COVID-19’s Impact on Chapter 11 Cases

Posted on March 25, 2020 by - Uncategorized

This question—how COVID-19, the novel coronavirus, will impact Chapter 11 cases going forward—is still to be determined, but this author believes it may turn the Chapter 11 process into what it was originally intended to be: a reorganization.

Today, and for more than the past decade, most Chapter 11 cases (other than prepackaged plan cases) have resulted in Section 363 sales of all the assets of the debtor to the highest bidder (the term Section 363 sale means a sale pursuant to Section 363 of the Bankruptcy Code), and sometimes that 363 sale comes within months of the filing of the case. Chapter 11 sales of all assets bring more value to the creditors than foreclosure sales, and, of course, “more value to the creditors” almost always means more value for the first priority secured lender of the debtor. After the 363 sale, the Chapter 11 case is typically over for all practical purposes. What happens next is one of two things: Either (a) the Chapter 11 case is converted to a Chapter 7 case, which is a liquidation of any remaining assets by a trustee who is appointed by the U.S. Trustee; or (b) a plan is confirmed in the Chapter 11 case pursuant to which all remaining assets are transferred to a Liquidating Trust and its Liquidating Trustee who then proceeds to liquidate all of the remaining assets. Same difference almost, albeit with some technical differences and advantages to each. In either situation, the “remaining assets” are typically lawsuits which the trustee is empowered to pursue, including, for example, claims for preferential transfers to creditors, claims for fraudulent conveyances against others, claims for breach of fiduciary duty against officers and directors, and anything else, including antitrust or securities fraud claims. It usually takes years of litigation before the unsecured creditors receive anything from the process, which is typically just pennies on the dollar. It is rare that any meaningful distribution is made to the unsecured creditors.

The Chapter 11 process, described above in very general terms, has been condoned by most bankruptcy judges and attorneys involved in the process, because it is the best thing for our economy in that it preserves operating companies intact, which benefits its employees who need the jobs (and buyers typically want to continue to operate the business) and its customers who rely on its product or services. Additionally, it brings the most value to the creditors, including a continuing market for the trade creditors who supply goods or services to the debtor (and who may lose some amounts due to them by the debtor but who preserve their past and future profits). It is difficult to argue against this rationale. Of course, the attorneys who represent each of the different constituencies (the debtor, the lender, the creditors committee, and the creditors) all get paid for their time and effort too, as well they should.

This author believes COVID-19 may change the process going forward, as it may disrupt domestic economies. How will judges, secured lenders, unsecured creditors, and others evaluate a situation if the major disruption of everything becomes the new normal? Who will consider buying a bankrupt company through a Chapter 11 363 sale amid so much uncertainty? Would the value of the bankrupt entity, assuming it has some, be preserved in a “fire sale” price to a third party? Would the secured lender and the debtor even be interested in trying to find out for themselves? It may be that there is a better alternative in Chapter 11 for both a debtor and its secured and unsecured creditors, and for the judges who must face this potential new normal caused by COVID-19.

The better alternative may well be a true corporate reorganization through the more traditional Chapter 11 plan process—that is, instead of selling the debtor’s assets pursuant to a 363 sale as has been the norm for more than a decade, the debtor may want to file and seek to confirm a true Chapter 11 plan which reorganizes the debtor for the mutual benefit of all the constituencies.

The secured lender (or lenders) are usually the most controlling constituency in this process (let’s start calling the different constituencies “players”). For the secured lender, it may make more business sense for it to do two things—reduce the interest rate being charged to the debtor, and convert some portion of its debt to equity (an ownership interest) in the debtor—rather than trying to cash out its unpaid loan through a 363 sale. The rationale for the sale and “cash out” of its loan has been that it can quickly make a new loan with that cash and at least earn interest on it. That rationale may not be readily attainable in a new normal. It may make more business sense for the lender to stick with its current debtor by reducing its interest charges and even by converting some of its debt to equity under the expectation that equity will have value in the future. These are the difficult business decisions that secured lenders may face if this new state of affairs persists for months or years.

The unsecured creditors will also have to face the new normal reality and take a reduction of the amounts owed to them for past due product or services. In Chapter 11 cases, persuading unsecured creditors or forcing them to take less is much easier than it is to force the secured lender to take less. Basically, a vote of a majority in number of unsecured creditors and of two-thirds of the amounts owed to them is enough to force them to take less (or a “haircut” as it is often called). Usually that vote is not difficult to obtain, especially if an official Creditors Committee has been formed and has negotiated the deal with the debtor and recommends it to the unsecured creditors. Typically, if the secured lender has agreed to take its own haircut in some form, then it will insist that the unsecured creditors do the same for two reasons—namely, it is the fair thing overall, and a reduction of the unsecured debt increases the value of the equity interests being obtained by the secured lender. Indeed, as part of any deal with the unsecured creditors, they may be given some amount of the existing equity ownership of the debtor as a group.

Lastly, the existing equity ownership of the debtor will also have to make major concessions. First, as the last to be paid anything in terms of priority of rights, it is the fair thing to do if the secured lender and unsecured creditors will be taking haircuts of their own. Secondly, the existing equity interests may have no real value without the reorganization of the debtor, and the argument is why should the existing equity retain anything. The answer has a practical side to it of course: If management owns equity and if they continue to operate the debtor, they probably deserve some equity, however small. They may also be asked to take reductions in their compensation.

In short, all of the different players in the process will be required to take haircuts of some sort in order to save the debtor from destruction for the mutual benefit of the group. While the American way may be to look out for number 1 almost exclusively, this dire situation (if it occurs) will necessitate a balance between the different players which is mutually beneficial overall. The players will each have their own attorneys representing them, and bankruptcy attorneys will likely be familiar with the necessities of the situation. The Bankruptcy Code itself also has mechanisms built into the system to allow for each player to exert pressure on the other players to cooperate, and the bankruptcy judge sometimes is called on to intervene to help the players or their attorneys to be more reasonable in their positions. For example, the debtor can threaten a cramdown plan of reorganization on the secured lender (that is, a plan without its consent); the secured lender can threaten the unsecured creditors with a 363 sale or a liquidation whereby the unsecured creditors and the equity interests will recoup nothing at all; or the existing equity can tell them all to “go fly a kite” or worse—say here are the keys (and good luck) or threaten them with endless litigation. Everyone knows how the game can be played as required and also knows that trying to reach a consensual deal is preferable.

We live in interesting times indeed, if not somewhat scary ones even for we Americans.  We all hope for the best of course, but for those of us who experienced the worst of Hurricane Katrina we have learned to try to be prepared to the extent possible.

Changing Hallway Behavior: How to Interrupt Implicit Bias

Posted on March 20, 2020 by - Business of Law

Law firms and in-house legal departments have moved past mere recognition of the importance of diversity and inclusion (D&I) to implementing widespread programs aimed at curbing biases that can stand in the way of diversity goals.[1] Formal training programs can only go so far, however. Law firms and legal departments also need employee buy-in on the necessity of giving and receiving real-time prompts aimed at thwarting biased behavior before it takes effect.

Many organizations require their employees to participate in diversity training. Most training starts with the concept of “implicit bias”[2] and seeks to educate employees about its existence and prevalence in the workplace.

The goal of the training is to empower employees to reconsider in real time how they respond to and judge others, thereby “interrupting” their potential biased behavior from taking effect. Training sessions often demonstrate scenarios of clearly biased behavior as examples of what not to do. Sometimes participants engage in role playing to work out better responses, but formal training tends to be infrequent, in group settings, and fairly passive. When mandatory,[3] the audience may not be sufficiently attentive and invested in the desired outcome. It is imperative that law firms and in-house departments educate employees and evaluate organizational procedures for reducing bias; however, without setting the stage for fundamental change in “hallway behavior” by enlisting and educating allies in all ranks of the organization, no formal program is going to move the needle on D&I.

Identify Bias

It will take a lot of work to ensure that sufficient numbers of lawyer and nonlawyer staff internalize the necessity of a truly diverse workforce, which is the first step toward ultimate success. First, they must understand that bias exists, everyone has it, and it has an effect.[4] Next, lawyers and staff must believe that the organization cares about diversity, that a diverse workforce is fundamental to the success of the firm or department, and that their personal success depends on their participation in achieving diversity goals. We know how to teach all of this: lots of evidence-based research on effective training is widely available.[5] Firms and law departments can, with sufficient analysis and thought, hardwire systems to de-bias hiring, evaluation, and promotion to make better decisions and to provide incentives for employees to promote diversity.[6]

In 2018, the American Bar Association (ABA) and Minority Corporate Counsel Association (MCCA) published a report outlining four types of gender and racial bias in the legal profession: (1) “prove-it-again” bias, (2) “tightrope” bias, (3) “maternal wall” bias, and (4) “tug-of-war” bias.[7] The report also provides a comprehensive picture of how implicit gender and racial bias affect the legal workplace and workplace processes. In part, the study revealed that bias is pervasive in the legal workforce but, significantly, it can be interrupted.

Interrupt Bias

Assume there is employee buy-in and a recognition of bias. Joan Williams, a leading researcher in work bias, notes that although “bias trainings remain important to educate others about bias . . . the key is to arm bystanders to interrupt bias, so that the people experiencing bias don’t have to carry that burden alone.”[8] This is where allies come in.

We observe that potential allies are everywhere.[9] Many men[10] are intellectually committed to gender equity but are under-educated about their own bias and don’t know how to take action to make a difference. What is needed is a grassroots, “hallway” effort in which individual employees are trained to identify and interrupt their own personal biases and taught how to address observed bias in others in a work environment in which all employees have “given permission” to engage in bias interruption. This will set the stage for the success of revamped organizational processes aimed at hiring, retention, and promotion for a more diverse workforce.

Firms that want to use allies will be more successful if they get explicit “permission” from employees to accept guidance on their behavior. If each employee affirmatively agrees that D&I efforts are important and that it is acceptable for other employees to point out when one may be acting out of bias, resistance to corrective action is reduced. The prompt becomes the content of the discussion, and not whether one person has the right to hold another accountable.

Central to these efforts is ally training. Learning how to be an ally takes time,[11] but a commitment to shorter but frequent sessions can be an effective approach. Organizations must identify potential allies and arm them with both the “antennae” to detect possible bias and the language to draw out discussion with colleagues. This could mean intervening and taking a moment to discuss a situation.[12] An example of an intervention would be having a colleague say, “Jane did a terrible job on that assignment.” If the listener simply says, “That’s too bad,” both the speaker and the listener leave with the view that Jane is not good at her job. If, however, the listener asks, “What did she do?” and follows up with, “What did you do? Did you speak with her about it?” then the listener may find there is more to the story. Perhaps what really happened is that Jane did not meet some unspoken expectation but did in fact complete the actual assignment timely and well. Allies can learn effective ways to assess the situation and help redirect that assignment interaction and interrupt future bias.

Organizations need not rely only on D&I professionals and formal, intermittent training to change behavior; they can instead enlist an army of allies to effect quotidian change. Without allies, efforts to de-bias systems and processes have little hope of success. With them, we will have engaged the exponential power of small actions to have significant, long-term effects.

[1] Ellen McGinnis is a partner in the law firm of Haynes and Boone, LLP, the co-chair of the Fund Finance Practice Group, and serves in multiple management positions, including on the firm’s board of directors and as the chair of the Admission to Partnership Committee. Jennifer Reddien is the director of diversity and inclusion at Haynes and Boone, and frequently speaks and writes about diversity and inclusion in the legal profession.

[2] Implicit bias refers to the attitudes and stereotypes that affect our understanding, actions, and decisions in an unconscious manner. Kirwan Institute for the Study of Race and Ethnicity, The Ohio State University, State of the Science: Implicit Bias Review 2015. The terms “implicit bias” and “unconscious bias” are often used interchangeably. Although some researchers note differences between the two terms, the legal field tends to use the term “implicit bias” rather than “unconscious bias.”

[3] We endorse mandatory training but recognize that without strong efforts to persuade lawyers that it is essential to their success, they are unlikely to become advocates for taking action.

[4] See, inter alia, the work of Professor Jerry Kang at UCLA.

[5] See, inter alia, resources at Catalyst, Deloitte, Harvard Business Review, and Paradigm4Parity.

[6] Iris Bohnet, What Works: Gender Equality by Design (Harvard University Press, 2016).

[7] “Prove-it-again” bias refers to the need for women and people of color to work harder than the majority to prove themselves; they may feel that their work product must be better than the majority’s work product to receive the same recognition. “Tightrope” bias describes the narrow range of behavior expected of and deemed appropriate for women and people of color. Women often report that they feel pressure to behave in feminine ways and that they are assigned more administrative tasks than men. “Maternal wall” refers to the bias against mothers. Many women report being treated “worse” when they return to work after having children. They find they are passed over for promotions and receive low-quality work assignments. “Tug-of-war” refers to the conflict between disadvantaged groups that may result in bias from the environment. For example, in male-dominated fields, many women note feeling like they are in conflict with other women.

[8] Joan Williams et al., You Can’t Change What You Can’t See: Interrupting Racial and Gender Bias in the Legal Profession, American Bar Association and Minority Corporate Counsel Association, 2018.

[9] David G. Smith & W. Brad Johnson, Lots of Men are Gender Equity Allies in Private. Why Not in Public?, Harvard Bus. Rev., Oct. 13, 2017.

[10] As a shorthand, we address this in terms of gender, but the concepts apply to all majority/minority groups.

[11] In a remarkable commitment to D&I, the North American sales division of Rockwell Automation engaged all of their people managers, mostly white men, in an extensive program run by White Men as Full Diversity Partners leadership development group, which began in some cases with a three-and-a-half day residential program. See Catalyst, Report: Calling White Men: Can Training Help Create Inclusive Workplaces?, July 18, 2012.

[12] See, e.g., Kerry Patterson, Joseph Grenny, Ron McMillan & Al Switzler, Crucial Conversations: Tools for Talking When Stakes Are High (McGraw Hill, 2002) (among other things, a “how to” on holding effective conversations about crucial issues).

What I’ve Learned in 20 Years About Lawyer Communications

Posted on March 20, 2020 by - Business of Law

I’ve spent the last 20 years as a communications consultant working with lawyers, law firms, bar associations, and law schools. It’s been a fascinating and rewarding career. Here are five things I’ve learned:

1. Identify and Understand Your Audience.

Lawyers communicate as if we are always talking with other lawyers. In law school, we train to do it, yet a big part of the job is communicating with lay people. Therein lies a fundamental mistake. The meaning of all communication—written or oral—is in the mind of the audience, not the speaker. You understand the meaning of your words, but the message may be garbled in the mind of the recipient.

Even professionals who are familiar with legalese may have different expectations and understanding than legal professionals. Understand who is receiving this communication, then go one step further: Tell your audience what it needs to know, rather than what you wish to say. This requires a bit of effort. Don’t make assumptions about what your audience knows. Identify what you know they know. Learn the vocabulary of their industry if you can, then craft your communications so your words (and you) meet the needs of your actual nonlawyer audience. You may discover that little needs to change, but those changes are the key to effective and efficient communication.

One place where lawyers forget this rule is in our bios. We tend to focus on what other lawyers want to know about us (I went to Blah Blah Law School), and forget to tell our clients what they want to know (I have 20 years of experience with your field.) Strike a balance.

2. Omit Needless Words

Strunk and White were right. Lincoln was right. Writing is easy. Editing is hard. (When I first wrote that sentence, it read, “It’s editing that is hard.”) Paring down your language almost always improves it and avoids burying your core message.

I’d never suggest that you write with no color or flair. Don’t dumb it down, but favor clarity and oppose verbosity and repetition. Watch the number of times you say “I” and “we.” Make your point with the maximum impact per word. Polish your communications until they shine.

 

One tool that may help you is the Flesch Test. This is an application that tells you the reading level of your writing. It’s built into Word (under Tools) and there are more sophisticated versions online.

A good Flesch score is 65, and a reading level of 7th to 10th grade is perfect.

The New York Times generally has a 10th-grade Flesch level. This article has a 7th-grade reading level.

3. Start at the Beginning and End at the End

This is the organizational counterpart to brevity, but it also embodies Rule #1.

When considering your audience, a focus on organization means that you might start with a brief explanation, a bit of background, or a recap. Make it easy for your audience to jump in and understand your message, follow your explanation or argument, and arrive at the proper conclusion with you. Don’t send them scrambling for another document or googling a legal theory.

An outline may help, or outline what you’ve already written to confirm an orderly flow of ideas. Cut-and-paste commands are the best tools ever devised for writing organization—I started writing in the days of literal cutting and pasting, and my writing is better now than it was then.

Do you need to take a side trip? Consider a footnote, a literal sidebar, or an aside in a speech. There are lots of ways to give an audience a bit of extra information. Just don’t wander off and forget where you were headed.

4. Identify and Stick to a Style

When I began as a legal writer, I adopted a formal and stilted style. I was young and wanted to appear experienced and professional. There are still times when that style is appropriate, as when writing demand letters. Over time, however, I discovered that my writing had more impact when it was more conversational. I’m often introducing an audience to new ideas and want it to seem more like a discussion than a lecture. E-mail has also had a dramatic impact on legal writing, so highly structured, formal language may alienate a lay audience.

Once you identify your style for a particular communication, stick to it. Don’t wander off midway.

5. Update Your Communications Regularly

Lawyers are great at forms. One of the most common mistakes lawyers make is to create documents, bios, ads, or website text and then leave it for years without updating. I got an e-mail the other day from a lawyer with some bottom boilerplate that wasn’t consistent with current law. Does that give me confidence in that lawyer? Probably not. Refreshing your communications not only makes them more timely and accurate, it also blows the linguistic dust off. Create a schedule and regularly update your website, e-mail template, and biography. It’s like a little facelift.

All five rules boil down to one: Have empathy for your audience, and your communications will hit their mark.

OSC Orders Approval of Prospectus for Canada’s First Bitcoin Investment Fund

Posted on March 20, 2020 by - Uncategorized

 Overview

In a ground-breaking decision, the Ontario Securities Commission (OSC) overturned the decision of the acting director of the Investment Funds and Structured Products Branch of the OSC (IFSP) to refuse to issue a receipt for the establishment of the Bitcoin Fund (the Fund), which is a proposed investment fund based on the cryptocurrency bitcoin.

3iQ Corp. is the investment fund manager and had been working on the Fund for three years with the goal of allowing retail investors the benefits of investing in bitcoin through a regulated, listed fund. Following multiple discussions with the IFSP, the acting director of the IFSP refused to issue a receipt for the Fund’s prospectus. In declining to issue a receipt, the director questioned the suitability of cryptocurrency as an investment, citing the lack of regulation for cryptocurrencies and the various associated risks.

Original Refusal

By way of background, the proposed Fund is a nonredeemable investment fund (NRIF) established as a trust. The objectives of the Fund are to provide investors with exposure to bitcoin and the opportunity for long-term capital appreciation.

On February 15, 2019, the acting director for the IFSP refused to issue a receipt for the Fund’s prospectus because it was not in the public interest to do so (see Securities Act, RSO 1990, ch. S.5, § 61(1)) and the Fund’s prospectus did not comply in a substantial respect with a requirement of the Securities Act (see § 61(2)(a)(i)).

In arriving at this decision, the acting director put forward the Fund’s shortfalls:

  1. The lack of the Fund’s ability to accurately value its assets due to the “fragmented and unregulated environment in which bitcoin generally trades”;
  2. The risk associated with safeguarding the Fund’s assets and the ability of the subcustodian to provide Customary SOC Reports;
  3. The risk of the Fund not being able to file audited annual financial statements in accordance with National Instrument (NI) 81-106;
  4. The operational risks associated with the lack of established regulation in the bitcoin market; and
  5. Bitcoin being an illiquid asset, and the Fund not complying in a substantial respect with the restriction NI 81-102 against the holding of illiquid assets.

OSC Panel Decision

In establishing and structuring the Fund, 3iQ engaged industry participants and the regulators. 3iQ requested to be heard before a panel of the OSC in which it submitted that a regulated Fund is a necessity given the recent collapses of various other platforms globally whereby individuals invest in crypto-assets without regulatory oversight.

Upon review, the OSC panel found that the Fund was structurally different in nature than certain Exchange Traded Funds (ETFs) related to cryptocurrencies that have been rejected by the U.S. Securities and Exchange Commission. This was due to the Fund placing restrictions by monthly reporting and only allowing redemptions annually by using the NRIF structure, which would significantly reduce the impact of market manipulation by daily trading. The Fund would also be using MVIBTC (as defined below) as the index and would only be purchasing bitcoin from dealers that hold a license or are otherwise regulated. All of these considerations distinguished the Fund from an ETF, which requires constant trading and is more vulnerable to market manipulation.

In arriving at its decision, the OSC panel also looked at the reasoning of the acting director as well as arguments put forth by staff:

  1. Illiquidity. Staff argued that bitcoin is illiquid because it is not currently traded on market facilities comparable to the Toronto Stock Exchange, and there is no central source for trading data concerning bitcoin. The OSC panel found that there is sufficient evidence of real volume and real trading in bitcoin on registered exchanges in large dollar size. Furthermore, the regulation does not define the term “market facility” that is found in the definition of “illiquid asset,” and the term should not be narrowly construed to imply some form of established and mature trading facility or network.
  2. Valuation and Market Manipulation. The OSC panel stated that under NI 81-106, the Fund would be required to calculate its net asset value using the fair value of its assets and liabilities. 3iQ proposed to value the Fund’s bitcoin by reference to an index called the MVIS CryptoCompare Institutional Bitcoin Index (MVIBTC), which is regulated by the German Federal Financial Supervisory Authority. MVIBTC uses transaction data from 22 trading platforms to calculate the value of bitcoin and complies with the European Union benchmark regulations and the International Organization of Securities Commissions regulations. As such, the OSC panel was not satisfied by the staff’s argument that valuation would not be possible. The OSC panel further noted that the issue with market manipulation having an impact would also be minimal because the fund (i) will only invest in bitcoin; (ii) would pursue a buy and hold strategy; and (iii) only buy and sell bitcoin on regulated exchanges.
  3. Safeguarding of the Fund’s Assets. The Fund would use Cidel Trust Company, which is regulated by the federal Office of the Superintendent of Financial Institutions, as a custodian and use Gemini Trust Company, LLC as a subcustodian, which is regulated by New York State, as a qualified custodian under NI 81-102. Staff made two arguments: (1) risk of loss; and (2) lack of insurance. The OSC panel commented that bitcoin can be lost or stolen like any valuable commodity, but staff did not provide sufficient evidence that Gemini, a regulated crypto-asset custodian, has suffered losses of customer assets.
  4. Auditability of the Fund’s Financial Statements. Staff submitted that it would be against the public interest to issue a receipt due to concerns over the Fund’s ability to file audited annual financial statements. In making this argument, staff pointed to the lack of Gemini’s SOC 2 type 2 report and the fact that Gemini may deny the auditor for the Fund access to test the operating effectiveness of Gemini’s controls. However, the OSC panel relied on the Fund’s submission that a qualified auditor can conduct the audit even without the report and still comply with generally accepted auditing standards.

In reaching its decision, the OSC panel commented that denying the Fund a receipt would not promote fair and efficient capital markets and confidence because it would leave investors with no choice but to invest without the protections of a public fund. The OSC panel also found that there was no issue of unfair, improper, or fraudulent practices as far as the structure of the Fund was concerned or the operation of it.

In the end, the OSC panel decided that staff had not demonstrated that bitcoin is an illiquid asset and that the Fund will not be compliant with NI 81-102, or that it was not in the public interest to issue a receipt for the Fund’s prospectus. Accordingly, the panel ordered that the acting director’s decision be set aside, and directed the acting director to issue a receipt for the Fund’s prospectus.

Conclusion

Although the OSC’s findings in this decision are not an endorsement of investment funds based on a cryptocurrency model, they do provide guidelines for the regulation of these funds in Canada. This is an important step in that it will support innovative investment opportunities while also protect investors who will be able to invest in funds with regulatory oversight.

RegTech: How Technology Can Revolutionize Compliance

Posted on March 20, 2020 by - Uncategorized

Highly regulated industries like the financial services industry have faced ever increasing regulatory compliance obligations. Technology, such as artificial intelligence (AI), that can be utilized to innovate the manner in which these organizations operate can lead to additional challenges for regulatory compliance, and the regulatory environment can drastically impact innovation in these sectors.

Regulatory compliance is a critical consideration for both start-ups and established organizations seeking to drive innovation in the financial services industry. Developing solutions and business strategies with compliance in mind will reduce the risk of potential fines and penalties and allow for the development of a viable solution.

To assist organizations in meeting these ever-growing compliance obligations, RegTech solutions are being developed that can be utilized to provide transparent, faster, and more efficient methods of reporting and ensuring compliance. This article will focus on the potential benefits of RegTech solutions for highly regulated industries, particularly the financial services industry.

What Is RegTech?

RegTech is a general term for new and innovative technologies designed to enable businesses to more easily meet their regulatory compliance obligations. Some of the benefits of the application of RegTech include: (1) the ability to efficiently navigate complex regulatory burdens and process enormous amounts of dense data, and (2) the reduction of risk flowing from human errors that could result in severe administrative fines.

RegTech has flourished due to a developing body of complex national and international regulations that often require the monitoring, evaluating, and reporting of vast amounts of information.

The Legal Landscape

Industries such as insurance, food and drug, oil and gas, mining, securities, telecommunications, energy, fisheries and forestry, and financial services (among many others) operate within a highly regulated environment that can be complex to navigate. Governments establish regulations with the intention of protecting the public from potential risk. This is particularly evident in the financial services industry where we have seen an increase in regulations impacting this industry in reaction to the 2008 financial crisis. However, overregulation can stifle innovation and create barriers to entry for emerging companies, such as FinTech organizations, due to the crippling expense required to comply with these regulations.

The adoption of disruptive technologies like AI in the financial services industry has led to the need for governments to develop new regulations to address the impact of these technologies.

Jurisdictions have diverged on how to address changes in the industry, including those driven by technology. This divergence creates significant obstacles for cross-border products and services or organizations that look to enter new markets. For example, organizations have differing compliance obligations with respect to data protection laws in Canada versus the European Union. Therefore, organizations must ensure that their compliance programs meet the relevant requirements of each jurisdiction in which they operate. RegTech solutions can be utilized to assist in the development of jurisdictional compliance frameworks.

Although some financial services companies have pre-emptively invested in technology to help keep up with the bourgeoning field of regulations, many don’t have the time or extra resources to focus on technology that would help them address the new regulatory burdens, so they have instead turned to using manual processes to address the frequency and volume of the new reporting requirements. This approach can be onerous and causes valuable human resources to be expended unnecessarily. Manual processing is also typically less accurate than RegTech processing.

RegTech Applications

Although there are numerous opportunities for RegTech to assist with compliance, five of the most promising applications of RegTech include the following:

  • Compliance. RegTech that can be used to review all relevant regulations and report on the potential impact of such regulations to the user, including jurisdictional data privacy laws.
  • Risk Management. RegTech solutions that conduct scenario analysis and risk monitoring on internal business operations through the use of big data analytics to identify and evaluate these risks.
  • Identity Management and Control. RegTech that has been developed in response to Anti-Money Laundering (AML) and the Know Your Customer (KYC) obligations regarding client identity authentication. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has also established various other obligations requiring regulated entities to conduct analysis and provide seamless reporting. RegTech can be used to efficiently conduct customer onboarding and monitoring activities and will allow for greater transparency.
  • Regulatory Reporting. RegTech that is utilized to assist in the generation and distribution of reports and information required by regulators. RegTech solutions can assist in data sharing between regulated entities and regulators and enable faster processing of vast amounts of data required to prepare these reports.
  • Transaction Monitoring. RegTech that monitors financial transactions for suspicious activity quickly and with a high degree of accuracy by leveraging the benefits of distributed ledger through blockchain technology and cryptocurrency. This type of RegTech also aids with much of the required FINTRAC compliance obligations.

The operational benefits gained from RegTech will depend on the specific solution. RegTech that creates reports through automation of the processes required to generate these reports (e.g., data collection, aggregation, and report generation) could lead to a significant reduction in expenses and time required to prepare these reports. In addition, if this information is available in real time, organizations can react to any issues sooner than if the reports were to be generated at a later stage.

Barriers to RegTech Adoption

Despite the promise, certain RegTech solutions are in their infancy; thus, issues related to its adoption still exist. One such issue is pricing. For certain applications, it is unclear what the true cost savings are or what value is generated by the RegTech solution. Therefore, developers may have difficulty in communicating the value of the solution or selecting the appropriate pricing model (e.g., a fee per record generated versus a monthly subscription fee). In addition, the cost of developing a tool to meet the ever-changing regulatory landscape may mean that developers will have difficulty in recouping the ongoing maintenance fees associated with building and maintaining the RegTech solution.

Another concern is the potential for large-scale errors caused by minor issues with RegTech solutions, especially a solution that is one-size-fits-all and used widely in the marketplace. For example, if a RegTech solution fails to address a change in reporting requirements, this could lead to its customers failing to meet their regulatory requirements. If this same problem is replicated multiple times in the same customer, or widespread across multiple customers, then the losses could be significant. RegTech providers and customers must consider these risks when negotiating the terms of the agreement and ensure that these risks are addressed through the apportionment of liability between the parties, indemnities, and requirements for insurance.

Due to the potential sensitivity of the data collected and processed, it is critical to ensure the adequate protection of the data. The potential risk of a data breach can be significant for both the customer and RegTech provider. Customers should therefore conduct the appropriate due diligence on both the solution and provider to ensure that this risk is mitigated. RegTech providers should also ensure that they have the appropriate cybersecurity policies and procedures in place to protect themselves from both financial and reputational risk.

Conclusion

RegTech offers many benefits to organizations operating in regulated industries. Although we have addressed some barriers to adoption, the opportunities offered by adoption of innovative technologies that can assist in meeting an organization’s regulatory requirements are significant.

The manner in which RegTech is supported and integrated into the current regulatory structure will play an important role in navigating both the developmental and implementation stages.

Developers of RegTech solutions should look to engage regulators directly and take advantage of regulatory sandboxes to assist in ensuring compliance. With cautious and thoughtful integration into the current regulatory environment, RegTech shows major promise in reshaping the way that companies interact with the growing body of regulatory oversight.

The Evolution of Mentorship in Legal Professional Development

Posted on March 19, 2020 by - Business of Law

Lawyers have different professional development obligations at each stage of their career.[1] Despite that evolutionary arc, there is one constant: the best lawyers are engaged in life-long learning. Many firms have formalized the elements of the traditional training that young lawyers historically, and often organically, received from partners and other more senior lawyers within the firm. Whether by such internal training methods or going outside the firm to hear from special consultants such as law professors or industry experts, or to participate in bar and trade associations, firms develop their lawyers in a variety of ways. In addition, seasoned lawyers equally benefit from helping to train other lawyers, whether inside or outside their firm.

One of the more prevalent law firm initiatives related to professional development for younger lawyers has been assigning mentors and encouraging participation in organizations like the American Bar Association to seek outside mentoring within its ranks. Research from the Center for Talent Innovation (CTI), a well-known think tank with a research focus in this area, shows that the vast majority of women (85 percent) and multicultural professionals (81 percent) need “navigational help” inside organizations.[2] Most law firms have some sort of internal mentoring program, and many local and state bar associations also have long-standing programs, several of which are at least in part able to trace their origins to an attempt to develop or retain women and lawyers of color.[3] Despite the availability and proliferation of mentorship programs, mentorship alone has been ineffective in helping to maximize the talent hired by law firms, and the investment in young lawyers, especially women and lawyers of color, continues to dissipate.[4]

Mentorship

The big push for mentorship programs is not only among law firms, but also within trade and professional associations, including bar and affinity associations, and in programs that have been created to assist in creating pipelines for potential law students. Mentorship can be defined as either one-on-one relationships between an experienced lawyer and another lawyer, law student, or potential law student, or it can be executed in a group setting. Individuals meet in person, via emails, or on calls, and the meetings can be on a regular schedule or on an ad hoc basis. Group mentorship programs can be especially helpful and can take the form of skills training in networking, relationship development, interviewing, professionalism, evaluations, and how to take advantage of opportunities to develop an industry or practice expertise.

Mentorship programs, especially in trade organizations, bar associations, and with young students, have been especially effective. Especially in communities of color and of women, a lawyer taking the time to visit or work with potential future lawyers is extremely impactful. When one of those lawyers or even a group of lawyers are lawyers of color or are women, it is especially important because their mere presence demonstrates to female students or students of color that they themselves can be a lawyer or a judge. These anecdotal remarks are backed up by teachers and students who confirm the effect on them and their classmates of these mentoring programs.[5] Similar success can be seen in the efforts by bar associations and trade groups to mentor young professionals. Both of these types of success stories have one thing in common: external mentoring programs. By comparison, internal programs have had poor to mixed results.

Shortcomings in Mentoring Programs

Despite the success of mentorship for students of all ages, the problem with mentorship programs within law firms has often been the execution of the mentor’s duties. Oftentimes the mentor will report on progress to firm administration, and mentors are not always advocating for their mentees. Indeed, some mentorship programs are seen with suspicion by associates, either as part of the firm’s apathetic bureaucracy, or part of the firm’s self-interested management.[6] A new concept has developed out of this discord and mistrust in the value of a sponsor, as opposed to a mentor, in the context of advancement within an organization and the role mentorship can play in that context.[7][8] On the contrary, mentors play a continuing and important role in professional development and, for example, help map out the unwritten rules and practices in an organization and pave the way for a sponsor.[9]

Sponsorship as the Cure to Failed or Faltering Mentorship Programs

Sponsorship has become especially popular in law firms. Many law firms have been criticized for not retaining lawyers of color and women. In the post-mortem analysis of “why,” it was found that key advantages related to professional development have not historically been provided to lawyers of color or women. For example, partners have provided the best assignments and, thus, one of the best professional development opportunities, to those they have chosen to informally mentor, which oftentimes were lawyers of the same peer groups, race, or gender as the partner. Institutionalized mentorship programs that work in tandem with a dedicated commitment to sponsorship by firm management could be the cure to the fatigue that many firm mentorship programs are currently experiencing.

Maryann Baumgarten, the head of Tech Diversity Business Partners at Facebook, has written a wonderful comparison of the key elements of being a mentor as opposed to a sponsor that illustrates where sponsorship can both add to the efficacy of existing mentorship programs, as well as become the next step in the evolution of such programs.[10] A mentor is anyone with experience who can support a mentee on how to build skills, professional demeanor, and self confidence in the workplace, whereas a sponsor is a senior member of management invested in the protégé’s success. Mentoring tends to be more general, whereas sponsorship is tailored to the protégé and involves using the influence and the networks of the sponsor to provide access to key assignments, people, and responsibility. Mentors help a mentee develop a career vision; sponsors drive that vision. Mentors will give suggestions on how to create a network; sponsors will open up their network to the protégé. Mentors will provide advice on visibility by encouraging the mentee to seek out key projects and people; sponsors will use their own platforms and mediums to provide direct exposure to the protégé.

Sponsorship Is the Gift That Keeps on Giving

Many firms will ask, “What is in it for me?” Sponsorship is an active and engaged relationship; the protégé has just as many responsibilities and commitments to the relationship as the sponsor. The protégé must perform well, demonstrate loyalty to the firm and sponsor, and  actively look to enhance the team brand.[11] CTI has researched the issue of job satisfaction for sponsors and finds that a sponsor with protégés has far greater job satisfaction (11 percent) than those who have not worked to develop new talent.[12] In terms of retention objectives, sponsors of color have reported 30 percent more job and career satisfaction than those who do not have the same following of protégés.[13] In many ways, you can see this in the legal profession directly and poignantly in the legions of law clerks that have worked with our judiciary. It is a well-known and chronicled aspect of clerking that there is a bond between the judges and their clerks that survives deep into their respective careers.[14] Even closer to the bottom line, an important update to CTI’s research published in 2019 reported that 66 percent of sponsors were confident with their ability to deliver on difficult projects with their teams, and only 53 percent of nonsponsors had the same confidence.[15]

“My crown is in my heart, not on my head; Not decked with diamonds and Indian stones, Nor to be seen. My crown is called content: A crown it is that seldom kings enjoy.”[16]

The weakness of a sponsorship program is that it requires leadership from the sponsor. The most important aspect of that leadership is to advocate for the promotion of the protégé. CTI’s latest research shows that of the one in four employees that identify themselves as sponsors, only 27 percent are advocating for their protégés, and to the point of this article, 71 percent of the sponsors have protégés who are the same race or gender as they are.[17] Probably just as applicable as the quote above from Henry VI could be the quote from Romeo and Juliet: “What’s in a name? That which we call a rose by any other name would smell as sweet.”[18] Leadership has often been defined as the art of motivating a group of people to act toward achieving a common goal. Kevin Kruse in a 2013 Forbes article dismisses the notion that leadership is defined by seniority or hierarchy, titles, extroverted charisma, or being part of management.[19] He takes a mild shot at Peter Drucker, who has been quoted as saying, “The only definition of a leader is someone who has followers,” dismissing it as “too simple.”[20] He then castigates and rejects the definitions of leadership put forth by no less than Warren Bennis (leadership is translating vision into reality), Bill Gates (leaders will be those who empower others), and John Maxwell (leadership is influence—nothing more, nothing less).[21] Instead, Kruse’s definition of leadership is “a process of social influence, which maximizes the efforts of others, towards the achievement of a goal.”[22] He emphasizes that leadership comes from social influence, not authority; requires others; does not rely on charisma or another personal trait (as leaders can come in all varieties); and focuses on a goal—and is not influence for the sake of influence—and does so by making the most of others’ talents.[23] Kruse’s definition punctuates and sums up one of the most effective executions of professional development programs: the marriage of mentoring and sponsorship, which managers in law and business should take to heart based on their collective experience in making the most of the talented professionals that they hire, train, and hope to retain.

[1] Director and practice chair, Elliott Greenleaf, P.C. Thank you to Courtney Snyder, business development director for Elliott Greenleaf, P.C.’s Delaware office, and Sarah Denis, Esq., for their assistance in the editing of this article.

[2] Sylvia Ann Hewlett, Melinda Marshall & Laura Sherbin with Barbara Adachi, Sponsor Effect 2.0: Road Maps for Sponsors and Protégés, Center for Talent Innovation (last accessed Feb. 25, 2020).

[3] The National Legal Mentoring Consortium lists a wide range of programs, including law firm, law school, ethics-based, local bar, and state-based. National Legal Mentoring Consortium, Mentoring Programs – Law Firms (Feb. 20, 2020). Organizations like the American Bar Association have extensive mentorship programs among the wealth of available professional development opportunities, including the Business Law Section Fellows Program and Business Law Section Diversity Clerkship Program.

[4] Endemic issues with lack of retention of women and minorities are not exclusive to the legal profession and have been the subject of many studies and articles about management in this area. See Joan C. Williams & Marina Multhaup, For Women and Minorities to Get Ahead, Managers Must Assign Work Fairly, Harvard Bus. Rev. (last accessed Feb. 25, 2020). An excellent overview of why diversity is important to the bottom line of law firms is Sheryl L. Axelrod’s Banking on Diversity: Diversity and Inclusion as Profit Drivers—The Business Case for Diversity, americanbar.org (last accessed Feb. 25, 2020).

[5] The Leadership Council on Legal Diversity, which consists of more than 320 corporate chief legal officers and law firm managing partners, runs a leadership development program known as the LCLD Fellows, which debuted in 2011. The program works by identifying high-potential attorneys from diverse backgrounds with the objective of the Fellows becoming leadership within their organizations. The author was fortunate enough to serve on the fellows Alumni Council as the community outreach co-chair. He has first-hand knowledge of the profound impact of mentorship programs on communities of color and on women, especially in a group session with young students who are first-generation citizens, potential first-generation college students, and potential first-generation law students.

[6] See, e.g., Malaika Costello-Dougherty, We’re Outta Here, Daily J. (last accessed Feb. 25, 2020).

[7] See, e.g., Hewitt, S.A., Forget a Mentor, Find a Sponsor: The New Way to Fast-Track Your Career, Harvard Bus. Rev. Press, Sept. 2013.

[8] Sylvia Ann Hewitt, CEO of the Center for Talent and Innovation, a think tank based in New York, also chairs the Task Force for Talent Innovation, which is comprised of 75 global companies that focus on maximizing talent in corporations.

[9] Dan Schawbel, Sylvia Ann Hewlett: Find a Sponsor Instead of a Mentor, Forbes (last accessed Feb. 25, 2020).

[10] Stanford University, The Key Role of Sponsorship, Feb. 25, 2020; see also Katherine Hansen, From Mentor to Sponsor: Enlisting Others to Help Boost Your Life Sciences Career, biospace.com (last accessed Feb. 25, 2020).

[11] Schawbel, supra note 9.

[12] Schawbel, supra note 9.

[13] Schawbel, supra note 9.

[14] See, e.g., Andrew Cohen, Real Mentorship: Do Judges and Law Clerks Still Do This (last accessed Feb. 25, 2020) (“Even lawyers and law students who have heard about Judge Hand probably don’t know that in addition to his stewardship of the 2nd Circuit for decades he also sort of invented the modern-day practice of federal judicial clerkships, which are nearly 100 years later still the gold standard in legal apprenticeship. . . . Most of [Judge] Hand’s clerks, fresh out of law school, were startled to find this experienced jurist; a near mythic figure, a household word to every law school graduate, the master judge of his generation, asking for help and insisting on candid criticism and continuous oral participation in the decision process. Was it really conceivable, they would wonder, that [Judge] Hand was seriously interested in their views when they were just months away from the classroom? . . . As the clerks got to know [Judge] Hand better, most realized that he was entirely serious about his constant prodding to elicit critical analysis, and that this unique way of working with his clerks was part and parcel of his distinctiveness as a judge.”); see also NALP, Clerkship Study Alumni Law Clerk Survey (last accessed Feb. 25, 2020) (“As expected, the relationships in their own judge’s chambers—their judge (87%), the other law clerks (71%) and the administrative staff (67%)—proved to be the most significantly enhanced. In addition, they developed relationships with other chambers, most reporting that their relationships with other judges, law clerks, and court personnel were also moderately or significantly enhanced.”); Chambers Associate, Clerkships, chambers-associate.com (last accessed Feb. 25, 2020) (“Clerks also build up a valuable network among members of the Bar, other clerks and judges. This comes in handy when practicing in the same state or district as the judge.”); Laura B. Bartell, A Splendid Relationship – Judge and Law Clerk, 52 La. L. Rev. 6 (July 1992) (last accessed Feb. 25, 2020) (“The partnership between a federal judge and the judge’s clerk can be a splendid and mutually rewarding relationship.”); Grace Renshaw, The Best Legal Job You’ll Ever Have, 40 Vanderbilt Law. 2 (last accessed Feb 25, 2020) (“She also gained two permanent advantages from her year as a clerk: a lifetime mentor and membership in a close-knit “family” of other former clerks. ‘Judge Collier is an amazing mentor to his law clerks,’ Johnson said. ‘He spent a lot of time talking with us and really seemed to enjoy the teaching aspect. He’s very patient and has a great understanding of the role that a clerkship plays in cultivating a young attorney’s career.’”).

[15] Center for Talent Innovation, Sponsor Dividend (last accessed Feb. 25, 2020). This survey was conducted by NORC at the University of Chicago under the auspices of the Center for Talent Innovation (CTI), a nonprofit research organization. NORC was responsible for the data collection, whereas the CTI conducted the analysis. 

[16] William Shakespeare, Henry the VI, Pt. III, Act III, Scene I.

[17] Center for Talent Innovation, supra note 15.

[18] William Shakespeare, Romeo and Juliet, Act II, Scene II.

[19] Kevin Kruse, What is Leadership?, Forbes (last accessed at Feb. 25, 2020).

[20] Id. To be fair, Kruse states in full that: “Drucker is of course a brilliant thinker of modern business but his definition of leader is too simple.”

[21] Id.

[22] Id.

[23] Id.

Online Ticket Seller Faces the Music on Extra Fees

Posted on March 18, 2020 by - Uncategorized

On February 13, 2020, the Canadian Competition Bureau struck another blow against so-called “drip-pricing” ticket selling tactics when it slammed the deceptive online advertising, marketing, and selling practices of StubHub Canada Ltd. and StubHub Inc. (collectively “StubHub”) for failing to display the real price of the entertainment and sporting events tickets they sold upfront, instead augmenting prices through the addition of quasi-hidden mandatory fees.

The companies ultimately agreed to pay a $1.3 million administrative monetary penalty to the Canadian Commissioner of Competition as part of a Consent Agreement (“Agreement”) following the Bureau’s investigation and the determination by the Commissioner of Competition/Competition Tribunal that the companies had made representations to the public that were false and misleading in a material respect and that they had engaged in conduct reviewable under the Competition Act (Canada).

As described in The Commissioner of Competition v. StubHub Inc., Stubhub Canada Ltd. (CT-2020-002) (decided February 13, 2020), the Commissioner reviewed StubHub’s pricing for tickets advertised on its public websites and mobile applications, as well as in promotional emails. The Commissioner concluded that StubHub promoted prices for tickets that were not actually attainable and that consumers could not actually buy tickets at the advertised prices because StubHub charged consumers so-called “non-optional” fees in addition to the prices advertised. These fees included so-called “service fees,” “transactional fees,” “fulfillment fees,” “delivery fees,” “additional fees,” and just plain “fees” that were added to the prices described on checkout pages before the consumers actually purchased tickets. In fact, the prices shown on the checkout pages were often 28% higher than the advertised price because of these fees.

Interestingly, while StubHub had given consumers an option to click or tap to “show prices with estimated fees” toggle on the pages containing the advertised price, the Commissioner found that even when consumers choose to see these fees by turning the toggle on, they sometimes were still required to pay more than the price represented as inclusive of all estimated fees.

Significantly, the Commissioner concluded that even if StubHub had disclosed the amount of the “non-optional” fees later in the purchasing process (i.e. on the checkout page), such action did not mitigate StubHub’s earlier practices nor prevent the sellers from engaging in “reviewable conduct” under the Competition Act.  Overall, StubHub’s practices were found to be in contravention of paragraph 74.01(1)(a) of the Act, which states that a person engages in reviewable conduct if they, for the purpose of promoting, directly or indirectly, the supply or use of a product or for the purpose of promoting, directly or indirectly, any business interest, by any means whatever, including making a representation to the public that is false or misleading in a material .

StubHub was also found to have used email to engage in reviewable conduct, contrary to Section 74.011 of the Act, as they sent misleading promotional email messages to consumers to promote their ticket sales, including (i) a false or misleading representation in the sender information or subject matter information of an electronic message; and (ii) a representation that is false or misleading in a material . It should be noted that the Act does not care whether the electronic address to which an electronic message is sent exists or whether an electronic message reaches its intended destination—it’s the fact that StubHub sent them that counted.

StubHub ultimately cooperated with the Commissioner and did not contest the Bureau’s findings (explicitly in exchange for more favorable terms). They agreed to execute a Consent Agreement which once registered has the same force and effect as an order of the Competition Tribunal. In the Consent Agreement, StubHub agreed to make all necessary changes with their Canadian websites, mobile applications, and emails to ensure that consumers were shown complete prices inclusive of all mandatory fees the first time that they were shown a price. StubHub was also required to intercept users identifiable as Canadians and require them at the outset to make an express choice to be redirected to Canadian stubhub.ca websites when searching for tickets on stubhub.com.

Additionally, StubHub was also required to establish a compliance program and implement new procedures to comply with the law and prevent advertising issues in the future within ninety (90) days of its execution of the Consent Agreement. Senior management of both companies, including the Chief Executive Officer, Chief Operating Officer, Chief Administrative Officer, Chief Financial Officer, Managing Directors, with responsibility for advertising and marketing tickets, must acknowledge a commitment to the compliance program by signing commitment letters. All current and future employees who are materially involved or responsible for developing, implementing, or overseeing ticket advertising or marketing will be given copies of this Agreement and are expected to sign statements acknowledging their compliance with its terms. StubHub has ten (10) days to notify the Commissioner of any breach or possible breach of any of the terms of the Consent Agreement, providing details sufficient to describe the nature, date, and effect (actual and anticipated) of the breach or possible breach, and the steps StubHub has taken to correct the breach or possible breach. The Consent Agreement is binding on StubHub for a period of 10 years following its registration.

This investigation and decision are consistent with recent Competition Bureau activity to resolve consumer concerns relating to the advertisement of unattainable online prices. As the Bureau’s website noted, various Canadian companies, including Ticketmaster and several car rental agencies, have paid a total of $11.25 million in penalties since 2016 in connection with hidden fees. On July 4, 2017 the Bureau expressly issued a warning to all ticket vendors to be upfront about the true cost of tickets available for purchase and make all necessary corrections to their existing business practices to be frank regarding any mandatory fees.

This decision serves as a costly reminder to all U.S. vendors that conduct business with Canadians online that not only is pricing transparency the hallmark of good business practice, it is also a legal requirement for doing business with Canadian consumers regardless of the media channel.  Deceptive marketing practices, including false or misleading drip pricing, will not be tolerated. As evidenced in the StubHub Consent Agreement, it also appears that the Bureau expects pricing transparency to exist throughout the purchasing experience; as discussed above, StubHub was not saved from findings of false or misleading practices or reviewable conduct by disclosing the non-optional fees at later stages of the purchasing process, including on the check-out page. U.S. vendors selling goods and services to Canadian consumers online would do well to review their marketing practices in light of this decision and take all necessary steps to bring themselves in compliance lest they risk significant penalties.

Lisa R. Lifshitz

SEC Announces Conditional Relief for Companies Affected by Coronavirus

Posted on March 17, 2020 by - Uncategorized

Background

On March 4, 2020, the Securities and Exchange Commission (“SEC”) issued an order (the “Order”) providing conditional relief to reporting companies affected by the novel coronavirus disease, or COVID-19. In recognition of the potential disruptions to transportation and limitations on access to facilities, support staff and professional advisors caused by COVID-19, the Order provides reporting companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020, subject to certain conditions.

Highlights of SEC Order

Relief Provided: Extension of Deadlines to File or Furnish Certain SEC Reports

The Order provides that any registrant (as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”)), and any person required to make any filings with respect to a registrant, may take an additional 45 days to file or furnish certain materials with the SEC that are otherwise due between March 1 and April 30, 2020.

Exchange Act reports due during this time period include: (i) Form 10-K filings for registrants with a calendar fiscal year, (ii) Form 20-F filings for foreign private issuers with a calendar fiscal year, (iii) Form 10-Q filings for registrants with a non-calendar fiscal year, (iv) definitive proxy statements if Part III of a registrant’s Form 10-K incorporates information from its proxy statement by reference, and (v) Current Reports on Form 8-K that become due during such time. The Order also applies to any Schedule 13G (or amendment thereto) that is due between March 1 and April 30, 2020, but notably excludes from relief requirements to file any Schedule 13D (or amendment thereto). Additionally, the Order does not apply to beneficial ownership reports required under Section 16 of the Exchange Act, such as Forms 3 and Forms 4.

The Order also provides relief relating to the obligations of a registrant or other person under Exchange Act Sections 14(a) and (c) and Regulations 14A and 14C to furnish soliciting materials to any security holder where the security holder has a mailing address located in an area where, as a result of COVID-19, the common carrier has suspended the delivery service customarily used and the registrant or other person has made a good faith effort to furnish the soliciting materials to the security holder as otherwise required by the applicable rules.

The press release announcing the Order adds that, for Form S-3 eligibility purposes, a registrant relying on the Order will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of March 1, 2020 and files any report due during the relief period within 45 days of the filing deadline of such report. Similarly, for purposes of Form S-8 eligibility and the current public information requirements of Rule 144(c) of the Securities Act of 1933, a registrant relying on the Order will be considered compliant in its Exchange Act reporting requirements if it was compliant as of March 1, 2020 and files any report due during the relief period within 45 days of the filing deadline of such report. Additionally, registrants will be able to rely on Exchange Act Rule 12b-25 to obtain extensions for filing deadlines for reports that were previously delayed in reliance on the Order.

Conditions to Relief

Any registrant relying on the Order must furnish to the SEC a Form 8-K or Form 6-K, as applicable, by the original filing deadline of the subject report stating (i) that it is relying on the Order, (ii) a brief description of the reasons why it could not file such report on a timely basis, (iii) the estimated date by which the report is expected to be filed, and, (iv) if material, a risk factor explaining the impact of COVID-19 on its business. Additionally, if the reason that the subject report cannot be filed timely relates to the inability of any person, other than the registrant, to furnish any required opinion, report or certification (e.g., an auditor’s opinion on audited financial statements), the Form 8-K or Form 6-K must attach as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report, or certification in time. The registrant then must file the subject report no later than 45 days after the original filing deadline. The subject report, when filed, must disclose that the registrant is relying on the Order and state the reasons why the registrant could not file such report on a timely basis.

In the SEC’s press release announcing the Order, Chairman Clayton clarified that registrants providing forward-looking information in an effort to keep investors informed about trends or uncertainties regarding COVID-19 can avail themselves of the Exchange Act’s safe harbor for forward-looking statements.

Conclusion

The outbreak of COVID-19 is rapidly developing and has created much uncertainty in markets worldwide. The Order recognizes the fluidity of the situation by extending relief to registrants with operations in “affected areas” without adding any context as to where those areas are located. Just as the SEC has quickly acted to announce relief through the Order, it is possible that the Nasdaq Stock Market and New York Stock Market, as well as other self-regulatory agencies, may follow suit.

The SEC’s press release announcing the Order acknowledges the balancing act presented by the need to protect the health and safety of market participants while also serving investors’ need for timely information. Similarly, affected registrants should consider taking advantage of the Order’s relief to ensure accurate disclosure , even in the face of demanding investor expectations.

 

Everyone Is a Little Bit Biased

Posted on March 16, 2020 by - Business of Law

Everyone has biases. It’s true. Having a bias doesn’t make you a bad person, however, and not every bias is negative or hurtful. It’s not recognizing biases that can lead to bad decisions at work, in life, and in relationships.

My first reaction to this notion that we all have biases was, “Certainly not I!” After all, I grew up in a family where diversity and inclusion were part of our basic values. My father was head of the Anti-Defamation League (ADL), an organization whose mission is to secure justice and fair treatment for all people. I was an ADL board chair and helped train others to combat prejudice and discrimination. So how in the world could I have biases?

Although people have both explicit and implicit biases, the implicit ones are the most concerning because they are the ones we don’t recognize we have.

What Is Implicit Bias?

What exactly is an unconscious (or implicit) bias? The Kirwan Institute (for the study of race and ethnicity) at Ohio State University defines these biases as “the attitudes or stereotypes that affect our understanding, decisions and actions in an unconscious manner. These implicit biases we all hold do not necessarily align with our own declared beliefs.”

I began analyzing how biases affect so many aspects of our jobs and our lives when I began teaching advocacy skills as they pertain to jury selection a number of years ago. We identified many biases associated with stereotypes: teachers were too soft; engineers and scientists too rigid; older people too judgmental; younger people too immature. These were the conscious parts of our brains at work—i.e., explicit biases. I then began noticing that when I was teaching a law school class and referring to expert witnesses and judges, I would always use the pronoun “he”. This was in spite of being a judge and having testified as an expert witness myself. This is the implicit or unconscious bias at work.

As I was exploring biases in the legal profession, I began asking more questions of my colleagues and friends. I learned that gender bias was endemic in many professions, including:

  • female lawyers, including myself, mistaken for someone other than the lawyer in a case
  • female pilots mistaken for flight attendants
  • male nurses frequently mistaken for doctors, and female doctors mistaken for nurses
  • females in the construction industry generally not presumed to be contractors or general managers

The list goes on and on.

The issue of race and implicit bias has also been in the headlines recently, whether it is a group of African-American men asked to leave a Starbucks, or much worse, an African-American man shot under the assumption that he had a weapon. However, implicit bias isn’t just about race or gender. We see implicit bias in many places, about many characteristics—age, religion, weight, appearance, disabilities, accents, gender identity, sexuality, single parents, stay-at-home moms and dads, kids with pink hair, people with tattoos and piercings, people with certain bumper stickers on their cars—again, the list goes on and on.

Why Should We Care About Our Biases?

If we are litigators, these biases can impact how we pick juries, how we assemble our legal team, how we prepare our cases, how we deal with our clients and witnesses, and how we interact with our colleagues. As a judge, I work to ensure that the decisions I make, including credibility decisions, and the sentences I give out are based on appropriate facts, and not implicit biases of which I may not even be aware.

In a work-place environment, unconscious biases can affect hiring and promotion decisions, work assignments, and career tracks, and unfortunately can end up a part of harassment, hostile work environments, and discrimination law suits. These biases can also cause problems and damage relationships, as well as affect the reputations of businesses. In addition, these implicit biases have deadly consequences when they affect such individuals as police officers, who must assess situations quickly and make life-and-death decisions—decisions that may be the result of an implicit bias.

These biases can be incredibly painful for the victims of the biases. One of my dear friends who is a district court judge, formerly a public defender, shared a story with a group of lawyers. He told them how, as an African-American public defender in the courtroom, there were a number of occasions where judges and other lawyers and staff would ask him where his lawyer was, assuming that because he is an African-American, he must be the defendant in the case. The people who made those assumptions weren’t necessarily racist or prejudiced, but there was clearly an implicit bias at work. As he shared this story, tears streamed down his face. Another friend of mine who is Hispanic shared his experience in court 15 years ago and being asked by a judge whether he spoke English (simply because of his last name). Regardless of the intent behind these questions, the pain was palpable for both of these individuals.

Is It Possible to Overcome Our Implicit Biases?

How do we recognize and interrupt our own biases? First, we must be willing to admit we have biases. The more we convince ourselves how unbiased we are, the more of a blind spot we may have when it comes to recognizing our own implicit biases. A great place to start is by taking the Harvard Implicit Association tests (Project Implicit). These are on-line tests that are designed to measure implicit biases in about 28 different categories. Although the results may be shocking at first, the science suggests that the test is absolutely valid.

We must also recognize that the old adage, “trust your gut,” may not prevent us from recognizing implicit bias. We must focus on how we form opinions about people. Sometimes it means asking ourselves whether our opinions would be the same if the person were a different race, gender, or religion or dressed in a different manner. In other words, would our opinion be the same if the individual were part of a different group? Studies suggest that we are most at risk of making a decision that is the result of an implicit bias when we are tired, under stress, and pressured to make quick decisions. How many lawyers do we know who fit that description? We may not be able to control how much sleep we get, or how much stress we feel, but we can control how quickly we make decisions that could be the result of an implicit bias.

Although we must be willing to identify and interrupt our own biases, we must also recognize and be willing to interrupt bias in others. This is probably the most difficult and the most uncomfortable part of overcoming bias.

The challenge with others is determining when to say something, how to say it, and to whom. I make every effort not to address another’s bias in front of other people. I try to find a place to talk in private, and perhaps begin the conversation with something like, “I know you didn’t mean to make me (or another person) feel bad, but I need to share with you the effect that those words or actions had.” I know it is easier said than done, but if someone isn’t made aware that he or she has a particular bias, it will only continue to cause pain to another individual or group of individuals and could lead to significant problems for the employer or organization.

Finally, in terms of specific steps we can take when interrupting bias, it is important to remember that biases develop at a young age and are often the result of our tendencies to surround ourselves with people who are the most like us. In fact, research indicates that we tend to perceive anyone different from us as a threat because our brain tells us to do so. “The capacity to discern ‘us from them’ is fundamental in the human brain,” wrote David Amodio, associate professor of psychology and neural science at New York University, in his 2014 paper, “The Neuroscience of Prejudice and Stereotyping.” However, that doesn’t mean that we can’t begin to recognize and overcome our implicit biases. Here are some suggestions:

  • Be aware of your initial thoughts about people and upon what those thoughts are truly based
  • Stay attuned to people around you and notice how often you engage in conversations with people who are different than you
  • Surround yourself with a diverse mix of cultural and social situations and individuals
  • Share your own experiences of bias with others
  • Educate others about the elements of an inclusive work, school, and community environment
  • Look for commonalities that exist regardless of race, religion, gender, culture, etc.
  • If you see something, say something, hopefully in a manner that is sensitive to the feelings of everyone involved
  • Don’t assume bad intent
  • Slow down your decision-making process

The reality is that we all say things or do things that we wish we could take back. Unfortunately, the tendency is to pretend that it wasn’t said, or that it didn’t happen, or hope that perhaps the person didn’t hear it. But it did happen, we did say it, and the person did hear it, so acknowledge it, apologize, MOVE on AND CHANGE.   My experience has been that most people truly appreciate it and can move on when someone acknowledges a misstep and apologizes for it.

Finally, by challenging ourselves to identify and overcome our own implicit biases, and to help others recognize their biases, we can begin to lay the foundation for harmonious and productive work and personal environments.

Karen Steinhauser is a practicing attorney, judge, and adjunct law professor at the University of Denver Sturm College of Law in Denver, Colorado. She presents workshops and seminars to lawyers and nonlawyers, government offices, and private businesses in the area of implicit/unconscious bias.

Civil Needs Unmet: The Latent Demand for Legal Services

Posted on March 16, 2020 by - Business of Law, Uncategorized

New from the ABA, “Automating Legal Services” will help lawyers understand how to use automation to reduce costs, cut fees, and remain profitable, all while making justice more accessible. Author Hugh Logue reveals how rather than posing a threat to the legal profession, automation will allow lawyers to do more of what they enjoy and access a latent market. Automating Legal Services: Justice through Technology can be purchased at shopABA.org.

A February 2016 Deloitte report, “Developing Legal Talent: Stepping into the Future Law Firm,” predicted that 114,000 jobs in the UK legal sector are likely to be lost to automation by around the year 2020.[1] In my view, while the report correctly states need for change in the legal services sector, I disagree that automation will lead to overall net job losses. Deloitte’s hypothesis, echoed by many others, assumes that all the legal needs in society are currently met by the legal services industry, and that as artificial intelligence and other technologies continue to grow they will take this work away from legal professionals.

Like the other industries that went, or are going, through automation, there is a latent demand for legal services that is not currently being met. The largest-ever survey of legal needs of people in England and Wales, published in May 2016, revealed the scale of the latent market for legal services, with only 30 percent of people with legal problems obtaining formal legal advice.[2]

Other commentators cite job losses and decline in revenue in the solo and small law firm market in recent years and attribute this to the rise of low-cost legal self-service websites such as LegalZoom and believe further automation will only lead to more job losses. However, in my view, those job losses have more to do with the toxic mix of the oversupply of lawyers in the U.S. market, coupled with the fact that current law firm business models do not allow them to increase demand by using automation to reduce costs and cut client fees without damaging profit margins.

A report in 2016 by the American Bar Association (ABA) found that 80 percent of the civil legal needs of lower-to-middle income individuals in the United States went unmet.[3] This broadly fits with studies by the World Justice Project, which estimated in 2018 that 77 percent of people in the United States and 93 percent of people in the United Kingdom did not seek support of an authority or third party to help them to resolve a legal problem.[4] A separate ABA report published in 2014 found that two-thirds of a random sample of adults in a midsize American city reported experiencing at least one of twelve different categories of civil justice situations in the previous 18 months.[5] When respondents were asked how they handled their civil justice situations, 16 percent did nothing, 46 percent took action on their own without any assistance from a third party, and 16 percent had help from family or friends. Of the 22 percent of people that did seek help from an adviser or representative, these seldom included a lawyer and were more likely to be a social worker, police officer, city agency, religious leader, or elected official.[6] Studies in Australia, Canada, and Germany all paint a similar picture—around 70 percent of people of people with legal problems are unable or unwilling to engage lawyers.

The latent market is driven by the fact that for many transactions, the cost of engaging a lawyer is prohibitive in relation to the value of the transaction. Although cost was factor reported by many respondents, another factor was the practical barriers to hiring a lawyer, such as unclear pricing and confusing processes. Growing demand for unbundled legal services is also increasing the need for law firms to assemble their knowledge in an automated self-service platform for their clients to pick à la carte where they need manual legal advice and where they just need to be pointed in the right direction by an authoritative source.

Law practices try to do too much. They are reluctant to accept that they need to realign their services to focus on their strengths and allow the delivery of some services via automated methods. Technology can make the delivery of some legal services a lot simpler. Clients do not always need personal one-on-one delivery; indeed, manual delivery can actually slow things down. If lawyers currently only meet less than a third of society’s legal needs, there is plenty of scope to leverage AI and other innovative technology to serve the other two-thirds. While there will be realignment between the tasks that are completed by technology, manually, and a combination of both, ultimately the new jobs will more than offset by those lost to technology.

Instead, law firms can split legal work into two piles. Offer high-quality manual legal services for fees that keep the firm sustainable and secure and offer work that is automatable as a completely new proposition for a fraction of the cost of manual work, while still retaining a decent profit margin. Once law firms bring clients into their firm with automated services, there will be legal tasks where the client can self-serve while there will be other areas where a lawyer is still needed. The key to upselling more complex legal work is to make the self-service platform really high quality to bring in as many prospective clients as possible and to provide good impression of the law firms’ expertise. Law firms need to be experts on different ways their clients can pay for more complex legal work that comes to the surface through automated legal services. For example, contingency fee arrangements, public funding, or legal expense insurance.

About the Author: Logue is the Lead Analyst for Legal & Regulatory technology at Outsell, a Silicon Valley-headquartered research and advisory firm that tracks market performance and trends in the data, information and analytics economy. His clients include the world’s leading legal publishers and legal tech companies. He has delivered talks and written extensively on legal tech, the business of law and the automation of legal services. Hugh was called to the Bar of England and Wales in 2007.

[1] Deloitte, Developing Legal Talent: Stepping into the Future Law Firm, Feb. 2016, https://www2.deloitte.com/uk/en/pages/audit/articles/developing-legal-talent.html.

[2] Legal Servs. Bd. & Law Soc’y of England & Wales, Online Survey of Individuals’ Handling of Legal Issues in England and Wales 2015, May 2016 (survey carried out by Ipsos-MORI polled 8,192 adults, followed up with in-depth interviews with a smaller panel of respondents).

[3] ABA Comm’n on the Future of Legal Servs., Report on the Future of Legal Services in the United States (ABA, Aug. 2016).

[4] World Justice Project, Global Insights on Access to Justice: Findings from the World Justice Project General Population Poll in 45 Countries (2018).

[5] Rebecca L. Sandefur, Accessing Justice in the Contemporary USA: Findings from the Community Needs and Services Study (Am. Bar Found./Univ. of Ill. at Urbana-Champaign, Aug. 8, 2014).

[6] Id.