Designing The Right Structure For Your Compliance And Ethics Program

by Michael Volkov
Contact

compliance6People love to make mountains out of mole hills.  Or to put in another way (as my daughter might say), “She/he is a drama freak.”

When it comes to structuring a compliance and ethics program, and the reporting lines, I have been accused of being a “drama freak,” meaning that I have advocated for an independent and empowered chief compliance officer.  What does an independent and empowered chief compliance officer look like (aside from handsome or beautiful)?

Many answer this question with the Federal Sentencing Guidelines and provide the simplistic answer of:  “Well, CCOs just have to report to the Board or the Audit/Compliance Committee?”  That is a little too simplistic.  It is worth taking a moment to define what is meant by a direct reporting relationship.

In management organizational terms, we are entering the world of dotted and straight lines.  Some like to think of this issue in those terms.  In most cases, the CCO should have both worlds — a dotted line to the board or board committee and a straight line to the CEO, or to the CCO, depending on the size and structure of the company’s senior management team.

To organize this inquiry, I like to break the issue down into three steps.

Step One is a basic but necessary step:  The Company has to demonstrate its commitment to compliance by committing to creating an ethical culture.  That is more than just the CEO saying the company is ethical and making such pronouncements from Mt. Olympus once every quarter.  Do not get me wrong – a CEOs statement of commitment is an important action but it is really only one piece in the entire puzzle.  The commitment to ethics and compliance has to permeate the company’s structure, at all levels, and become part of the fabric, the day-to-day operations of the company.

Assuming that the commitment is there, the question then is structuring the compliance function.  It amazes me that in this day and age, after the 2010 Sentencing Guidelines amendments, 40 percent of all companies continue still have their chief compliance officers reporting to the general counsel.  How can that be?  What planet are these companies on?compiance5

Step Two then requires the empowerment of the chief compliance officer – that means, in practice, having the chief compliance with an independent line of reporting to the board or the audit/compliance committee.  The CCO has to have the authority to report directly to the board.  In practice, that does not mean day-to-day reporting; instead, it means at least quarterly reporting to the board or the audit/compliance committee and continuing, informal communications with the head of the audit/compliance committee.  If necessary, the CCO has to be able to circumvent senior management and report to the board and/or board committee.

The Federal Sentencing Guidelines amendments of 2010 were intended to create such a relationship because of the need for CCO independence.  As a consequence, the board would become more actively involved in the supervision of the compliance and ethics program and ensure that the CCO has adequate authority, autonomy and sufficient resources.

The question then becomes to whom does the CCO report on a day-to-day basis?  That is Step Three and the answer really depends on the management structure and size of the company.  JP Morgan recently made news by creating an independent and empowered CCO who report directly to the Chief Operating Officer.  In a company as large as JP Morgan, that makes sense.  In a “smaller” company, the CCO typically reports to the CEO.  That also makes sense.

complaince4The CCO’s daily reporting relationship is not as important so long as one prerequisite is met – the CCO has to sit in the C-Suite.  This is an important requirement and demonstrates the company’s commitment to compliance and ethics.  If you ask CCOs what they want (beyond adequate resources), the CCO will invariably reply – senior management support and visibility.  Support and visibility give the CCO the credibility they need to carry out their job, to walk into a room and know that the CEO backs the CCO and that the CCO has influence within the organization, meaning that the CCO is viewed as a valuable member of the business team.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

Written by:

Michael Volkov
Contact
more
less

The Volkov Law Group on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.