Compliance, Risk and Ethics Officers – Best Practices to Gain Job Security

“When you stretch the truth, watch out for the snapback.”

– Bill Copeland

ACTUAL “CASE HISTORY”: Note – In almost all of our case histories, we alter the names and facts a bit to disguise the true identity of our clients. In this case history, we have not done so, because all of the facts are a matter of public Court record.

In 2008 I represented Joseph Sullivan, a Chief Compliance Officer of New York-based hedge fund Peconic Partners. Sullivan objected to the actions of the principal owner of Peconic Partners, William Harnish, in his timing stock sales that gave Harnish and his family an advantage over Peconic’s investors. The practice is called “front running,” and is considered a breach of fiduciary duty to investors. Sullivan had a written contract of employment, but by its terms was still an “at will” employee.

After Sullivan voiced objection to the seeming “front-running,” he was asked to sign an agreement that, without reason or payment, took away his existing ownership interests in the firm. When I wrote a cordial email to Peconic’s legal counsel asking to discuss the matter, hours later Sullivan was fired.

We initiated Sullivan’s lawsuit in New York Supreme Court, claiming, in essence, that objecting to compliance failures was Sullivan’s very job, and so Peconic’s firing him for doing his job was a breach of his employment contract. No Court in New York had ever made such a ruling on behalf of compliance, risk or ethics officers, but we were determined to change the law. Audacious, yes, but surely needed in this day and age, and especially in New York, considered by many to be the finance capital of the world.

Sure enough, we won: Justice Lowe of the New York Supreme Court ruled in Sullivan’s favor. In doing so, he “went out on a legal limb” of sorts, in that he was brave enough to make “new law” where he saw it as quite logical and necessary to do so. His decision was a big step forward for compliance and risk officers.

Unfortunately, on Harnish’s appeal of the ruling, the New York Court of Appeals, which is New York State’s highest court, overruled Justice Lowe’s decision, effectively leaving New York-based compliance officers in the lurch. The Court’s reasoning, in summary, was that a decision to give new legal protections to compliance officers was not its to make, but rather a decision that had to be made by the state legislature, U.S. Congress, or federal securities regulators.

The Court’s decision was not without strong dissent from some of its more thoughtful Judges. Here is what Chief Judge Lippman of the New York Court of Appeals wrote in his stinging rebuke of the decision reached by the majority on the Court:

“In the wake of the devastation caused by fraudulent financial schemes – such as the Madoff Ponzi operation, infamous for many reasons including the length of time during which it continued undetected – the courts can ill afford to turn a blind eye to the potential for abuses that may be committed by unscrupulous financial services companies in violation of the public trust and the law. In the absence of conscientious efforts by those insiders entrusted to report and prevent such abuses of investors, such behavior can run rampant until a third party outside the company discovers it and takes action. The message that will be taken from the majority’s decision is self evident: if compliance officers (and others similarly situated) wish to keep their jobs, they should keep their heads down and ignore good-faith suspicions or evidence they may have that their employers have engaged in illegal and unethical behavior, even where such violations could cause or have caused staggering losses to their employers’ clients. The majority’s conclusion that an investment advisor like Peconic has every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the Madoff debacle, runs counter to the letter and spirit of this Court’s precedent, and facilitates the perpetration of frauds on the public.”

To put it mildly, we agreed wholeheartedly with Chief Judge Lippman’s sentiments, and we shared his great disappointment, too.

LESSON TO LEARN: There is an undeniable friction between, on the one hand, sales and operations people, whose job it is to increase revenues and profits, and whose performance is judged on numerical metrics, and compliance, risk and ethics officers, on the other hand, whose job it is to make sure that sales and operations are carried out in accordance with legal, regulatory and ethical bounds. It is a natural friction that will never go away.

But there need to be rules to protect compliance, risk and ethics officers, who face pernicious retaliation for simply doing their jobs. Until compliance and risk officers are given job protection by the state and federal legislatures, or federal securities regulators, they will remain in significant job jeopardy for doing their jobs, even in the best of faith. That is bad for them. Worse still is that compliance, risk and ethics officers will feel pressured – directly or indirectly, overt or covert – to ignore breaches of “the rules.”

I simply cannot count the number of times that compliance-oriented clients have reported being criticized for being “too negative,” “too picky,” “trying to run the company,” “getting in the way,’ or “going overboard.” One client received a stern email, in all caps, that read, “CHILL.” (That one terribly chosen word in an email resulted in a negotiated severance settlement of over one million dollars.)

Until this problem is attended to by legislatures and regulators, or perhaps the Courts, compliance, risk and ethics officers are on their own to protect themselves. While compliance, risk and ethics officers may not have sufficient leverage when seeking employment to dictate the terms of their employment relations, nothing stops them from asking for protections against retaliation for doing their jobs in good faith. Imagine, if you would, that all compliance professionals made such requests, employers (most especially in the world of finance) would then be under pressure to grant such protections to all.

Membership organizations and trade groups of compliance officers can lobby, too, for industry standards, regulatory standards and “best practices” standards in the structure of employment agreements for compliance officers. That is already underway; more pressure is still needed.

In representing numerous compliance and risk professionals, I have seen first-hand how doing their job can result in losing their job, and how such damage might have been prevented.

In the meantime, there are things compliance officers can – and should – seek when they are negotiating new employment (or during employment renegotiations) to make themselves more job secure. Remember that “forewarned is forearmed,” and “The Lord helps those who help themselves.”

WHAT YOU CAN DO: It’s readily acknowledged that requesting contractual protections during employment discussions may cast a pall on hiring momentum. At the same time, it’s unquestioned that knowing what to ask for, and asking for it when you have the greatest leverage, can only help. The following are the ten items we suggest all compliance, risk and ethics officers raise in employment discussions.

1. First and foremost, try to get “something in writing.” In my experience, most compliance, risk and ethics officers receive written offer letters as a basis for their hiring. However, Chief Compliance, Chief Risk, and Chief Ethics Officers, or their equivalents, generally receive more formal written employment agreements. If you get neither, then it is incumbent on you to ask for some agreement in writing, or provide one, yourself. It’s a necessary first step to the other steps below.

2. Use “Best Practices” as your rationale. Whenever you make any request, the most important part of that request is not the timing, the amount requested, or to whom it is presented but rather whether it is accompanied by a powerful and persuasive rationale, one that is hard to argue against. I mean, who could argue against “best practices?”

Illustration: If I told you that my telephone consultations cost $10,000, you would probably say “That is way too expensive.” But, if I added, “If you consult with me, however, I will guarantee that you will be paid no less than $10 million by your employer,” well, then – considering this new and convincing rationale – you might see $10,000 as a bargain. The reason behind a request makes all the difference in how the request is received, viewed, and responded to.

The very best rationale for the 10 requests we suggest is this: “These are considered to be ‘best practices’ in the employment of compliance personnel, and this company is expressly committed to best compliance practices.”

Act like a pro! Use our Model Response to Offer Letter; Seeking Improvements. It shows you “What to Say, and How to Say It.™” To obtain a copy for your use, just [click here.] Delivered by Email – Instantly!

3. Request a fixed term of employment. The most common basis for employment is “at will” employment, which means only that either the employer or the employee may terminate the employment relation “at any time.” Most people, including even lawyers and Judges, don’t understand that “at will” does not mean “for any reason.” When an “at will” employee is terminated, the law in 49 of the 50 states (Montana is the lone exception) provides that no reason need be given for the decision.

However, in an employment relation that has a fixed term of duration, such as one or two years, in order to end that relation some reason generally does need to be given. Having a fixed term of employment has the effect of shifting the burden to employers to justify firing a compliance officer. The Sullivan Court made a big point of Sullivan’s being an “at will” employee, suggesting that employers had wider latitude to retaliate against “at will” employees, without sound logic in my own view.

I fully recognize and appreciate that when you are eager to get hired, you may be loathe to try to set the terms of the relation. It is not often that an employee feels such leverage. However, so long as any request of any kind is made (a) respectfully, (b) for something reasonable, and (c) supported by a sensible rationale, there is rarely any downside to making the request. One thing is for sure: “Unless you ask, it is almost a given that you won’t get.”

4. Seek, too, automatic renewal. Automatic renewal of a term (that is, duration) of an agreement (sometimes called an “evergreen” provision) means that the relation will renew, automatically, for another fixed term, unless one or both of the parties says, in effect, “No more, thank you.” It creates an expectation that the relation will be extended when expired, for another fixed term, and thus, also shift the burden to employers to explain their termination of the employment relation.

5. Request that termination be permitted only for “cause.” Obtaining agreement to “termination only for cause” gives especially significant effect to the job security afforded by “fixed term” and “automatic renewal” in employment agreements. Such a provision may be set forth as “The employee’s employment cannot be terminated without a good reason first being provided to the employee in writing.” This both (a) differentiates “at will” employees from “fixed term” employees, and (b) makes it necessary to provide a proper reason to terminate the relation. Thus, quite an important provision.

6. Strongly suggest a reporting line to the Audit Committee. If there is one, most important element of job security for compliance, risk and ethics officers it is that he or she reports directly to the Audit Committee of the Board of Directors, even if by “dotted line.”

If compliance, risk and ethics officers are to keep an eye on the conduct of operational staff and managers, they simply cannot report to them. The functions and interests of Audit and Compliance professionals are aligned completely, or nearly so, but in all events more so than the functions and interests of those concerned primarily with revenue and bottom-line matters.

Plan on looking for a New Job? We offer a 152-Point Master Checklist of Employment Negotiation Items to help you make sure you have not (a) forgotten to ask for anything, (b) failed to raise any issues, and (c) that your interests are protected in your offer letter and/or employment contract. To obtain a copy, just [click here.] Delivered by Email – Instantly!

7. Material changes in your employment relation should require Audit Committee approval. One way to get a “picky” compliance, risk or ethics officer out of the company is to fire them. But that can attract unwanted “attention.” The other, more common – and subtle, covert, passive – approach is to make them miserable. How?

As illustrations, by (a) assigning them to “the branch office in Baghdad,” (b) removing all of their reports and support staff, (c) seating them in a basement cubicle, and/or (d) putting them on the “night shift.” Of course, these are all exaggerations, but not by much. Poor performance reviews, demotions, reassignments, lowered bonuses and a halt to invitations to meetings are the most commonly seen tactics.

If Audit Committee approval is required for any material changes in the employment relationship of compliance, risk or ethics officers, any one or combination or more of such changes can be brought to their attention in the ordinary course of business, and without it seeming like “whistle blowing.” Just the fact that someone is “looking over the shoulder” of those tempted to retaliate is often enough to prevent that retaliation from taking place in the first instance.

8. Resist any reporting line to the General Counsel. This is one of those things that surely elevates my blood pressure. General Counsel’s office is supervised and staffed with lawyers. Lawyers are both counselors and advocates. Thus, if a lawyer knows his or her client has violated the law, with very few exceptions, it is his or her duty not to divulge that, but rather to KEEP IT SECRET. That is almost diametrically opposed to the duties of compliance, risk and ethics officers.

Making matters worse, General Counsel are compensated to some degree on their ability to help keep their clients “out of trouble,” and so it is against their very interests to report legal violations, breaches of integrity, and acts insistent with rules, regulations and policies.

If the compliance, risk or ethics officer has to report to the General Counsel, there is ipso facto established a conflict of interest of the very first order, and a “worst practice” that is not capable of correction. Just knowing your boss’s job and compensation will be in jeopardy if you do your own job will inevitably “chill” your doing your own job, especially if the “violator” is a member of the General Counsel’s office.

9. In regulatory or law enforcement inquiries, you need truly independent counsel, at company expense, for three important reasons. It is not often the case that regulatory or law enforcement authorities investigate a firm. But, when it does happen, it is critical that you have independent legal counsel at your employer’s expense, for three distinct reasons:

First, scapegoating. When investigations or inquiries take place, whether by securities regulators, banking officials or prosecutors, scapegoating of compliance, risk and ethics officers are, unfortunately, often “thrown under the bus.” Even if you struggled mightily to prevent problems and correct them, your employer’s continuing to violate “the rules” may likely be laid at your doorstep. Having a truly independent legal advisor can only help you if this should happen to you.

Second, cost. Lawyers are so darn expensive! Though a lawyer myself, I have had occasion to hire lawyers to represent me, and I am acutely aware of how expensive they can be. If you have a contractual commitment from your employer to reimburse you for such legal expense, you will have good reason to sleep a whole lot better.

Third, conflicted loyalties. There is considerable wisdom in the saying, “He who pays the fiddler calls the tune.” I have more than once witnessed lawyers – who are chosen by the employer, and have worked with the employer before – in these situations fail to take the obvious, clearly needed, simply necessary steps to adequately represent a compliance, risk or ethics officer, including even showing up at the interview or hearing.

In one instance, when I asked an attorney who, years earlier had been chosen to represent my new client, why he failed to take obviously necessary steps, the answer was “to save money for the employer.” I kid you not! His concerns for the employer’s costs trumped his concerns for my client’s career and reputation. You need a truly independent lawyer, of your own independent choice, and employer reimbursement can only help.

10. Minimum notice or severance in the event of job loss. Lastly, if you have the confidence that, no matter what, you will have a “soft landing” if you are ever terminated in retaliation for doing your job, you will undoubtedly be less intimidated by the specter of job termination, at least to some degree. It’s good to have at least 60, 90 or 120 days to seek new employment from existing employment, and a “financial cushion” in all events.

P.S.: If you would like to speak with me directly about this or other subjects, I am available for 30-minute, 60-minute, or 120-minute telephone consultations, just [click here.] Evenings and weekends can be accommodated.

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SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the likely bumps in the road. For compliance officers, risk managers, and ethics personnel, obtaining special protections is a significant step in the path to job and career success.

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.

Please Note: This Email Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.

Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the state of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear. Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.

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