The Governance Implication of a Proposed Yates “Soft Repeal”

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine. Rebecca Martin and Joshua T. Buchman assisted in the preparation of this post. Their views do not necessarily represent the views of McDermott Will & Emery or its clients.

In an October 6, 2017 speech, Deputy U.S. Attorney General Rod J. Rosenstein offered further hints on the proposed “soft repeal” of the long-controversial “Yates Memorandum” on corporate liability and individual accountability.

Mr. Rosenstein had first raised the possibility of a change to Yates in a September 14, 2017 speech to the Heritage Foundation. In that speech, he stated that the policy set forth in that Memorandum was “under review”. In his October 6 speech, to the NYU program on Corporate Compliance and Enforcement, he elaborated on the pending change in policy.

More often than not, it is acceptable for the board to be reactive to the governance implications of pending legislation and proposed regulatory policy. It can often be prudent to defer reaction until the final version of the legislation or regulation is in hand. However, a “soft repeal” of Yates could be an exception. While likely nuanced in scope, the changes, as suggested by Mr. Rosenstein, could nevertheless have significant (and in some respects unanticipated) implications for corporate risk policies and compliance programs. Board risk, audit & compliance committees are thus well advised to anticipate, and plan for, these implications.

The Rationale for Change

The overarching theme of Mr. Rosenstein’s comments was the continued commitment of the Department of Justice to holding corporations and their employees responsible for criminal and civil fraud, and other misconduct.

Yet this message was combined with an acknowledgment that, in the context of particular enforcement policies, “the solutions of the past are not necessarily the right solutions today. Circumstances change. We should not blindly accept past practices.”

To that end, Mr. Rosenstein announced that DOJ practices concerning corporate monitors, the FCPA Pilot Program, corporate investigation training programs, and the mandate of the Financial Fraud Enforcement Task Force are being reviewed.

And so it appears to be with the Yates Memorandum, which Mr. Rosenstein confirmed is also one of the policies under review.

The Possible Scope of Change

Mr. Rosenstein did not announce any new “policy” in his October 6 speech, nor did he indicate when changes would be announced. He did, however, indicate that any adjustments or changes in the policy will reflect certain common themes, e.g., the continued resolve to hold individuals accountable for corporate wrongdoing; an affirmation that government should not use criminal authority unfairly to extract civil payments; any changes to Yates will make the policy more clear and more concise; and such changes will reflect input from stakeholders inside and outside the Department of Justice.

In that regard, his comments give room for speculation on the possible direction of limited Yates changes; e.g.,

  • relaxing the circumstances under which corporations must provide information about potentially culpable employees in order to qualify for corporation credit;
  • attributing higher value to “truly robust” compliance programs;
  • directing prosecutors to take into consideration an individual’s “ability to pay” when making decisions on civil enforcement actions; and
  • extending prosecutorial deference to corporations where the nexus between corporate leadership and individual misconduct is highly attenuated; e.g., by geographic distance, or location within the corporate hierarchy.

And perhaps the most significant potential change would be to allow corporate cases to be resolved before there is a “clear plan” to resolve related cases against individuals. Such a change would seem consistent with Administration policies intended to reduce what it perceives as unnecessary regulatory burdens on corporations.

But, it’s all conjecture except for one certainty—the changes will be “soft”; i.e., unlikely to involve any meaningful roll-back of the emphasis on individual accountability.

The Unintended Governance Consequences of Change

At surface level, it is difficult to see any governance-related negatives to a Yates revision, nuanced or otherwise. Boards would particularly welcome any change that would relax the “corporation credit”-driven tension between the board and management that may arise in the context of investigations.

But the more important governance challenge will be to respond to organizational misperceptions that “Yates has been repealed” and that individual accountability is no longer a focus of government enforcement policies.

There is a legitimate concern that those members of leadership and line management who are ordinarily prone to “push the edge of the envelope”, will view a Yates policy change as a “green light” to pursue much more legally problematic business strategies. This is consistent with broader concerns with the compliance implications of deregulation, as identified by the National Association of Corporate Directors.

As Mr. Rosenstein noted, these risk-takers are the people who either do not believe the government will enforce applicable penalties, or who calculate that the likely benefit of breaking the rule outweighs the potential penalty. And they exist in virtually every large organization.

Corporate boards and their risk and compliance committees should anticipate the potential for this misinterpretation, and be prepared send a clear message that corporate policies on legal compliance, corporate conduct and legal risk evaluation of business initiatives, will not change. In addition, the board will want to confirm that management will continue to timely share with it important information relating to legal compliance, organizational ethics and corporate reputation. The board may also direct management to continue ongoing efforts to eliminate any executive/employee compensation incentives or similar protocols that could motivate employees to ignore the organization’s commitment to ethical conduct and to compliance with the law.

The board will also need to provide demonstrable support to efforts of the General Counsel and the Chief Compliance Officer to preserve the integrity of the legal control system and prevent employees from pursuing business initiatives that present significant legal risks.

Mr. Rosenstein makes it clear that corporations and their employees will continue to be held accountable for their misconduct. That’s just not changing. This message will need to be sent to every hierarchical level within the corporation—and the board should be thinking about getting a head start on that messaging.

Summary

Deregulation can be a powerful catalyst for corporate growth and is usually welcomed by the corporate governing board. This is especially the case with the roll-back of enforcement policies widely perceived as inequitable.

But deregulation or relaxation of regulatory enforcement standards can have unintended compliance consequences. It is the responsibility of the board to be attentive to this possibility and to be proactive in vigorous support for a “truly robust” culture of corporate legal compliance.

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