February 2009 – Page 5 – Compliance Building

States With Pay-to-Play Laws

Twelve states have some variant of a pay-to-play law: California, Connecticut, Hawaii, Kentucky, Maryland, New Jersey, New Mexico, Ohio, Pennsylvania, South Carolina, Rhode Island, and West Virginia.

Regardless of where you are doing business, if it entails contracting with, attempting to contract with or otherwise providing goods or services to a governmental entity, you need to analyze whether your company and its employees are in any way limited with regard to making political contributions as a result of the business relationship with the government.

Registration Disclosure for Illinois Entity Registration

Illinois has a new business entity registration for procurement law in place to counteract “pay-to-play” in state contracting.

As part of the registration process, you must register the company as well as any “affiliated entity” and any “affiliated person.” Both of these terms are defined in Section 50-37 of Illinois Procurement Code.

“Affiliated person” means
(i) any person with any ownership interest or distributive share of the bidding or contracting business entity in excess of 7.5%,
(ii) executive employees of the bidding or contracting business entity, and
(iii) the spouse and minor children of any such persons.

“Affiliated entity” means
(i) any subsidiary of the bidding or contracting business entity,
(ii) any member of the same unitary business group,
(iii) any organization recognized by the United States Internal Revenue Service as a tax‑exempt organization described in Section 501(c) of the Internal Revenue Code of 1986 (or any successor provision of federal tax law) established by the bidding or contracting business entity, any affiliated entity of that business entity, or any affiliated person of that business entity, or
(iv) any political committee for which the bidding or contracting business entity, or any 501(c) organization described in item (iii) related to that business entity, is the sponsoring entity.

Illinois Business Entity Registration for Procurement

On January 1, 2009, two “pay-to-play” measures went into effect in Illinois.

Public Act 95-971 (.pdf) requires any business whose state contracts and/or bids on state contracts exceed $50,000 annually (“Covered Entity”) to register with the Board by January 31, 2009. The registration includes the Covered Entity’s name and address; the name and address of the Covered Entity’s parents, subsidiaries and affiliates (“Affiliated Entities”); and the name and address of any person who is an executive employee of, or who has an ownership interest exceeding 7.5% of, the Covered Entity, and the spouses and minor children of those persons (“Affiliated Persons”). Any business not currently a Covered Entity must register with the Board prior to submitting a bid whose value would cause the business to become a Covered Entity.

Upon registering, a Covered Entity will receive from the Board a certificate of registration. Within ten days of receiving the certificate, the Covered Entity must provide a copy to each of its Affiliated Entities and Affiliated Persons.

By April 1, 2009, the Covered Entity must provide a copy to the chief procurement officer of each agency with which the Covered Entity has a contract or to which the Covered Entity has submitted a bid. The Covered Entity must notify any political committee to which it contributes that it is registered with the Board; likewise, an Affiliated Entity and Affiliated Person must notify any political entity to which it (or he or she) contributes that it is affiliated with a Covered Entity.

Public Act 95-971 prohibits Covered Entities from making political contributions to statewide elected officials (Governor, Lieutenant Governor, Attorney General, Secretary of State, Comptroller, and Treasurer), and to declared candidates for those offices, if the officeholder is responsible for awarding a contract held or sought by the Covered Entity. The same prohibition applies to the Covered Entity’s Affiliated Entities and Affiliated Persons. The prohibitions extend for the duration of the officeholder’s term,or for a period of two years following the termination of the contract, whichever is longer.

Executive Order 3 (.pdf) imposes additional restrictions on Covered Entities that contract or bid with state agencies under the Governor’s authority. Those Covered Entities are prohibited from making political contributions not only to the particular statewide officeholder (and declared candidates for the office) responsible for awarding the relevant contract, but also to: (i) all other statewide elected officeholders and declared candidates for those offices; (ii) all members of the General Assembly and declared candidates for the General Assembly; and (iii) all political committees of a party’s state central committee represented by a statewide elected officer or member of the General Assembly. In addition, Executive Order 3 prohibits Covered Entities from making political contributions and from soliciting contributions or engaging lobbyists to solicit or make contributions.

Surprisingly, now-former-governor Rod Blagojevich signed the August, 2008 Executive Order #3 (.pdf).

You should also take a look at the Illinois State Board of Elections emergency regulations for this registration process. (.pdf)

Here is the Business Entity Registration Form (a fillable .pdf)

Data Breach Costs $202 per Customer Record

PGP Corporation and Ponemon Institute issued their fourth annual U.S. Cost of a Data Breach Study. The study examined 43 organizations across 17 different industry sectors with a range of 4,200 to 113,000 records that were affected. According to the report, data breach incidents cost U.S. companies $202 per compromised customer record in 2008, compared to $197 in 2007. Within that number, the largest cost increase in 2008 concerns lost business created by abnormal churn of customers. Since the study’s inception in 2005, this cost component has grown by more than $64 on a per victim basis, nearly a 40% increase.

Report of Congressional Oversight Panel on Regulatory Reform

Modernizing the American Financial Regulatory System: Recommendations for Improving Oversight, Protecting Consumers and Ensuring Stability (.pdf)

In response to the escalating crisis, on October 3, 2008, Congress provided the U.S. Department of the Treasury with the authority to spend $700 billion to stabilize the U.S. economy, preserve home ownership, and promote economic growth. Congress created the Office of Financial Stabilization (OFS) within Treasury to implement a Troubled Asset Relief Program (TARP). At the same time, Congress created the Congressional Oversight Panel to “review the current state of financial markets and the regulatory system.” The Panel is empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and their effect on the economy. Through regular reports, the Panel must oversee Treasury’s actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasury’s actions are in the best interests of the American people. In addition, Congress has instructed the Panel to produce a special report on regulatory reform that will analyze “the current state of the regulatory system and its effectiveness at overseeing the participants in the financial system and protecting consumers.”

This report is short on particulars, but does give me a sense that private investment funds are likely to be subject to more regulatory oversight in the near future.

Number three on the list of critical problems and recommendations for improvement is to modernize the supervision of the “shadow” financial system. The report lumps private equity funds in the same basket with OTC derivatives, off-balance sheet SIVs and hedge funds.

Using the Attorney-Client Privilege to Protect Drafts of SEC Filings

Mintz Levin published a client alert about the Roth v. Aon case I mentioned a few days ago: Draft SEC Filings Can Be Protected From Discovery.

The lawyers at Mintz have these recommendations:

Disclosures that involve legal judgments, discussions of pending litigation, and business matters that the company must disclose for compliance purposes should be fully vetted with both in-house and outside counsel;
Though SEC filings eventually become part of the public domain, under the right circumstances, the attorney-client privilege may cover drafts of such filings.
Despite the involvement of some non-legal staff in the drafting process, the privilege may extend to teams within the company that work with counsel to make legal decisions concerning disclosures.
As a matter of best practices, company procedures should mandate that all drafts of SEC filings and communications concerning these filings that may implicate the attorney-client privilege be labeled “Draft” and “Attorney-Client Privileged.”
Internal communications seeking legal advice or opinion about disclosures should expressly state such intentions in the subject line or first sentence of an email.

A Simple Strategy to Avoid Paying a Bribe

Alexandra A. Wrage writes on the WrageBlog about Simple Strategies to avoid paying a bribe:

“Our informant carefully prepared himself to meet with a notorious bribe-demanding functionary for the first time. He scripted his approach to the exchange:
(a) Stand quietly at the functionary’s little window until the functionary looked at him,
(b) Smile confidently,
(c) Say “good morning”, followed immediately by
(d) “I am so relieved that I get to talk to you. I have heard that most of the public employees here demand bribes, but I have also heard that you never ask for a one.” (These words are exactly those used.)
(e) Smile, again and describe his request.
(f) Use an expression and body language indicating that he trusts her to give him what he has requested.”

Investigating Complaints of Harassment

E. Jason Tremblay of Arnstein & Lehr LLP in Chicago put together an article in the ABA’s Business Law Today on how to limit a company’s exposure by Properly Investigating Complaints of Harassment. jason points out that an ineffective investigation can turn simple workplace humor into an expensive harrassment of retaliation complaint.

He inserts a word of caution that an investigation is not priveleged unless it is conducted through legal counsel. You need to take care that an investigation does not produce information that would be admissions adverse the company. Just gather facts.

Jason lays out these key steps that you can read in the articel in more detail:

Importance of training. Avoid the problems before they start.The better trained the company’s managers and supervisors are to identify personnel problems in the workplace, the more quickly and effectively the employer can take prompt and appropriate action to resolve the workplace conflict.
Start the investigation. Have a designated, impartial investigator instead of the employee’s manager.
Interview the alleged victim. When interviewing the alleged victim, there are a number of appropriate questions to ask in addition to the standard “who, what, when, where, and how” of the alleged harassment. Here are some examples of additional interview questions to ask the employee: How did you react? What response did you make when the incident occurred or afterwards? How did the harassment affect you? How has the harassment affected your job? Are there any persons with relevant information? Did the person who harassed you harass anyone else? Do you know whether anyone else complained about harassment by that person? Can you continue to work in your worksite?
Interview the alleged harrassser. It is prudent to give the alleged harasser an opportunity to respond to the allegations.
Interview other witnesses. What did you see or hear? When did the incident occur? Describe the alleged harasser’s behavior toward the complainant and toward others in the workplace. What did the complainant tell you? Has the conduct occurred in the past? Do you know of any other relevant information? Are there any other persons who have relevant information?
Take prompt, remedial action. Employres have an obligation to treat similar complaints of harassment in a similar fashion.
Document the investigation. Make sure your notes are accurate and are taken contemporaneously. Identify who drafted the notes and when. make sure they are legible. Confirm notes with the interviewees for accuracy.

Books and Records Requirement for Investment Advisers

The proposed Hedge Fund Transparency Act would require private investment funds to maintain books and records that the SEC requires. Presumably, if the Act passes the SEC would promulgate some regulations addressing what it would require.

One place to look would be Rule 204-2 under the Investment Advisers Act. The other place would be Rule 31a-1 under the Investment Company Act.

The Group of Thirty Report on Financial Reform

The Group of Thirty released their latest report: Financial Reform – A Framework for Financial Stability.(.pdf)

The report focuses on flaws in the global financial system and provides recommendations to improve the systems. The report project was led by Paul Volcker, Chairman, and Tommaso Padoa-Schioppa and Arminio Fraga Neto, Vice Chairmen. The rrport does not focus on the current actions and capital injections. It looks to the policies and regulations that control the financial markets.

I focused on Recommendation number 4 on the oversight of private pools of capital:

Recommendation 4:

a. Managers of private pools of capital that employ substantial borrowed funds should be required to register with an appropriate national prudential regulator. There should be some minimum size and venture capital exemptions from such registration requirement.
b. The prudential regulator of such managers should have authority to require periodic regulatory reports and public disclosures of appropriate information regarding the size, investment style, borrowing, and performance of the funds under management. Since introduction of even a modest system of registration and regulation can create a false impression of lower investment risk, disclosure, and suitability standards will have to be reevaluated.
c. For funds above a size judged to be potentially systemically significant, the prudential regulator should have authority to establish appropriate standards for capital, liquidity, and risk management.
d. For these purposes, the jurisdiction of the appropriate prudential regulator should be based on the primary business location of the manager of such funds, regardless of the legal domicile of the funds themselves. Given the global nature of the markets in which such managers and funds operate, it is imperative that a regulatory framework be applied on an internationally consistent basis.