From Father Confessor to Compliance Officer

Risk management in law firms will soon be a tortuous task. At the 2nd Annual Law Firm General Counsel & Risk Management Forum today a group of law firm general counsel discussed their roles and how they thought they might change when the Solicitors' Regulation Authority (SRA) new handbook rules come into play.

The concerns arise because the SRA will require law firms to appoint COLPs (or Compliance Officer for Legal Practice). COLPs will be quite different to general counsel, and they will come into being at the end of 2012.

General counsel are often described as confessor type figures to whom lawyers can go when "sins" need to be discussed. Or as one participant said, "I got a call from a partner who told me he was being indicted the next day." For more academic discussion see Fortney and Chambliss. They are not, however, compliance specialists--their role is more diffuse and varied.

There are a range of questions over whether discussions with general counsel are privileged or not. In Europe the ECJ says not: and in the US the matter is before several courts.

The COLP--deriving from Head of Legal Practice in the Legal Services Act 2007--will be the main conduit between law firms and the SRA. But not just a conduit. COLPs will have to develop compliance and reporting policies and persuade the firm to follow them. So the COLP has to be someone of seniority and a lawyer. The COLP is supposed to record failures and report material breaches to the SRA.

What does it all mean? No one knows as guidance is sketchy. What will the liability of COLPs be? How will firms treat them? One thing is clear: the consensus from the panel today was that no general counsel wants to become a COLP. It would destroy the role general counsel have taken on themselves. So will COLPs be selected from risk directors, managing partners, or will they be a new free-standing role?

The SRA chief executive has been trying to allay fears:

...the SRA’s chief executive said the new requirement should not cause major changes in well-run practices.
“COLPs and COFAs will not be sacrificial lambs for what goes wrong in firms,” he said. “The new rules are about making sure there is somebody in the firm who ensures that there are systems in place to comply with the new principles.”
Answering a question from the audience, Townsend said COLPs and COFAs would be responsible for making decisions such as whether to refer a compliance concern to their firms’ managers but would not, in ordinary circumstances, be expected to report such matters to the SRA.
He also sought to reassure the profession that outcomes-focused regulation would not increase reporting requirements. The regulator had been cautious about not imposing further reporting requirements, he said before adding: “We’ll be looking at collecting additional information in relation to the soundness of the business but this will not be huge reams because we’re aware we shouldn’t be asking for too much.”

Testing times ahead for senior managers in law firms and ABS. I'm sure the sheep dip will be working overtime.

From Father Confessor to Compliance Officer

Time to Take Your Law Firm to Market?

(thanks to greentech media)

Is it worth floating a law firm on the stock market? Peel Hunt, a broking house, thinks it can work. In a briefing note, it lays out the attractions and possible drawbacks.

Some of the key points are a continuing need for legal services with a growing regulatory state--ie. more red tape, more need for lawyers and other professionals. Good steady income streams (if partners bill properly, I assume). One of the most important reason given is

Flotation simplifies many of the problems associated with partner transition – equity is transparently valued and incoming partners need not provide capital. This can ease the recruitment of young partners, who rarely have built up their own personal wealth to be able to afford to buy in from their own cash resources. Equally, rewards above normal remuneration and after loan interest and loan capital repayments are, in some cases, only achieved by partners in their late forties. The best young partners, particularly those with a marketing mindset, are likely to want a visible reward and, in particular, the possibility of capital reward in their thirties.

 On the downside is a crucial factor. I've written about managing cultural risk in firms and Peel Hunt identify "the risk of culture change" as a clear risk of flotation

The biggest risk, but the most difficult to analyse objectively, is the extent to which
a public flotation may cause partners to change their behaviour in a way that damages their “trusted advisor” status. The intrinsic pressure of meeting market expectations may change the behaviour of partner/directors. If this causes them to market more aggressively the firm’s specialist services then this may be positive. If however it leads to a more “churn and burn” mentality then, even though this may take years to feed through, this would severely undermine goodwill.

  This is one area where I would say the vast majority of professional service firms, frankly, don't have a clue. If they mess it up then this is where they will do it. Without cultural mediators they are lost. The example Peel Hunt cites is Slater & Gordon in Australia which seems to be a financial and cultural success.

Lawyers would do well to read pages 13 to 15 of the briefing which detail how salaries and dividends would need to be handled. Some middle-range partners might not be entirely pleased with what's on offer: the senior partners will be laughing, however.

The biggest question is how do you value a law firm? I'm not going into detail here but most lawyers will have to learn something called financial reality. It's rather different from Wonderland. (See page 18 for more.)

Using Allen & Overy as a case study, the value of the equity comes out "at £1.48bn, equal to £4.0m each per full equity partner...Those closest to retirement are the most likely immediate beneficiaries of a listing."

Standby for internecine warfare...?

PS. I should mention a fascinating post by Mark Brandon at Motive Legal on "Would you buy shares in a law firm?" which delves into some of the dangers of law firm flotations.

Time to Take Your Law Firm to Market?

Exactly Who Should Be Able to Claim Privilege?

When the Australian Minister for Financial Services refers to accountants and tax professionals as "the consiglieri of suburban prosperity", you know a good argument is brewing.

The argument is over who should be able to claim privilege over communications with clients and third parties. At the moment we recognize legal professional privilege. But for a long time accountants have bristled resentfully at their being outside this charmed circle.

During the negotiations over the Legal Services Act 2007 accountants lobbied for the extension of privilege to cover them. Resistance by the legal profession was far too strong and the accountants were forced into retreat. Yet help may be at hand.

The Australian government has issued a discussion paper which considers whether some form of privilege ought to be extended to cover tax practice--tax advice privilege. The Australian Law Reform Commission (ALRC) has suggested privilege should be so extended.

The paper notes that a very limited form of tax advice privilege exists in the US in relation to non-criminal matters. New Zealand has codified some form of privilege also. The UK appears to be in an anomalous situation. At the moment Prudential is appealing to the Supreme Court claiming that tax advice it received from PwC was privileged. The Court of Appeal rejected Prudential's claim after hearing arguments for and against by the Institute of Chartered Accountants for England & Wales and the Law Society.

Arguments for and against seem to take place on multiple levels. There is the security of the tax system which is essential to the mature functioning of the developed state. Tax authorities will have to go beyond the taxpayer's willingness to cooperate. But ideally compliance should be voluntary.

Professions are discriminated against if tax lawyers appear to have an unfair advantage over tax accountants. It can be seen to stifle competition and give monopoly powers unfairly. If you want to see something that bears comparison, have a look at Barak Richman's paper on Rabbinical cartels over the appointments of Rabbis--absolutely fascinating. The arguments adduced by Rabbis are the same as most professions use to claim why there should be no change to their monopolies. It comes down, in large part, to the Rabbis having the expertise which the congregations don't have.

A strong argument put to counter extension is the position of the lawyer as officer of the court who has undergone ethical training. The ALRC believes this can be dealt with by accountants having heightened sensibilities to ethics. They should be ethically trained and continually trained.

There are many other arguments which are covered in the paper. This is a paper worth reading for those concerned with ethics, professions, and globalization.

We know from experience that much Australian thinking has been exported elsewhere, especially in the forthcoming ethical regime in the UK with outcomes focussed regulation. Moreover, the Legal Services Act introduction of alternative business structures will bring this issue to the foreground as multidisciplinary practices grow.

So, maybe now is the time to pull out those DVD sets of The Godfather so nascent consiglieri can learn how to do that intimate and obsequious murmuring into the ear....

Exactly Who Should Be Able to Claim Privilege?

Managing Cultural Risk in Professional Service Firms

"We'd like you to talk about culture," the caller said, "Over breakfast."

Why not? I thought. I've almost got to the stage where I'll talk about anything. A friend once cracked the lame joke that he'd set up a stall with me, the notice announcing The Prof Is In. Only I'd do it for free instead of charging 5 cents and in this case I was getting fed too.

The Managing Partners' Forum asked me to talk about managing cultural risk along with another social scientist from Holland, Candida Snow, a student of Geert Hofstede.

Two pieces of writing influenced my thinking for this presentation. One was Jordan Furlong's post Why do law firms exist? It helpfully goes back to first principles. The second was a paper External Agency Relationships and Agency Problems in Professional Service Firms: A Multilevel Study by Michael Lander, J. Van Oosterhout and Pursey P. M. A. R. Heugens, which examines in detail the effects of the deployment of soft versus hard controls in professional service firms. I should also mention Emmanuel Lazega's fascinating book The Collegial Phenomenon: The Social Mechanisms of Cooperation among Peers in a Corporate Law Partnership (OUP 2001).

Given that Candida and I had at best a vague brief, we wondered what we ought to say and how it would be received. We only had 15 minutes or so each. Our audience was a mix of lawyers, accountants, consultants among others. So we did what we would like and I think it went over well since the discussion ran ten minutes over time before the moderator called a halt.

I've made my presentation with fuller notes available for download.

And if you want to know how I imagined a professional services firm or law firm might look like, then it's like this

And here's what you have to do to manage one...

Managing Cultural Risk in Professional Service Firms

Philosophical Foundations of Law & Finance 76th Session (Friday 13 May, from 6-8pm, Room 516, Regent Street, London)

Dear All,

For the 76th session of the Philosophical Foundations of Law and Finance, we will presume to apply Plato's theory of law as found in Book I of The Laws to the latest inconvenience of the US senate, namely, the hunt for blame in the 2008 financial crisis. For the record, see: http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf. It is noteworthy that the crusader against Goldman Sachs, Mark Taibi, will have his summary of said report posted in the archives of Rolling Stone on May 13th, and therefore, not in time to contribute to our eloquent rage against insolent chrematistics. 

Afterwards (circa 8:30pm), we shall dine at the Galleria restaurant, at 17 New Cavendish Street. For reservations, please text me at 07748186880.
------
As a side note, The Journal of the Philosophical Foundations of Law & Finance is currently being prepared by Dr. Laura Niada and myself. We are seeking submissions of articles and scholarly notes mainly from LLM and PhD candidates. So far we have selected 6 articles and 1 note for publication. We hope to print a "sample" of the first issue in August 2011. Our ideal is to encourage and assist aspiring talent find a means to share their knowledge and to grow a community of professionals and scholars.

Ciao
Joe

Philosophical Foundations of Law & Finance 76th Session (Friday 13 May, from 6-8pm, Room 516, Regent Street, London)

Is This How Lawyers Think?

(Thanks to New Yorker)

Is This How Lawyers Think?

The Law School/University Grant/Bursary Game

The changes to UK university funding are about to unleash myriad unintended consequences that the UK government has no doubt not thought of. Fees and bursaries are meant to go together like horses and carriages.

This was brought home to me when I read an article on US law school grants in the New York Times. Grants for law students in the US are recent. They were considered unnecessary because law students would get high-paying jobs on graduation and therefore could afford to pay off student loans. It was the less-fortunate grad students (eg. those doing sociology PhDs) who needed studentships and fellowships.

Then a stray elephant wandered into the room--a new ranking of law schools by US News and World Report which started in 1987. Commentators such as Bill Henderson and Brian Leiter have railed against the shoddy statistics of the US News rankings but they are now so engrained in the public consciousness and that of university administrations that their influence is overweening.

Law schools now compete and game the system to climb the rankings. Of course money is at stake here.

Two significant variable for US News are college grade-point averages (think A levels) and Law School Admission Test scores. According the NYT 22% of the ranking is determined by these two scores. And this is something schools can control for. How? By offering studentships to talented new students to entice them. It works.

But to take the animal metaphor one step further--there's a fly in the ointment. Law schools make it very, very hard to maintain those studentships. If your law school grade-point average slips, you've had it: you will need to fund your own tuition and at $30,000 or $40,000 a year, that's expensive.

Such is the situation in the US. Why should this be of concern to UK universities and law schools? Under the new funding rules whereby the UK will charge up to £9,000 per year for tuition, government is commanding universities to institute a system of bursaries. (We use the word bursary: I suppose it has the connotation of a religious order about it and therefore isn't really about filthy lucre.) And one can easily foresee tuition rising from here in the near future.

For the moment I'm excluding the fact that UK law students are undergraduates rather than graduate students.

But by stealth the UK is fomenting its own rankings. Two are quite prominent: the Guardian and the Times. For many experienced observers of these rankings they are flawed as are others but nonetheless relied on by parents and offspring. While the top end of the scale appears uncontroversial--apparent not real--it is the middle and lower parts that are trying to establish their identities in the new emerging markets. These university law schools will be chasing students to ensure full classrooms but with an eye on the rankings also.

While our rankings are somewhat less pachydermal than those of the US News, I can foresee a time when they grow in importance and UK universities will be thinking how to game the system. Bursaries are a heavy burden but could be worth the weight if they lead to an improved student entry. Will our students find themselves ensnared by strict requirements as in the US? It's possible.

Job markets for lawyers have shrunk over the last few years although some think they are coming back. Moreover, in several months time alternative business structures for legal services will be coming on line and will be offering more jobs potentially than those of the standard legal profession. The thing is they won't look like "normal" law jobs, but that's not necessarily bad.

However, law students should be reading Alex Aldridge's article on "Five ways to get the best value out of your law degree". It could be essential reading.

And....願你生活在有趣的時代

The Law School/University Grant/Bursary Game

The Paradigm of Good Financial Regulation & Money Market Funds

The Masters LLM Corporate Finance Law Programme

& The International Law and Theory Centre

Cordially invites you to an evening seminar on

The Paradigm of

Good Financial Regulation

& Money Market Funds

New Themes of Advanced Research

Thursday, 19th May 2011

Portland Hall, School of Law

University of Westminster

4 Little Titchfield Street, London

Do bad regulations cause financial crises? Conversely, are there examples of good regulation that protect investors. For example, money market funds are a significant part of the global financial landscape where regulations have demonstrably improved investor protection during the credit crisis. Discover new areas of research with our panel of experts representing the legal practice in the U.S. and European investment management industry and structured finance.

Registration 5:45 – 6:15pm

Welcome 

6:15 - 6:30 pm

 by Joseph Tanega

 Course Director LLM Corporate Finance Law

A Case of Successful Regulation: U.S. Mutual Funds 

6:30 – 7:00pm

by Matthew Fink

President of the Investment Company Institute (U.S.) from 1991 to 2004

Author of a history of mutual funds, The Rise of Mutual Funds: An Insider’s

View, published by Oxford University Press (2008, 2011)

Many Faces of European Money Market Funds 

7:00 – 7:15pm

by Viktoria Baklanova, CFA

PhD Candidate, University of Westminster, School of Law

Senior Director, Fitch Ratings, New York

Europe: Regulation, a Salutation; Investment, a Valediction 

7:15 – 7:45pm

by Edmond Curtin

Special Counsel in the Capital Markets Department of the London office of

Cadwalader, Wickersham & Taft LLP and Visiting Fellow in Securities and

Structured Finance Law at University of Westminster

Questions & Answers 7:45 – 8:00pm

Reception 8:00 – 9:00pm

Attendance is free, but places are limited.

RSVP & further Information: Ms. Samantha King

S.King5@westminster.ac.uk

0207 911 5000 ext. 2525

The University of Westminster is a charity and a company limited by guarantee. Registration number: 977818 England. Registered Office: 309 Regent Street, London W1B 2UW.

http://www.westminster.ac.uk/about/news-and-events/events/2011/the-paradigm-of-good-financial-regulation-and-money-market-funds

The Paradigm of Good Financial Regulation & Money Market Funds

How Complex Can Spiral Be?

(thanks to Tate Gallery)

Matisse's L'escargot shows a spiral deconstructed into a medley of elements. In a way it looks simple but mathematically spirals are excruciatingly complicated. There are Fibonacci spirals; spirals that look like M.C. Escher designed them; and there are spherical helices called Loxodromes. Have a look at this page if you're not satiated by these.

For mind-bending complexity Spiral on BBC4 has them beaten. This spiral is (un)winding over 12 episodes and each one appears to add extra, virtually impossible, dense layers of intricacy, perhaps becoming a clothoide (a double spiral).

Take Judge Roban's trainee, Arnaud, who is the son of a lost lover reclaimed. Arnaud discovered Roban breaking into his own chambers to stage a robbery and blackmailed him to keep away from his mother. Then Arnaud is lured into a honey trap by Roban's brother who is involved with a corrupt mayor--a touch of the Chirac or Sarkozy here--and to prevent his sexual dalliance with a minor becoming public Arnaud must disclose facts about the investigation. Roban suspects Arnaud and despite Arnaud's original blackmail finds himself in his lover's arms again. Arnaud finds his mother and Roban in bed together and despairs. Can there be more? Yes, there is....

Honey traps are abounding in Spiral. The fine, upstanding ex-prosecutor, Pierre, has been ensnared on false charges by a young client who sponges on Pierre's good nature. Pierre is accused of rape. The questioning by the police inspector is clenchingly personal.

"Are you married?"
"No."
"Did your wife divorce you or you her?"
"What does it matter who divorced who?"
"Let me call your ex-wife and see if she remembers...."
"OK, she divorced me."
"How many affairs have you had since the divorce?"
"Two or three."
"That's not many for two or three years of separation. Do you masturbate?"
And on, all at 3am.

Pierre, having split from his law partner, Josephine, because of her corruption, has to call on her to represent him as, in her words, she thrives on such cases. In a nice touch Josephine passes Laure, the police inspector with whom Pierre had had an affair in Series One, and they commiserate over Pierre's plight.

And so Spiral (or Engrenages in French) moves on. I've only touched on the surface of some the plots, sub-plots, sub-sub-plots, ad infinitum that the programme is spinning out. It's the best thing on television and it knocks spots off anything I've seen on American or British TV. Only The Killing (from Denmark and also on BBC4) comes close. One feature that Spiral and The Killing share is the luxury of letting the series develop organically (do I really mean that?) over 12 episodes. There's no feeling of rushing towards a premature resolution. We have time to think about the way the series goes which is another feature, Spiral does make you think.

How Complex Can Spiral Be?