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Sentencing Guideline Amendments Emphasize Compliance Officer Reporting Relationships

For several years, the Federal Sentencing Guidelines have provided that a corporation convicted of a criminal offense is eligible to receive a reduced sentence if it had in place at the time of the criminal offense an “effective compliance and ethics program.” For that reason, law enforcement authorities will often refer to the criminal Sentencing Guidelines when determining whether to prosecute an organization or pursue the organization on civil grounds. The Sentencing Guidelines are also likely to be considered both by regulators and private plaintiffs in determining whether to pursue the members of a governing board for breach of its compliance plan oversight obligations. More fundamentally, effective compliance programs are critical in preventing corporate wrongdoing, and therefore should help protect companies and their directors and officers from litigation. The standards set out in the Sentencing Guidelines are thus an important benchmark even apart from the federal criminal context.

The United States Sentencing Commission has recently amended the standards for an "Effective Compliance and Ethics Program" contained in the Federal Sentencing Guidelines. These amendments, unless specifically rejected by Congress (which is unlikely), will become effective November 1, 2010.

An important change made by the amendments is that they add a new provision that emphasizes the important role of the compliance officer. Generally, a company receives no credit for maintaining an effective compliance program if members of senior management were found to be involved with, condoned, or were willfully ignorant of the criminal activity. The new amendments create an important exception to this general rule if: (i) the compliance officer has a "direct reporting obligation" to the board or a subgroup of the board (e.g., the compliance or audit committee); (ii) the compliance program detected the criminal conduct before it was discovered or was reasonably likely to be discovered by regulators or other persons outside of the organization; (iii) the organization promptly reported the offense to the federal government; and (iv) no corporate compliance officers were involved with, condoned, or were willfully ignorant of the criminal offense. (Section 8C2.5).

A "direct reporting obligation" is defined as one which provides the compliance officer with express authority to communicate personally with the board promptly on any matter involving criminal or potential criminal conduct, and no less than annually on the implementation and effectiveness of the organization’s compliance plan.

These new amendments demonstrate that the government considers a "direct report" requirement an important element of a compliance program and will consider its existence when deciding whether to charge organizations in criminal cases and/or pursue them in civil cases (including those involving breach of fiduciary duty). The changes are consistent with other new compliance plan developments in the healthcare field, including the board compliance oversight requirements mandated in recent corporate integrity agreements and the increased willingness of the federal government to exercise its right to exclude individuals (including officers and directors) from participation in federal healthcare programs.

We suggest that, before the November 1 effective date of the amendments, clients re-examine and, if necessary, redefine, the role of the compliance officer with respect to board access and reporting relationships, as well as the most appropriate degree of coordination between the compliance officer and other key senior executives.

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About this Author

Neal R. Roach Jr., Taft Stettinius & Hollister LLP, IP Lawyer
Partner

Neal focuses his practice in the areas of business transactions (particularly intellectual property licensing transactions), corporate compliance and securities law compliance, and healthcare and life sciences law. He has represented numerous startup and high-growth companies on a broad range of matters, including advice on corporate structure and financing; intellectual property protection, management and licensing; contracts; FDA issues; sales and marketing regulation; healthcare compliance; reimbursement; strategic partnership agreements; and consulting agreements. In...

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