February 04, 2010
Proposed Amendments to the Organizational Sentencing Guidelines. Part I: Document Retention Policies.
Posted by Miriam Baer

In January, the United States Sentencing Commission released proposed amendments to the Sentencing Guidelines, which included amendments to those guidelines that relate to the sentencing of organizations accused and convicted of criminal wrongdoing (ie, the "Organizational Sentencing Guidelines"). 

When companies are actually charged and convicted of a federal offense, the Organizational Sentencing Guidelines (Chapter 8 of the United States Sentencing Guidelines) guide the sentencing court in its decision on how to impose penalties.  Because the collateral costs of indictment are so high for many companies (think Arthur Andersen), most regulated entities seek a Deferred Prosecution Agreement in lieu of any indictment. For that reason, one might reasonably conclude that the Department of Justice's charging guidelines are far more important than the OSG.  Nevertheless, to the extent the OSG casts some "shadow" over the negotiating process, we should care about its contents.

Since there are several proposed changes, I'm going to break this up into several posts.  For now, I would like to focus on the Application Notes that follow Section 8B2.1.  (The official text of the Proposed Amendments is here.) This Section defines an "Effective Compliance Program" - or rather, it provides minimal requirements companies must meet for getting credit for having an "Effective Compliance Program."  Some of these requirements are (and always have been) extremely vague.  (For example, "The organizational shall exercise due dilligence to detect and prevent criminal conduct."). 

This year, two of the Commission's proposed amendments focus on document retention policies.  I find this interesting for two reasons. First, the OSG's focus on document retention policies confirms claims I have made here and here that the government's interest in corporate compliance is not driven by some desire to improve governance culture for the sake of shareholders or other stakeholders, but rather by a desire to reduce the costs of corporate policing. It's easier to police firms if they have internal guidelines in place that make it harder to destroy documents.

Consistent with its general approach toward Compliance, the OSG does not dictate the specific content of a document retention policy. Instead, it leaves much of the decision-making to the firms themselves (and other regulators, to the extent other industry-specific agencies promulgate more specific rules). Some call this a form of delegation, but I see it more as a form of "passive agressive" regulation: "We won't tell you how many documents to hold or for how long, but if you get it wrong, we might decide you don't have an Effective Compliance Program and you'll suffer all of the consequences that go along with such a determination. But hey, we don't want to intervene in your internal affairs or anything.  This is completely your decision."

In any event, even though the OSG is mum on the specific content of a "document retention policy," its proposed amendments are more specific on how thoroughly the corporation should verse its employees in said policy. 

The proposed amendment to Application Note 3 (on page 35 of this document, which is the "reader-friendly" version), states that high level and supervisory personnel should be aware of document retention policies in order for a company's compliance program to be deemed effective.   

Now, I would imagine that following Arthur Andersen's famous implosion, many if not most public corporations already have implemented document retention policies. (All business organizations, regardless of size or form, however, are covered by the OSG.)  And many of them likely have already trained their "high level and supervisory" personnel on these policies. 

But they probably have not complied with proposed Application Note 7(A)(iv) of Section 8B2.1, which provides that in assessing the organization's risk of criminal conduct, its compliance program should ensure that all employees are aware of the company's document retention policy.  

Really?  All employees?  Even those whose job functions have nothing to do with the creation or retention of any type of document whatsoever? 

What about temporary or seasonal employees?  For example, do we want Walmart to train all of its temporary holiday workers on document retention?  Should Disney train everyone who works at its theme parks on the topic of document retention?  How does a blanket requirement such as training "all employees" aid in the (already elusive) goal of improving "corporate culture"? Has the Commission given any thought to the extent to which spending resources on a blanket requirement like this might crowd out other, valuable compliance initiatives?   

Comments are due March 22, 2010 (you can send them to the address listed on page 3 of this document).  The Sentencing Commission will then hold a public hearing on these comments. Although many will no doubt focus on other aspects of the Proposed Amendments (more on those later), it would be a shame if the document retention language got lost in the shuffle. 

Update: Sorry about that - I accidentally forgot to turn on the Comment function.  It's fixed now.

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