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E-MailVeronica Root Martinez is Professor of Law at the Duke University School of Law. This post is based on her paper, recently published in the Harvard Law Review.
When a company engages in misconduct, questions often arise over whether the company should handle its own remediation effort without outside oversight and assistance. For the most egregious misconduct—conduct that is significant, pervasive, or widespread—a monitorship is often imposed by the court or via a settlement agreement between the firm and the government. For instance, in 2012, HSBC Bank USA N.A. and HSBC Holdings plc (collectively, “HSBC”) entered into a deferred prosecution agreement with the Department of Justice due to issues with their money-laundering program and due diligence practices. As part of the agreement, HSBC entered into a corporate compliance monitorship for a period of five years. The HSBC monitor, as is true with most monitors, was required to provide regular reporting to the government and the firm, but those reports, like most monitor reports, remained unavailable to the public.
However, the question of whether, and to what degree, monitors’ reports should be available to the public is hotly contested. In the case of HSBC, the company, the DOJ, and the monitor all objected to the release of information to the public, stating that it would impede the monitor’s effectiveness. Moreover, the monitor expressed concerns that releasing an interim report might create a “chilling effect” on his ability to work with HSBC employees during the balance of the monitorship. Ultimately, the Second Circuit blocked public access to the monitor’s report.
One might argue that the lack of public disclosure of the work done during a monitorship term is acceptable, because the Government is supervising what goes on during the monitorship and ensuring that all goes according to plan. As I detail in my Article, Public Reporting of Monitorship Outcomes, however, governmental actors are often unable to engage in perfect supervision of the work undertaken by monitors. Given this reality, I argue that at the conclusion of all monitorships the public should receive an accounting that details whether the firm has or has not engaged in a successful remediation effort. My proposed intervention does not require a monitor or firm to turn over the types of reports that monitors currently prepare. It leaves the status quo untouched. Instead, my proposal is that a new, additional report be prepared for and released to the public at the conclusion of each monitorship.
Part I of the Article provides a primer on the use and role of monitors and monitorships. I define the term “monitor” and describe the four different types of monitorships that are used today: (i) traditional, court-ordered monitorships, (ii) enforcement monitorships, (iii) corporate compliance monitorships, and (iv) modern, court-ordered monitorships.
Part II discusses the problems of attempting to create disclosure and oversight norms for modern-day monitorships. The Part begins by demonstrating how there is limited information disclosure for many modern-day monitorships. First, information from the monitor is frequently blocked—either fully or partially—from being accessed by interested third parties, often by obtaining a court order restricting access to the monitor’s report. Second, monitors sometimes successfully gather, analyze, and assess information, but fail to disseminate that information to certain interested parties. Third, even where the information is available broadly, it is often not easily understandable by the public without the help and assistance of an intermediary to distill all that the monitor has disseminated. The reluctance of all parties involved—the DOJ, the firm, and the monitor—to advocate for increased information disclosure certainly does not help. At the same time, monitors operate in a regulatory vacuum. Congress, courts, policymakers, academics, and the legal profession have all noted this lack of oversight and have engaged in activities to attempt to create boundaries to govern the behavior of monitors. These attempts, however, have largely failed, resulting in the absence of formal oversight governing today’s monitorships. The only constant constraints on monitor behavior are, thus, the agreement or court order that created the monitorship and the monitor’s own reputation.
Part III puts forth the thesis of this Article and argues that, at the conclusion of all monitorships, a public report should be disseminated that opines on whether the firm has or has not engaged in a successful remediation effort. This Part outlines three potential avenues of creating incentives for the use of this new reporting mechanism: (i) an act of Congress (unlikely), (ii) an SEC disclosure mandate for public companies, and (iii) a policy intervention from the Office of Management and Budget (OMB). This Part then discusses standardized elements to include in a public report that details the results of a monitorship, such as the monitor’s assessment methodology, general information about the monitor’s work and reporting periods to the government, the identity of the monitor, and an attestation of truthfulness by the monitor. Drawing on corporate crime and securities literatures, this Part then outlines why a public report might be beneficial in furthering: (i) the general public’s interest in information related to corporate settlements; (ii) shareholders’ rights to information; and (iii) stakeholders’ interests in information disclosure. This Part then discusses how a public reporting mandate for monitorships could create an opportunity for addressing the oversight problems as well as contribute to the creation of an ethical floor of conduct for monitors.
Part IV turns to some additional considerations raised by this Article’s argument and proposal. First, this Part argues that the problems of disclosure and oversight are unlikely to be resolved by requiring the reports that monitors currently generate to be turned over to the public. A supplementary report is necessary. Second, this Part addresses whether the Article’s proposal will lead to a decrease in the number of monitorships entered into between organizations and governmental actors. While this empirical question is hard to answer based on currently available data, I argue that there are policy rationales that suggest any decrease would be de minimis. Third, this Part discusses how a public reporting mandate might increase shareholder activism and potential liability concerns for public corporations. I argue that the potential costs of increased shareholder activity are worth it to achieve increased transparency around monitors.
Monitors are responsible for overseeing remediation efforts across a variety of legal and regulatory areas. However, because courts, regulators, and prosecutors are not capable of perfectly supervising the work of monitors, a number of concerns related to a lack of information disclosure and oversight for modern-day monitorships persist. The upshot of this Article is that public reporting of monitorship outcomes will provide an important opportunity to create broader disclosure regarding the results of monitorships and organizations’ successes or failures at implementing remediation processes, while also creating opportunities for more formal oversight of monitor conduct.
The complete Article is available here.
