On April 29, 2010, after a period of public comment, the United States Sentencing Commission ("USSC") issued proposed amendments to the United States Sentencing Guidelines ("USSG"). Absent Congressional action, those amendments will take effect on November 2, 2010. One of the proposed amendments relates to USSG § 8C2.5(f), which provides for a 3-point reduction in culpability score for companies that had an effective compliance and ethics program in place at the time of the offense of which they have been convicted. This amendment is part of the USSC's announced effort to reevaluate corporate sentencing and provide for greater reward and encouragement for compliance programs, self-reporting, and remediation of discovered offenses.
The proposed amendment to USSG § 8C2.5(f) would make a
3-point reduction in culpability score more readily available to
companies whose compliance programs provide for "direct
reporting obligations" from the head of that compliance
program to the board of directors or the audit committee. A
reporting obligation to a general counsel or other high-level
corporate officer would not meet this description unless he or she
also were a member of the board of directors. Although the actual
beneficial impact of the change is somewhat speculative, it could
be very helpful in a later criminal prosecution. Even without an
outright prosecution, such "direct reporting" will
probably be regarded favorably by other law enforcement agencies
that evaluate the effectiveness of a company's compliance
program in deciding whether to bring criminal charges or take civil
or administrative courses of action. Thus, for most companies,
making the contemplated change is advisable.
Although the subsection (f) reduction has been in the USSG for many
years, it has reportedly been applied only three times between 1995
and 2008. The reason for this scant application is the existence of
a looming exception under subsection (f)(3): The reduction was not
available if "an individual within high-level personnel of the
organization ... participated in, condoned, or was willfully
ignorant of the offense." The reason for that exception was
the suspicion that if high-level personnel were involved, the
compliance program must not have been very effective or
trustworthy. More practically, if an internal investigation
revealed the involvement of high-level personnel – even
tangential or barely-knowing involvement – the company
was then faced with a difficult choice regarding self-reporting,
because the 3-point reduction for an effective compliance program
would not be available regardless of whether the offense was
reported.
The proposed amendment substantially modifies that exception and in
some ways eliminates it altogether. Under the amendment, the
involvement of high-level personnel no longer operates as a
mandatory disqualifying factor. Instead, the 3-point reduction
remains available so long as:
- the individual or individuals with operational responsibility for the compliance and ethics program had direct reporting obligations to the organization's governing authority or subgroup thereof;
- the compliance program detected the offense before it was discovered outside the organization or before such discovery was reasonably likely;
- the organization promptly reported the offense to the appropriate governmental authorities; and
- no individual with operational responsibility for the compliance program participated in, condoned, or was willfully ignorant of the offense.
Viewed from a technical point of view, this amendment can be
regarded as creating an "exception to an exception." As a
practical matter, however, if companies provide for the required
direct reporting the effect of this amendment will likely be to
make the 3-point reduction available in the overwhelming majority
of cases since it is unlikely that the head of the corporate
compliance program will have participated in, condoned, or been
willfully ignorant of the offense.
This amendment reflects two fundamental policy judgments about
compliance programs: first, that compliance programs are more
meaningful and trustworthy if the head of the program has
"direct reporting obligations" to the board of directors
or the audit committee of the board; and second, that more should
be done to encourage companies to institute robust compliance
programs.
How to Take Advantage of the Proposed
Amendment
The Application Notes provide some guidance about what the
compliance program must look like in order to make the 3-point
reduction available. "Direct reporting authority" is
defined as authority on the part of the individual in charge of the
compliance program to communicate personally with the board of
directors and/or the audit committee in any specific matter where
there is potential criminal conduct. An additional requirement is
that the person in charge of the compliance program must report to
the board no less than annually on the general subject of the
implementation and effectiveness of the compliance program. The key
concept here seems to be unfettered personal access to those on the
board – and not merely to management. Indeed, the
amendment can be interpreted as reflecting an abiding suspicion of
management and encouraging a direct relationship between the board
and the head of the compliance program, to the exclusion of
management.
For many companies, satisfying this requirement would require
changes in the corporation's structure and policy. A company
whose current program provides for reporting by the head of the
compliance program to an officer who does not sit on the board
should make an explicit change in its written policy to provide for
direct reporting to the board, assuming that it wants to maximize
its chances of qualifying for a 3-point reduction in the event of a
violation. To satisfy the requirement of a direct reporting
obligation very clearly, companies may want to designate a specific
board member to receive such reports from the head of the
compliance program.
Whether to Revise a Company's Compliance Program to
Take Advantage of the Amendment
It is always a bit speculative to assess the benefits supposedly
made available by a change in a subsection of a sentencing
provision. Many other factors would need to come together to bring
the 3-point reduction into play: the company would have to suffer a
conviction; detect the offense before it became public and disclose
the offense to the proper authorities; and the head of compliance
must not have been involved in the unlawful activity. Moreover, the
real value of the reduction at sentencing depends on what the
sentence would have been without the reduction, which depends on
the various other characteristics of the offense, especially the
resulting loss, which is difficult or impossible to predict
prospectively.
Still, a 3-point reduction is very substantial in the USSG
corporate sentencing scheme. Depending on the amount of the loss,
the benefit could be a reduction of 30-50% of the fine range that
is generated by the USSG sentencing formula. Without the corporate
changes envisioned by the proposed amendment, the reduction is
completely unavailable. (The other three criteria are essential
too, but they can be known and/or accommodated only after the
offense, not in advance.)
In addition to providing a benefit in a point-level calculation,
direct reporting to the board should make for a more effective
compliance program. This amendment to the USSG reflects a judgment
by the USSC about what compliance programs are most effective.
William Sessions, the current Chairman of the USSC, has said that
the amendment reflects the view that direct communication between
the board of directors and compliance officers is essential to
effective corporate compliance programs.
If the USSG encourages this direct reporting, and if Chairman
Sessions regards it as essential, then considerable weight will
likely be given to that factor by prosecutors, law enforcement, and
regulators (such as the SEC) in determining whether to regard a
case as criminal or merely civil or administrative. Such direct
reporting may even have a bearing on how plaintiffs evaluate
whether to pursue charges against directors and other
officials.
On the other side of the equation, there do not appear to be many
disadvantages to implementing the adjustments contemplated by the
amendment. Currently, many companies provide for a primary
reporting obligation by their compliance officers to a corporate
executive who does not sit on the board of directors. To come
within the coverage of this amendment, this reporting relationship
will have to be modified. The new rule, however, does not require
keeping the general counsel or other corporate officials out of the
loop. It requires only that the head of the compliance program have
a direct reporting obligation to the board or audit committee. It
is possible that a few more borderline compliance questions will be
brought to the board's attention directly rather than being
corralled by management beforehand, but the inconvenience of that
change is probably minimal.
In view of the prospective benefits made available by this USSG
amendment, which could be quite substantial in a significant case,
and the minimal cost of making the necessary changes, many
companies may well find it advisable to change their compliance
programs to take advantage of the additional point reduction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.