The Regulator Rundown

One of the greatest challenges facing general counsel is keeping up with current legal issues while anticipating future liabilities. But it's difficult to know where to turn your attention first when dealing with employee complaints, shareholder pressures, potential litigation and a host of regulatory agencies enforcing a host of constantly changing laws and standards.

The "Regulator Rundown" provides some help on the last point. The pages that follow offer an overview of the enforcement trends at many of the major federal regulatory agencies and some ideas about how to stay off their radar screens.

While there's no overarching trend that applies to all of these agencies, there are a few things to keep in mind when dealing with any D.C. watchdog. First, whatever the environment is now, things are subject to change with the political winds. In the months since the 2006 mid-term Congressional elections, subtle changes toward a more enforcement-oriented environment are beginning to show up in many agencies. And a potential change in the White House in 2008 may yield an
even more aggressive stance from regulatory agencies.

Second, general counsel can no longer just worry about keeping their clients out of trouble with federal agencies. They also need to worry about protecting themselves, as many agencies are holding lawyers personally liable for their clients' missteps.

Securities and Exchange Commission

  • Targeting in-house counsel in fraud actions
  • Increased scrutiny of 10b5-1 plans
  • Considering adoption of international financial reporting standards

Since Enron's 2001 collapse, the SEC repeatedly has said it would not only come down on corporate wrongdoers, but also on the gatekeepers who should have been watching out for fraud. But it wasn't until this year that the commission really carried through on that promise.

Now it is doing so in a big way, and general counsel are in the hot seat. The SEC brought fraud enforcement actions against seven in-house attorneys in the first four months of 2007. Some of those attorneys are alleged to have engaged in blatantly unethical behavior. For instance, the SEC charged former Morgan Stanley attorney Randi Collotta in March for stealing information about upcoming acquisitions, distributing that information to traders and sharing in the illicit profits.

But other charges aren't so clear-cut. For instance, in April the commission charged former Tenet Healthcare Corp. GC Cristi Sulzbach with fraud for failing to reveal enough to investors about the company's aggressive strategy to exploit a Medicare loophole. Many see such charges as a troubling development.

"This is a very scary prospect," says David Bayless, a partner at Covington & Burling. "Lawyers make judgments all the time about what to disclose. If the SEC starts suing lawyers for things they do in their capacity as advocates for their clients, they are going to chill lawyers' ability to do their jobs." The commission also is taking a hard look at 10b5-1 plan abuses. 10b5-1s enable executives to sell off stock without facing insider-trading charges by setting up regular, periodic sales of a certain number of shares. But an academic study recently revealed that executives are making a lot more money from sales through 10b5-1s than one would expect if they were completely random, leading SEC enforcers to examine whether executives are manipulating these plans. That situation is eerily similar to the one that led to the current frenzy over backdated stock options.

But not everything coming from the commission is bad news. In March the agency held a roundtable about adoption of International Financial Reporting Standards. If the commission follows through on its plan, it would allow foreign issuers and U.S. companies to use standardized international accounting standards in their filings rather than converting to GAAP.

Environmental protection agency

The biggest story about the EPA over the past decade is what it hasn't been doing.

Since President Bush took office in 2000, lawsuits seeking to spur the agency into action have far outstripped lawsuits accusing the agency of overstepping its authority.

In recent years, state governments and environmental activists have successfully sued the EPA for its failure to issue regulations about the pesticides sprayed on produce, its missed deadline for reviewing emissions standards for petroleum refineries and, most famously, its refusal to regulate greenhouse gasses that contribute to global warming.

But at least on the last point, things are about to change. In March the Supreme Court ruled in Massachusetts v. EPA that the Clean Air Act requires the EPA to regulate vehicular carbon emissions.

"The Court essentially told the EPA to get to work," says Lynda Brothers, a partner at Sonnenschein, Nath and Rosenthal. In the wake of that decision, corporate America is bracing itself for a new era of federal regulation. But just what form that regulation will take and when it will come about remains to be seen.

national labor relations board

By far, the most important issue on the NLRB's radar over the past year was clearing up its fuzzy definition of "supervisor" under the National Labor Relations Act. How the board defines supervisor determines which employees may join unions.

In October 2006, the board issued a long-awaited decision in Oakwood Healthcare Inc., which somewhat loosened the definition of supervisor and excluded more employees from union eligibility. The AFL--CIO says the decision barred more than 8 million workers from joining unions. But the decision is not entirely pro-employer.

"The effect of that decision is two-fold," says Michael Hood, a partner at Paul, Hastings, Janofsky & Walker. "It makes it slightly easier for a union to organize because there are fewer people in the voting group. It also means there are less managerial-type employees within the union."

But because the president appoints the five members of the NLRB--three of which are from the president's political party--the Board could flip on this issue in 2008. "If a Democrat is elected president, the board will become more employee oriented," Hood says.

federal communications commission

  • Protecting consumer privacy
  • Policing broadcast content
  • Aiding law enforcement officials

Most companies outside the telecom and broadcasting sectors probably don't give much thought to the FCC's regulatory activities. But if Chairman Kevin Martin has anything to say about it, that's about to change.

Martin has made it an enforcement priority to go after companies that buy, sell or misuse individuals' private telephone records--penalizing carriers that fail to put in place procedures to protect customer data, seeking forfeitures from data brokers that sell private consumer information and urging the FTC to take action against other entities that misuse telephone records. The agency got a big boost on the third point when HP's pretexting scandal broke last year.

"The FCC immediately took up the pretexting issue, adopting regulations that make it harder to use consumer telephone records," says Rick Joyce, a partner at Venable. "Companies have to be wary of the law enforcement implications of their in-house use of customer data. Privacy is an enormous issue." In addition to its increased focus on protecting consumer privacy, the agency is still actively policing broadcast indecency--a trend set off by Janet Jackson's infamous 2004 Super Bowl "wardrobe malfunction."

The agency also is looking at the telecom industry's role in law enforcement issues--for instance, working to make VoIP networks accessible to government wiretaps and promoting better coordination between wireless companies and emergency response officials to provide enhanced 911 services.

federal trade commission

  • Identity theft and consumer data security
  • Children and the Internet
  • Anti-competitive single firm conduct

It's not news to anyone that the FTC is aggressively fighting identity theft. But corporate America may not be prepared for a litany of regulations the FTC-led Presidential Task Force on Identity Theft recommended in an April 2007 report. The report calls for a federal law setting standards for how companies safeguard consumer data and requiring them to provide notice when a breach occurs, the establishment of a cross-agency law enforcement team devoted to ID theft prosecutions and new restrictions on how public and private entities use Social Security numbers--all of which the agency would implement in the coming year.

Another new development in the ID theft arena is that civil plaintiffs are using the FTC's standards to sue companies responsible for data breaches. For example, an association representing more than 200 financial institutions filed a class action suit April 25, 2007, against the parent company of T.J. Maxx to recover the costs the banks incurred when thieves stole 45,000 credit card numbers from the retailer. Looking ahead, companies can expect increased coordination of sophisticated plaintiffs with FTC investigations.

"Both the FTC and civil plaintiffs will look at whether you're keeping data longer than you need to for a reasonable business purpose, whether you had a good data destruction policy and whether you've taken reasonable steps to physically and technologically secure personal information," says Roz Allen, a partner at Holland & Knight. "This is being vigorously pursued by the government and civil plaintiffs."

Although combating ID theft is the agency's top priority, the FTC also has several other major initiatives. It has recently upped enforcement of the Children's Online Privacy Protection Act (COPPA), which prohibits Web site operators from collecting information from children on the Internet. The agency recently fined social networking site Xanga $1 million for COPPA violations.

The FTC also is planning to set standards for determining when single firm conduct violates antitrust laws. Although the agency has done some prosecution of single-firm conduct it deemed anti-competitive--most famously against Microsoft for its bundling of the Internet Explorer browser with its market-dominating Windows operating system--the agency has not set clear standards for when single-firm conduct violates the law. The FTC and DOJ held joint hearings on the topic in January 2007, but have not yet given companies any guidance.

"Often, this conduct lowers costs for consumers, but it's unclear when a company crosses the line into taking advantage of its market position," Allen says. "The agency is continuing to weigh how it should decide which activities ultimately reduce consumer choice."

immigration customs enforcement

  • Criminal prosecution of company managers
  • Companies held liable for contractors' misdeeds
  • Coordinated, multi-location raids

No one who remembers news footage of federal agents pointing guns at seven-year-old Eli??n Gonz??lez in 2000 would accuse the INS of being soft on immigration issues. But in many ways ICE, which replaced INS as the nation's top immigration enforcer in 2003, is a heck of a lot tougher.

First, ICE has dramatically increased the number of criminal charges against individuals who knowingly hire or harbor illegal immigrants. In 2006 the agency's worksite raids resulted in 718 criminal arrests--that's not counting the 3,667 illegal aliens the agency arrested on administrative violations. By way of comparison, the INS made only 25 criminal arrests in 2002. In the first half of fiscal 2007, the agency already has made 527 criminal arrests and 2,763 administrative arrests--putting ICE on pace for another record-breaking year.

Managerial employees are hot targets for criminal prosecution. For example, ICE raided potato-processing company Worley & McCullough Inc. in April and arrested three managers on criminal charges. The month before, ICE arrested three managers at manufacturer Michael Bianco Inc.

A second trend at ICE is holding companies liable when their contractors hire illegal workers. The most famous example of this is Wal-Mart's 2005 consent decree, which required the company to pay $11 million to settle civil charges that its janitorial contractors employed illegal workers. That scenario has played out on a smaller scale for many companies in the past year.

Finally, ICE is engaging in simultaneous, multi-location raids against suspected offenders. One such raid led to the arrest of 1,200 workers from Swift & Co. meatpacking facilities in Colorado, Nebraska, Texas, Utah, Iowa and Minnesota.

As with most regulators, the best offense against ICE is a good defense, including training first-level hiring managers about the consequences of hiring illegal workers, auditing your I-9s and paying more attention to Social Security no-match letters, which indicate that a worker may have submitted falsified documents. "You have to be aware that your employees may not be who they say they are," says Steve Trow, a partner at Trow & Rahal. "Once ICE stepped up enforcement actions for failure to check documents, the phony document industry became a bigger problem."

occupational safety & health admin.

  • Voluntary compliance and outreach programs
  • Few new regulations
  • Recognition of compliant workplaces

For the past six years, OSHA has gone easy on corporate America. So much so, in fact, that many critics say the agency is not accomplishing its core mission--protecting worker safety.

President Bush did little to quiet those critics when he made Ed Foulke, a former partner at Jackson Lewis who had been an outspoken opponent of OSHA, the agency's chair in April 2006.

Since 2001 the agency has issued few new regulations, and those it has issued are narrow. For example, OSHA updated regulations for the steel erection industry in 2002, set standards for preventing shipyard fires in 2004 and placed limits on worker exposure to hexavalent chromium in 2006--the latter after the 3rd Circuit ordered it to do so. In many other instances, the agency relaxed existing rules. Gone is the push for safety standards for office workplaces that dominated OSHA's agenda under President Clinton.

"The workplace has changed drastically, and most of OSHA's standards are 37 years old," says Howard Mavity, a partner at Fisher & Phillips. "Its frustrating for companies to operate without guidance."

One area in which OSHA has been active is promoting its Voluntary Protection Program (VPP). This program sets criteria for employer safety and health systems, invites worksites to apply and then assesses applicants against the criteria. OSHA recognizes worksites that are in compliance, but does not bring enforcement actions against those that are not. OSHA's 2008 budget includes money for 13 more positions in VPP, signaling the agency will continue to promote voluntary compliance.

But don't get comfortable. Many experts predict a seismic change in OSHA policy and enforcement posture now that Democrats control Congress. Employment lawyers point to two April Congressional hearings--a House hearing titled "Have OSHA Standards Kept Up with Workplace Hazards?" and a Senate hearing titled "Is OSHA Working for Working People?" as signs of a changing tide.

"There's a battle for the soul of OSHA," Mavity says. "Democrats and unions want heavy, punitive enforcement, and Republicans and businesses want cooperative, volunteer programs."

Office of federal contract compliance programs

  • More aggressive enforcement posture
  • Statistical analyses of demographics
  • Prosecuting systemic discrimination

For more than 40 years, the OFCCP's primary mission was to help government contractors comply with equal employment opportunity and affirmative action laws. As a result, the agency devoted the majority of its resources to conducting informational outreach about antidiscrimination laws and helping companies set up voluntary self-monitoring programs.

But in 2005 the agency did an about face. That year it implemented its Active Case Management system--an initiative that poured the agency's resources into conducting more audits, subjecting contractors' EEO submissions to sophisticated statistical analysis and aggressively going after suspected instances of systemic discrimination. In fiscal 2006 OFCCP recovered a record $51.5 million on behalf of 15,000 workers--a 78 percent increase over 2001 recoveries. A telling 88 percent of those recoveries came from systemic discrimination prosecutions where the agency found an employer had facially neutral practices that had a statistically significant negative impact on women or minorities.

"OFCCP has transformed itself," says Alissa Horvitz, shareholder at Littler Mendelson. "It's doing three times more audits than it was two years ago, and its regional offices are coordinating to bring large class action cases."

Not only has OFCCP become more aggressive with enforcement, it also is becoming smarter about identifying the companies it audits. In the past the agency relied on companies to self-disclose as government contractors on their EEO-1 filings. But many companies that were eligible for government contracts simply failed to do so. The agency's 2007 Contracts First initiative gave OFCCP access to the federal procurement database, which revealed a large number of contractors that never had been subject to an OFCCP audit. In April 2007 the agency scheduled compliance evaluations of 4,500 employers--many of which were caught off guard.

It's not an easy task to stay off the OFCCP's radar in this environment. But a big part of the battle is understanding how the agency identifies audit targets.

"Look at your data through a systemic microscope," Horvitz says. "That will save you a lot of trouble down the road."

internal revenue service

  • Fall out from tax shelter investigations
  • Reporting on tax contingencies
  • Cross-border tax issues

There's good news and bad news when it comes to the nation's tax watchdog. The good news is that the IRS' all out war on abusive tax shelters is beginning to slow down. The bad news is that its last gasps are likely to take out some of its most high-profile opponents.

One such opponent is Jenkens & Gilchrist, formerly the largest law firm in Dallas. Jenkins closed its doors March 30 after spending four years battling the IRS over complex tax shelters involving foreign currency options it had approved for its clients. The firm took a huge hit when the agency forced it to hand over a list of its tax clients in 2003, but the last straw was a $76 million penalty the IRS assessed against Jenkens in March 2007.

"The tax shelter war is over, and the government won," says Christopher Rizek, a member in Caplin & Drysdale. "But we'll continue to feel the collateral consequences for the coming year."

Another issue to watch out for is compliance with the Financial Accounting Oversight Board's FIN 48 standards, which went into effect for fiscal years beginning after Dec. 15, 2006. This standard requires companies to make disclosures about future tax liabilities or benefits they expect to experience and assign probabilities to the likelihood of those events occurring. Many tax attorneys predict both the government and the plaintiffs' bar will be watching these disclosures very closely for accuracy and specificity as they show up on quarterly filings for the first time later this year.

Third, the IRS is stepping up its scrutiny of foreign dealings from which companies reap tax benefits such as transfer pricing, reporting of gifts given or received overseas and foreign tax credits.

"We're starting to see more penalties on international transactions--not sham transactions, but real transactions structured to take advantage of the tax code--where IRS disagrees with the taxpayer," says John Peterson, partner at Baker & McKenzie. But even as these trends continue to develop, the IRS will be in flux as the agency looks for a replacement for Commissioner Mark Everson, who resigned in April to head the American Red Cross.

equal employment opportunity commission

  • Renewed focus on race discrimination
  • Fighting systemic discrimination
  • Work/family balance

Despite the fact that it recovered $376.4 million on behalf of discrimination victims in 2005, the EEOC was dissatisfied with its performance.

So in April 2006 the agency developed a plan to refocus its resources to increase the size, sophistication and impact of the cases it brings. That plan called for the agency to move away from suing on behalf of individual victims of discrimination in order to focus on coordinated, multi-plaintiff actions against high-profile national employers.

Although the agency has been slow to fully roll out the plan, it seems to be working. During the past year, the agency has won judgments or settlements in excess of $1 million from employers including Chase, Trans Bay Steel and Custom Companies.

In February the agency announced its first major initiative since the reorganization plan. Called E-RACE, the new program calls for an agency-wide focus on investigating and rooting out racial discrimination, once again concentrating on large, multi-employee actions. Toward that end, the agency is proactively analyzing companies' EEO submissions for signs of systemic discrimination rather than waiting for employees to come forward with complaints.

The first major case brought under the E-RACE initiative targets Walgreen's. The EEOC alleges the pharmacy chain has a company-wide practice of assigning black employees to poor-performing stores, thus limiting their career advancement opportunities in violation of Title VII. The suit seeks back pay, compensatory and punitive damages and an injunction.

And the agency has signaled it has every intention to remain focused on large race discrimination claims in the coming years.

"This is their single focus," says Littler Mendelson partner Mark Ogden. "The EEOC has other large retail establishments in mind. The agency is out there litigating both disparate treatment and disparate impact cases, and it seems to be very well organized, very well funded and very well staffed."

One new issue on the agency's radar is protecting the rights of mothers and other caregivers in the workplace. In April the agency held a public meeting to discuss the development of employer guidelines on the topic. While the comments from that meeting demonstrated a unified belief across the agency that discrimination based on family responsibility violates Title VII, it remains to be seen what enforcement posture the agency will take on the emerging issue.

Alphabet Soup
Here's a quick look at what's going on in a few more regulatory agencies:

employee benefits security administration

  • Scrutiny of kickbacks and undisclosed fees paid to consultants and advisers to ERISA plans
  • Valuation of employee stock ownership plans in private companies

public company accounting oversight board

  • Addressing concerns of small public accounting firms
  • Auditing companies' filings for backdating of stock options

food and drug administration

  • Clamping down on marketing of prescription drugs for off-label uses
  • Protecting and promoting the development of generic drugs

department of health and human services

  • Stricter enforcement of HIPPA rules about use and confidentiality of consumer health information

consumer products safety commission

  • Continued focus on products that can be hazardous to children

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