In-house Compliance Attorneys—Yea or Nay?

Corporate executives are all too aware that regulators expect them to have competent, effective compliance functions these days. That’s leading some to wonder whether dedicated legal staffers should be part of an “effective” compliance department.

Most companies still have a chief compliance officer and perhaps a few deputies, but they rely on the regular corporate legal department when they need lawyers to help with an investigation or to confirm that compliance programs meet government expectations. The problem? “You don’t have your finger on the pulse of what the government is expecting as much as someone who does [compliance] every day,” says Bob Bittman, a securities lawyer at the law firm White & Case.

Cox

Those expectations are only growing. In a November speech to chief compliance officers, Securities and Exchange Commission Chairman Christopher Cox warned that giving short shrift to regulatory compliance “subjects a company’s investors, employees, management, directors, and every other stakeholder to unacceptable risks.” To punctuate the point, the SEC published an open letter to CEOs in December that said, in part: “While many firms are considering reductions and cost-cutting measures, we remind you of your firm’s legal obligation to maintain an adequate compliance program.”

Nevertheless, with many companies under pressure to cut budgets, compliance staffs are stuck between a rock and a hard place. “Compliance programs are designed to prevent bad behavior,” says Deborah House, deputy general counsel of the Association of Corporate Counsel. For companies that have never had a compliance problem before, convincing top management to spend additional money on specially trained legal staff is a very tough sell, she says.

A recent poll by the Open Compliance and Ethics Group shows just how diverse companies’ approaches to compliance staffing can be. Of 278 companies polled, half reported using their general counsel for legal matters; 23 percent had dedicated staff attorneys to determine legal and regulatory compliance, while another 20 percent used outside counsel.

And 46.4 percent of respondents noted that their compliance group worked more effectively by having its own legal team, while 30.9 percent claimed to save cost by having a legal team within the compliance department.

Ziegler

“The right approach varies tremendously from one company to the next,” says Richard Ziegler, former general counsel for 3M Corp. and now a partner at the law firm Jenner & Block. “One excellent approach is to have a combination of some lawyers who are dedicated to the compliance function and have the skills and expertise that come with that focused role, and, yet, have the support of other lawyers who are knowledgeable of the day-to-day business operations.”

TEAM PLAYER?

Does Your Company Have an In-House Legal Team?

Item

Count

Percent

No, we primarily work with the office of the general counsel on legal matters.

140

50.36%

Yes, we have our own staff attorneys for determining legal and regulatory requirements.

64

23.02%

No, we primarily work with outside counsel and/or outside advisors on legal matters.

57

20.50%

Yes, we have our own attorneys for investigations.

51

18.35%

Source

OCEG Survey: Legal Teams—Who Needs ’Em? (Dec. 29, 2008).

Not surprisingly, House from the ACC says in-house lawyers are generally more attuned than outside counsel to assess what constitutes the greatest risks faced by their company, which is “part of any good ethics and compliance program.” Because those risks vary greatly by industry, compliance lawyers can complement the knowledge of those in-house lawyers, bringing expertise in everything from securities disclosure laws to anti-trust and anti-corruption laws.

A core argument in favor of specially trained compliance lawyers is that they are better able to focus on those compliance issues that general in-house lawyers may not have time to grasp. For example, House predicts that corporate compliance lawyers will increasingly need to be more informed about financial standards in accounting.

“If you look at the corporate debacles of the last five to ten years, so many of them are linked to financial issues,” she says. But not a lot of lawyers know how financial standards work, “and it’s not something they pick up in law school,” she says. (The ACC even offers continuing education courses intended to enhance the financial and accounting skills of in-house counsel.)

Extra Help

But many circumstances also exist where the assistance of outside counsel can help. Lawyers working day to day within a company’s business units, for example, “may find it very awkward to put on a compliance hat if there is a specific matter that needs to be investigated,” Ziegler says.

Bittman

Outside counsel also can help companies steer away from one of the most common mistakes companies make, which is to assume that their compliance program is little more than a written policy, says Bittman. “That’s not sufficient by far,” he says. “A compliance program involves much more than a policy or code of conduct that includes all the required prohibitions.”

As the SEC stressed in its letter to senior officers: “Firms must be vigilant and proactive in preventing, detecting, and correcting problems that could occur.”

The letter, authored by Lori Richards, director of the SEC Office of Compliance Inspections and Examinations, continues: “Firms should pay attention to ensuring that their interactions with investors meet high standards, that sales and trading practices are appropriate, that financial, valuation and risk controls are followed, and that all disclosure obligations are met, as well as meeting all other obligations in conformity with the securities laws.”

Opinions on whether to seek the help of outside counsel vary from company to company. “We use both in-house and specialized legal resources, and frankly, I don’t know how we would operate without using both,” says Joy Cipperly, head of the compliance and ethics department at McKesson Medical-Surgical Inc. “This has been very successful for us, and our compliance team works very closely with them.”

Overall, says House, the goal of in-house attorneys always is to understand legal and regulatory issues fully, so that they can ensure that problems don’t arise. But if it is an area outside of their expertise, like financial standards, in-house counsel also need to have enough knowledge to recognize a problem when it does arise and make sure that it gets addressed.