations and in conducting its business in an ethical and moral manner.

When corporate managers put together a compliance program, one of the key resources they look to is the Federal Sentencing Guidelines. Under the guidelines, companies faced with a criminal charge can qualify for some level of leniency in sentencing if they have in place a compliance program that meets a number of specific requirements.

These requirements include:
  • A governance process and infrastructure that allows the board of directors to exercise reasonable oversight of the compliance program and its effectiveness
  • A compliance officer who has access to the board and to high-level personnel
  • policies and procedures, including a corporate code of conduct
  • Compliance and ethics training
  • Reporting and auditing systems
  • Incentives and disciplinary measures
  • Processes to respond to complaints and prevent further noncompliance
  • Background checks to weed out those who are debarred from a regulated industry or are otherwise ineligible for employment by the company

Compliance Rules in the Securities Industry
Securities industry compliance rules were tightened during the past decade, among other things by Rule 3130 adopted by the Financial Industry Regulatory Authority, or FINRA, which is the industry's self-regulatory body, Stewart Scott of Daiwa Capital Markets said. Rule 3130 requires that CEOs of securities companies deliver an annual certification on a variety of compliance issues and activities.

The CEO must certify, for example, that he or she and the company's chief compliance officer "meet to talk about compliance issues at least once per year. Now, at many firms this happens multiple times every day all the time. At other firms perhaps it didn't. But, in any event, this was an effort by the securities industry to instill within firms in the industry certain requirements and guidelines that were expected in order to make compliance paramount at the firms."

An extensive process precedes the annual certification, including "a review, a due diligence process, a reporting process, a series of meetings" and the process typically takes months if not the full year. Policies, procedures and controls have to be tested every year in an independent audit, which is sometimes done by an outside firm, sometimes by an internal group or by a combination of the two.

Rule 3130 comes on top of a host of guidelines and expectations imposed on securities firms under both federal and state law, Mr. Scott continued. When regulators examine firms, there |are now often "grids that run on for scores and scores of pages describing specific rules, specific products, and asking, 'What do you have on this?' 'What do you have on that?' 'If it's not applicable, please explain why.'" Training, surveillance desk reviews, control functions on audit departments and many other areas are subject to these expectations. There are extensive individual licensing requirements. When it comes to training, regulators check literally name by name by name "to make sure that the right people have attended the right sessions."

Notwithstanding these detailed expectations and examinations, "everybody reads the |headlines, and it doesn't always work. So, there is a constant evolution" and an ongoing debate about whether there should be more regulation, less regulation, or a different type of regulation--"and as to that, stay tuned."

There are constant communications between firms and regulators--scores each day that are routine, many that are non-routine. Regulatory inquiries can often be duplicative, as different regulators, and even different offices within a single regulatory body, may not always communicate and coordinate with each other.

Communication within your firm on compliance issues is essential, Mr. Scott emphasized. This includes coordination between compliance and the legal team--which sometimes are located in the same department--as well as between compliance and accounting, operations, internal audit, risk management and IT. Above all, there must be communication between compliance and the rest of senior management. This is not just because it's required by Rule 3130; "it's a basic concept if it doesn't happen the compliance effort will crumble."

When something goes awry, supervisors, not the compliance department, are "the people who are really in the crosshairs of the regulators," he said. "When something goes wrong, there are usually two questions that are asked initially by a regulator. One is 'What happened?' and the second one is 'Who was in charge?' And they don't want a department--they want a name."

Thus, Mr. Scott concluded, "Supervisors are on the hook. They can't delegate to compliance. They need to be supported by compliance and control functions, but they cannot delegate that away"; "they are expected to supervise and take responsibility for the firm and its people following the rules and regulations that apply."

Speak-Up Policies; Recordkeeping
Bob Reif of Epstein Becker & Green turned to the broader landscape of compliance obligations that apply to every company, regardless of the industry. One of these is having a speak-up or whistleblower policy that empowers an employee "to report conduct that he or she believes is inimical to both legal and ethical obligations imposed on the entity."

Another is recordkeeping, where there are specific securities-industry policies but also general principles "that are absolutely required, or at least considered best practices." These include defining what a record is, both electronic and paper; providing for procedures on maintenance, retention periods, storage and disposition; and establishing hold procedures in the event of actual or threatened litigation, whereby normal record destruction policies are suspended and records are retained.

Insider information is a critical topic for compliance programs in any industry. So are Foreign Corrupt Practices Act issues, which are being prosecuted at a dramatically higher rate. "Again, recordkeeping and internal controls in this area are very critical."

A corporate immigration policy is an essential part of a compliance program, Bob Groban of Epstein Becker & Green said. The policy has to define respective responsibilities of the company and the employee. It has to be administered in an even-handed manner that avoids issues of discrimination. It must ensure that the company is filing Form I-9s and hiring only those who are eligible to work in the U.S. under the specific circumstances in question. It has to ensure compliance with state laws as well as federal law.

A case called Lionbridge illustrates what can happen when immigration policies are not handled with meticulous care, Mr. Groban said. Lionbridge was a company that had started out sponsoring a foreign national, but "things did not go well. And as a result the foreign national was forced to leave the country." She sued the company, and won. The jury rendered a $1.3 million verdict.

These very difficult situations "could have been avoided if the company had an immigration policy that preserved its employment-at-will relationship" and made clear "who was going to pay for things and what the relative rights and responsibilities are, if it defined when a company would proceed and under what circumstances, and, more importantly, what discretion the company had to stop, start, or otherwise turn in a different direction. We live in volatile times. We need to preserve that discretion, and Lionbridge may teach us that the way to do that is to have a corporate policy that does that."

Most of all, company policy has to define "who has control of the process--because all foreign nationals think that they're being sponsored, they're the driving force, but generally under the immigration laws it's the company that has the application, and what if the company changes its mind?"
Visa issues that crop up repeatedly include expiring I-94 cards, a problem that tends to occur more often with family members than with the employee him or herself. The consequences are severe: If "the families overstay their expiration date by six months and leave the country, they are barred from coming back for three years. And if that gap is a year, they can't come back for a decade."

Companies have to be careful not to reassign foreign-national employees in a way that violates their status. "There is a tendency for some organizations to say once the person is here we can do anything we want with them. We can assign them to a subsidiary. We can put them on a client site. That may not always be possible." Firms also need to be wary of risks involving their contractors; Wal-Mart was fined $11 million for immigration violations involving cleaning contractors for several of its stores.

The Obama administration has made worksite enforcement a major issue, including "notices of intent to fine all across the country for Form I-9 violations." Finally, state immigration legislation has become pervasive, and "it's going to get worse if there is no comprehensive immigration reform" on the federal level, Mr. Groban said. Already, Georgia, Colorado and Arizona impose requirements that go beyond the Form I-9.

Corporate Social Responsibility

The concept of corporate social responsibility, or CSR, departs from the oft-cited view that the sole purpose of a corporation is to make profits, and that corporate success is measured by the bottom line, Michael Levine of Epstein Becker & Green said, "To others, CSR is the notion that corporations are, or should be, responsible for their impact on their stakeholders (those who are interested in or affected by what corporations do." Some call this the triple bottom line, or the three Ps--people planet, and profits.

"The issue then is do you have to do CSR. Is it required? Is it voluntary? Is it a good practice? And I think the answer is that there has been an increasing widely held view that it's a mix of both," he said. Implementing environmental, social and governance principles, or ESG, into corporate operations can be seen as a form of "a corporate survival regimen." Addressing ESG issues tends to help a company survive and sustain itself over time." ESG can be thought of as "part of a sustainable business model, because it has been repeatedly argued that one of the causes of the current financial crisis was an excessive focus on realizing short-term profits, and issuing positive earnings reports--living life by the quarter instead of seeking long-term, sustainable growth."

Consideration of ESG factors may be mandatory as a matter of fiduciary duty in some contexts, for example, in the investment decisions of pension fund trustees. In other contexts, a commitment to ESG may be undertaken voluntarily, as a matter of good business, to avoid litigation, and to address the concerns of shareholders. Unsatisfied stakeholders may commence action campaigns like the Toys are Toxic campaign, and "under-performing" companies may be subject to the scrutiny of watchdog organizations such as Private Equity Watch. There are also voluntary citizenship programs such as the UN Global Compact and the Equator Principles; "many companies sign up for these commitments, but the issue then is do they live up to them?"

"We have a big financial regulatory bill that could massively affect the entire financial services industry in part perhaps because certain influential stakeholders may perceive that in the past, corporations paid insufficient attention to ESG issues," Mr. Levine said. With any compliance issue, whether it's human rights, environmental, "green" business, or supply-chain anti-sweatshop laws such as recent anti-sweatshop legislation in California, "you can't just have the policy; you have to assess compliance with it" and "be prepared to take action to address substandard conditions."

Employment Law Issues
Bill Milani of Epstein Becker & Green said that companies "have faced something of a perfect storm in the last couple of years" over employment law issues. Job cuts stemming from the global economic crisis led to litigation, and "at the same time, the Obama administration committed to expanding and vigorously enforcing employee rights," including wage and hour laws, in particular the laws on classification of employees who are exempt from overtime-pay rules and those who are nonexempt.

In the securities industry, one of the more significant recent developments is the Obama administration's decision to withdraw an earlier ruling on classifying mortgage loan officers. In a recent case, the U.S. Department of Labor took the position that, contrary to a Bush administration ruling, mortgage loan officers are nonexempt, because they are "more akin to salespersons than they are to those administering the policies of the employer."

A second hot-button issue is off-the-clock work. Federal law requires that employees be paid for time they work "even if you don't ask them to do it and they do it on their own," Mr. Milani said. When employers tell their employees "'Work through lunch, work late, don't put your time down. We have a tight budget, don't put your time down,' this is unlawful." A particular trap for the unwary is the BlackBerry. "To the extent you have a nonexempt employee checking their BlackBerry after hours, that is compensable time."

Independent contractor status versus employee status likewise creates many issues, he said. A so-called independent contractor whose relationship with the company ends may show up seeking unemployment benefits, and the state Department of Labor may end up "auditing the employer as to all of those similarly classified. It can be extraordinarily expensive." Having workers agree in writing that they're an independent contractor "doesn't matter. The issue is what do they actually do for you."

Bonus plans are receiving lots of attention. "The net of it is if you have in place a bonus policy that sets out a formula for payment, for example, where the achievement of specified goals for payment, what you may be doing unintentionally perhaps is giving up your discretion as to that bonus. You may say the bonus is discretionary, but where you have set certain achievable goals to be satisfied to receive the bonus, our Department of Labor here in New York State, many courts take the position you have in essence forfeited the discretionary nature of that payment, you may not reduce it, you may not claw it back."

Social media present sensitive issues. It's important to do due diligence on a prospective employee. However, if you as a manager run a Google search on a potential hire, turn up information unrelated to the qualifications for the job, for example, information on race, sexual orientation, or disability, and then don't hire the person, you might be the subject of a bias charge. "Our advice has been go in with your eyes open," Mr. Milani concluded. "Have your personnel officer, your designated HR person, do those searches. Screen that information from your managers so that the only thing that they are presented with is what may be relevant to the job."


Q&A from the audience followed.

Who has the obligation to monitor the employee's 1-94 status in situations where there isn't a company policy that requires employees to maintain their status on their own?

"In terms of legal responsibility I think it's the individual, but there is a practical side to this," Mr. Groban said. "The practical side is you have a valued employee. That employee has family. And what fits your organization in terms of checking up on this?" This may mean having an onsite staffer routinely get copies of the I-94s and keep track. "Or conversely you say, 'Listen, this is your problem, and this is going to impact you, and ultimately if there is a problem it's going to impact your employment.' But I think not talking about it and not assigning responsibility is more of a recipe for disaster."

Are the rules different for summer interns and for temp positions for students who are currently attending school?

Mr. Groban replied that the Department of Labor's current view on unpaid internships is very narrow. To the extent the interns "were not receiving school credit, and to the extent that they were performing functions that would aid or assist the employer, and would otherwise be done by employees, it was unlawful not to pay them."

Related to the Lionbridge case about visa sponsorships and company responsibilities, what would be the effect if the employee had been on rotational staff and employed by the foreign parent rather than the U.S. company?

That case involved an employee with an H-1B visa who sued when the company didn't follow through on getting her green card, and most rotational staff are not looking to get green cards, though there are exceptions, Mr. Groban said. "All I'm suggesting is that you define what responsibilities are and make sure that the employees that you are seeking to benefit from this sign off on the dotted line."

"As a general proposition a best practice is to consider rotating staff employees of the parent, on temporary assignment here. It gives you an ability to say that we treat them differently as to pay, benefits, and the like not because of any national origin or protected classification, but simply because of their status as employed by the parent," Mr. Milani commented.

--Katherine Hyde
Topics:  Business

Calendar of Events

February 2018

S M T W Th F S
        1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 27 28      
All content © 2018, Japan Society, unless otherwise noted. |
333 East 47th Street New York, NY 10017 Phone: 212.832.1155 |
Credits | Press | Contact Us | Privacy Policy