Carried Interest Tax Legislation Suddenly Appears and Moves Forward

Tucked into the Tax Extenders Act of 2009 (H.R. 4213), is a provision targeted at partnership interests held by partners providing services.

This proposal seems to be the same proposal offered by Congressman Sandy Levin from the 12th District of Michigan in H.R. 1935 which has been sitting in Committee [See prior post: Carried Interest Tax Legislation.

H.R. 4213 flew through the legislative process of the House of Representatives. It was introduced on December 7, 2009 and passed by the House on December 9, mostly along party lines. The Carried Interest Tax is one of several dozen changes to the tax code included in the bill.

The text of the relevant section of the bill:

TITLE VI–OTHER REVENUE PROVISIONS

Subtitle A–Partnership Interests Held by Partners Providing Services

SEC. 601. PARTNERSHIP INTERESTS TRANSFERRED IN CONNECTION WITH PERFORMANCE OF SERVICES.

(a) Modification to Election To Include Partnership Interest in Gross Income in Year of Transfer- Subsection (c) of section 83 is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

‘(4) PARTNERSHIP INTERESTS- Except as provided by the Secretary, in the case of any transfer of an interest in a partnership in connection with the provision of services to (or for the benefit of) such partnership–

‘(A) the fair market value of such interest shall be treated for purposes of this section as being equal to the amount of the distribution which the partner would receive if the partnership sold (at the time of the transfer) all of its assets at fair market value and distributed the proceeds of such sale (reduced by the liabilities of the partnership) to its partners in liquidation of the partnership, and

‘(B) the person receiving such interest shall be treated as having made the election under subsection (b)(1) unless such person makes an election under this paragraph to have such subsection not apply.’.

(b) Conforming Amendment- Paragraph (2) of section 83(b) is amended by inserting ‘or subsection (c)(4)(B)’ after ‘paragraph (1)’.

(c) Effective Date- The amendments made by this section shall apply to interests in partnerships transferred after the date of the enactment of this Act.

SEC. 602. INCOME OF PARTNERS FOR PERFORMING INVESTMENT MANAGEMENT SERVICES TREATED AS ORDINARY INCOME RECEIVED FOR PERFORMANCE OF SERVICES.

(a) In General- Part I of subchapter K of chapter 1 is amended by adding at the end the following new section:

‘SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT SERVICES TO PARTNERSHIP.

‘(a) Treatment of Distributive Share of Partnership Items- For purposes of this title, in the case of an investment services partnership interest–

‘(1) IN GENERAL- Notwithstanding section 702(b)–

‘(A) any net income with respect to such interest for any partnership taxable year shall be treated as ordinary income, and

‘(B) any net loss with respect to such interest for such year, to the extent not disallowed under paragraph (2) for such year, shall be treated as an ordinary loss.

All items of income, gain, deduction, and loss which are taken into account in computing net income or net loss shall be treated as ordinary income or ordinary loss (as the case may be).

‘(2) TREATMENT OF LOSSES-

‘(A) LIMITATION- Any net loss with respect to such interest shall be allowed for any partnership taxable year only to the extent that such loss does not exceed the excess (if any) of–

‘(i) the aggregate net income with respect to such interest for all prior partnership taxable years, over

‘(ii) the aggregate net loss with respect to such interest not disallowed under this subparagraph for all prior partnership taxable years.

‘(B) CARRYFORWARD- Any net loss for any partnership taxable year which is not allowed by reason of subparagraph (A) shall be treated as an item of loss with respect to such partnership interest for the succeeding partnership taxable year.

‘(C) BASIS ADJUSTMENT- No adjustment to the basis of a partnership interest shall be made on account of any net loss which is not allowed by reason of subparagraph (A).

‘(D) PRIOR PARTNERSHIP YEARS- Any reference in this paragraph to prior partnership taxable years shall only include prior partnership taxable years to which this section applies.

‘(3) NET INCOME AND LOSS- For purposes of this section–

‘(A) NET INCOME- The term ‘net income’ means, with respect to any investment services partnership interest for any partnership taxable year, the excess (if any) of–

‘(i) all items of income and gain taken into account by the holder of such interest under section 702 with respect to such interest for such year, over

‘(ii) all items of deduction and loss so taken into account.

‘(B) NET LOSS- The term ‘net loss’ means, with respect to such interest for such year, the excess (if any) of the amount described in subparagraph (A)(ii) over the amount described in subparagraph (A)(i).

‘(b) Dispositions of Partnership Interests-

‘(1) GAIN- Any gain on the disposition of an investment services partnership interest shall be treated as ordinary income and shall be recognized notwithstanding any other provision of this subtitle.

‘(2) LOSS- Any loss on the disposition of an investment services partnership interest shall be treated as an ordinary loss to the extent of the excess (if any) of–

‘(A) the aggregate net income with respect to such interest for all partnership taxable years, over

‘(B) the aggregate net loss with respect to such interest allowed under subsection (a)(2) for all partnership taxable years.

‘(3) DISPOSITION OF PORTION OF INTEREST- In the case of any disposition of an investment services partnership interest, the amount of net loss which otherwise would have (but for subsection (a)(2)(C)) applied to reduce the basis of such interest shall be disregarded for purposes of this section for all succeeding partnership taxable years.

‘(4) DISTRIBUTIONS OF PARTNERSHIP PROPERTY- In the case of any distribution of property by a partnership with respect to any investment services partnership interest held by a partner–

‘(A) the excess (if any) of–

‘(i) the fair market value of such property at the time of such distribution, over

‘(ii) the adjusted basis of such property in the hands of the partnership,

shall be taken into account as an increase in such partner’s distributive share of the taxable income of the partnership (except to the extent such excess is otherwise taken into account in determining the taxable income of the partnership),

‘(B) such property shall be treated for purposes of subpart B of part II as money distributed to such partner in an amount equal to such fair market value, and

‘(C) the basis of such property in the hands of such partner shall be such fair market value.

Subsection (b) of section 734 shall be applied without regard to the preceding sentence.

‘(5) APPLICATION OF SECTION 751- In applying section 751(a), an investment services partnership interest shall be treated as an inventory item.

‘(c) Investment Services Partnership Interest- For purposes of this section–

‘(1) IN GENERAL- The term ‘investment services partnership interest’ means any interest in a partnership which is held (directly or indirectly) by any person if it was reasonably expected (at the time that such person acquired such interest) that such person (or any person related to such person) would provide (directly or indirectly) a substantial quantity of any of the following services with respect to assets held (directly or indirectly) by the partnership:

‘(A) Advising as to the advisability of investing in, purchasing, or selling any specified asset.

‘(B) Managing, acquiring, or disposing of any specified asset.

‘(C) Arranging financing with respect to acquiring specified assets.

‘(D) Any activity in support of any service described in subparagraphs (A) through (C).

For purposes of this paragraph, the term ‘specified asset’ means securities (as defined in section 475(c)(2) without regard to the last sentence thereof), real estate held for rental or investment, interests in partnerships, commodities (as defined in section 475(e)(2)), or options or derivative contracts with respect to any of the foregoing.

‘(2) EXCEPTION FOR CERTAIN CAPITAL INTERESTS-

‘(A) IN GENERAL- In the case of any portion of an investment services partnership interest which is a qualified capital interest, all items of income, gain, loss, and deduction which are allocated to such qualified capital interest shall not be taken into account under subsection (a) if–

‘(i) allocations of items are made by the partnership to such qualified capital interest in the same manner as such allocations are made to other qualified capital interests held by partners who do not provide any services described in paragraph (1) and who are not related to the partner holding the qualified capital interest, and

‘(ii) the allocations made to such other interests are significant compared to the allocations made to such qualified capital interest.

‘(B) SPECIAL RULE FOR NO OR INSIGNIFICANT ALLOCATIONS TO NONSERVICE PROVIDERS- To the extent provided by the Secretary in regulations or other guidance, in any case in which the requirements of subparagraph (A)(ii) are not satisfied, items of income, gain, loss, and deduction shall not be taken into account under subsection (a) to the extent that such items are properly allocable under such regulations or other guidance to qualified capital interests.

‘(C) SPECIAL RULE FOR DISPOSITIONS- In the case of any investment services partnership interest any portion of which is a qualified capital interest, subsection (b) shall not apply to so much of any gain or loss as bears the same proportion to the entire amount of such gain or loss as–

‘(i) the distributive share of gain or loss that would have been allocable to the qualified capital interest under subparagraph (A) if the partnership sold all of its assets immediately before the disposition, bears to

‘(ii) the distributive share of gain or loss that would have been so allocable to the investment services partnership interest of which such qualified capital interest is a part.

‘(D) QUALIFIED CAPITAL INTEREST- For purposes of this paragraph, the term ‘qualified capital interest’ means so much of a partner’s interest in the capital of the partnership as is attributable to–

‘(i) the fair market value of any money or other property contributed to the partnership in exchange for such interest (determined without regard to section 752(a)) ,

‘(ii) any amounts which have been included in gross income under section 83 with respect to the transfer of such interest, and

‘(iii) the excess (if any) of–

‘(I) any items of income and gain taken into account under section 702 with respect to such interest for taxable years to which this section applies, over

‘(II) any items of deduction and loss so taken into account.

The qualified capital interest shall be reduced by distributions from the partnership with respect to such interest for taxable years to which this section applies and by the excess (if any) of the amount described in clause (iii)(II) over the amount described in clause (iii)(I).

‘(E) TREATMENT OF CERTAIN LOANS-

‘(i) PROCEEDS OF PARTNERSHIP LOANS NOT TREATED AS QUALIFIED CAPITAL INTEREST OF SERVICE PROVIDING PARTNERS- For purposes of this paragraph, an investment services partnership interest shall not be treated as a qualified capital interest to the extent that such interest is acquired in connection with the proceeds of any loan or other advance made or guaranteed, directly or indirectly, by any other partner or the partnership (or any person related to any such other partner or the partnership).

‘(ii) REDUCTION IN ALLOCATIONS TO QUALIFIED CAPITAL INTERESTS FOR LOANS FROM NONSERVICE PROVIDING PARTNERS TO THE PARTNERSHIP- For purposes of this paragraph, any loan or other advance to the partnership made or guaranteed, directly or indirectly, by a partner not providing services described in paragraph (1) to the partnership (or any person related to such partner) shall be taken into account in determining the qualified capital interests of the partners in the partnership.

‘(3) RELATED PERSONS- A person shall be treated as related to another person if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b).

‘(d) Other Income and Gain in Connection With Investment Management Services-

‘(1) IN GENERAL- If–

‘(A) a person performs (directly or indirectly) investment management services for any entity,

‘(B) such person holds (directly or indirectly) a disqualified interest with respect to such entity, and

‘(C) the value of such interest (or payments thereunder) is substantially related to the amount of income or gain (whether or not realized) from the assets with respect to which the investment management services are performed,

any income or gain with respect to such interest shall be treated as ordinary income. Rules similar to the rules of subsection (c)(2) shall apply for purposes of this subsection.

‘(2) DEFINITIONS- For purposes of this subsection–

‘(A) DISQUALIFIED INTEREST-

‘(i) IN GENERAL- The term ‘disqualified interest’ means, with respect to any entity–

‘(I) any interest in such entity other than indebtedness,

‘(II) convertible or contingent debt of such entity,

‘(III) any option or other right to acquire property described in subclause (I) or (II), and

‘(IV) any derivative instrument entered into (directly or indirectly) with such entity or any investor in such entity.

‘(ii) EXCEPTIONS- Such term shall not include–

‘(I) a partnership interest,

‘(II) except as provided by the Secretary, any interest in a taxable corporation, and

‘(III) except as provided by the Secretary, stock in an S corporation.

‘(B) TAXABLE CORPORATION- The term ‘taxable corporation’ means–

‘(i) a domestic C corporation, or

‘(ii) a foreign corporation substantially all of the income of which is–

‘(I) effectively connected with the conduct of a trade or business in the United States, or

‘(II) subject to a comprehensive foreign income tax (as defined in section 457A(d)(2)).

‘(C) INVESTMENT MANAGEMENT SERVICES- The term ‘investment management services’ means a substantial quantity of any of the services described in subsection (c)(1).

‘(e) Regulations- The Secretary shall prescribe such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section, including regulations or other guidance to–

‘(1) provide modifications to the application of this section (including treating related persons as not related to one another) to the extent such modification is consistent with the purposes of this section,

‘(2) prevent the avoidance of the purposes of this section, and

‘(3) coordinate this section with the other provisions of this title.

‘(f) Cross Reference- For 40 percent penalty on certain underpayments due to the avoidance of this section, see section 6662.’.

(b) Income From Investment Services Partnership Interests Not Treated as Qualifying Income of Publicly Traded Partnerships- Subsection (d) of section 7704 is amended by adding at the end the following new paragraph:

‘(6) INCOME FROM INVESTMENT SERVICES PARTNERSHIP INTERESTS NOT QUALIFIED-

‘(A) IN GENERAL- Items of income and gain shall not be treated as qualifying income if such items are treated as ordinary income by reason of the application of section 710 (relating to special rules for partners providing investment management services to partnership).

‘(B) SPECIAL RULES FOR CERTAIN PARTNERSHIPS-

‘(i) CERTAIN PARTNERSHIPS OWNED BY REAL ESTATE INVESTMENT TRUSTS- Subparagraph (A) shall not apply in the case of a partnership which meets each of the following requirements:

‘(I) Such partnership is treated as publicly traded under this section solely by reason of interests in such partnership being convertible into interests in a real estate investment trust which is publicly traded.

‘(II) 50 percent or more of the capital and profits interests of such partnership are owned, directly or indirectly, at all times during the taxable year by such real estate investment trust (determined with the application of section 267(c)).

‘(III) Such partnership meets the requirements of paragraphs (2), (3), and (4) of section 856(c).

‘(ii) CERTAIN PARTNERSHIPS OWNING OTHER PUBLICLY TRADED PARTNERSHIPS- Subparagraph (A) shall not apply in the case of a partnership which meets each of the following requirements:

‘(I) Substantially all of the assets of such partnership consist of interests in one or more publicly traded partnerships (determined without regard to subsection (b)(2)).

‘(II) Substantially all of the income of such partnership is ordinary income or section 1231 gain (as defined in section 1231(a)(3)).

‘(C) TRANSITIONAL RULE- In the case of a partnership which is a publicly traded partnership on the date of the enactment of this paragraph, subparagraph (A) shall not apply to any taxable year of the partnership beginning before the date which is 10 years after the date of the enactment of this paragraph.’.

(c) Imposition of Penalty on Underpayments-

(1) IN GENERAL- Subsection (b) of section 6662, as amended by section 512, is amended by inserting after paragraph (6) the following new paragraph:

‘(7) The application of subsection (d) of section 710 or the regulations prescribed under section 710(e) to prevent the avoidance of the purposes of section 710.’.

(2) AMOUNT OF PENALTY-

(A) IN GENERAL- Section 6662, as amended by section 512, is amended by adding at the end the following new subsection:

‘(j) Increase in Penalty in Case of Property Transferred for Investment Management Services- In the case of any portion of an underpayment to which this section applies by reason of subsection (b)(7), subsection (a) shall be applied with respect to such portion by substituting ‘40 percent’ for ‘20 percent’.’.

(B) CONFORMING AMENDMENTS- Subparagraph (B) of section 6662A(e)(2) is amended–

(i) by striking ‘section 6662(h)’ and inserting ‘subsection (h) or (i) of section 6662’, and

(ii) by striking ‘GROSS VALUATION MISSTATEMENT PENALTY’ in the heading and inserting ‘CERTAIN INCREASED UNDERPAYMENT PENALTIES’.

(3) SPECIAL RULES FOR APPLICATION OF REASONABLE CAUSE EXCEPTION- Subsection (c) of section 6664 is amended–

(A) by redesignating paragraphs (2) and (3) as paragraphs (3) and (4), respectively,

(B) by striking ‘paragraph (2)’ in paragraph (4), as so redesignated, and inserting ‘paragraph (3)’, and

(C) by inserting after paragraph (1) the following new paragraph:

‘(2) SPECIAL RULE FOR UNDERPAYMENTS ATTRIBUTABLE TO INVESTMENT MANAGEMENT SERVICES-

‘(A) IN GENERAL- Paragraph (1) shall not apply to any portion of an underpayment to which this section applies by reason of subsection (b)(7) unless–

‘(i) the relevant facts affecting the tax treatment of the item are adequately disclosed,

‘(ii) there is or was substantial authority for such treatment, and

‘(iii) the taxpayer reasonably believed that such treatment was more likely than not the proper treatment.

‘(B) RULES RELATING TO REASONABLE BELIEF- Rules similar to the rules of subsection (d)(3) shall apply for purposes of subparagraph (A)(iii).’.

(d) Income and Loss From Investment Services Partnership Interests Taken Into Account in Determining Net Earnings From Self-Employment-

(1) INTERNAL REVENUE CODE- Section 1402(a) is amended by striking ‘and’ at the end of paragraph (16), by striking the period at the end of paragraph (17) and inserting ‘; and’, and by inserting after paragraph (17) the following new paragraph:

‘(18) notwithstanding the preceding provisions of this subsection, in the case of any individual engaged in the trade or business of providing services described in section 710(c)(1) with respect to any entity, any amount treated as ordinary income or ordinary loss of such individual under section 710 with respect to such entity shall be taken into account in determining the net earnings from self-employment of such individual.’.

(2) SOCIAL SECURITY ACT- Section 211(a) of the Social Security Act is amended by inserting after paragraph (16) the following new paragraph:

‘(17) Notwithstanding the preceding provisions of this subsection, in the case of any individual engaged in the trade or business of providing services described in section 710(c)(1) of the Internal Revenue Code of 1986 with respect to any entity, any amount treated as ordinary income or ordinary loss of such individual under section 710 of such Code with respect to such entity shall be taken into account in determining the net earnings from self-employment of such individual.’.

(e) Conforming Amendments-

(1) Subsection (d) of section 731 is amended by inserting ‘section 710(b)(4) (relating to distributions of partnership property),’ after ‘to the extent otherwise provided by’.

(2) Section 741 is amended by inserting ‘or section 710 (relating to special rules for partners providing investment management services to partnership)’ before the period at the end.

(3) The table of sections for part I of subchapter K of chapter 1 is amended by adding at the end the following new item:

‘Sec. 710. Special rules for partners providing investment management services to partnership.’.

(f) Effective Date-

(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years ending after December 31, 2009.

(2) PARTNERSHIP TAXABLE YEARS WHICH INCLUDE EFFECTIVE DATE- In applying section 710(a) of the Internal Revenue Code of 1986 (as added by this section) in the case of any partnership taxable year which includes December 31, 2009, the amount of the net income referred to in such section shall be treated as being the lesser of the net income for the entire partnership taxable year or the net income determined by only taking into account items attributable to the portion of the partnership taxable year which is after such date.

(3) DISPOSITIONS OF PARTNERSHIP INTERESTS- Section 710(b) of the Internal Revenue Code of 1986 (as added by this section) shall apply to dispositions and distributions after December 31, 2009.

(4) OTHER INCOME AND GAIN IN CONNECTION WITH INVESTMENT MANAGEMENT SERVICES- Section 710(d) of such Code (as added by this section) shall take effect on January 1, 2010.

(5) PUBLICLY TRADED PARTNERSHIPS- The amendment made by subsection (b) shall apply to taxable years beginning after December 31, 2009.

Data Accountability and Trust Act Passed by House

I'm just a bill from Schoolhouse Rock

The Data Accountability and Trust Act (H.R. 2221) was passed by the House on Tuesday. This act would requires the Federal Trade Commission to promulgate regulations requiring each person engaged in interstate commerce that owns or possesses electronic data containing personal information to establish security policies and procedures.

This bill would preempt any state laws in the area, wiping out the Massachusetts Data Privacy Law [Massachusetts Amends Its Strict Data Privacy Law (Yet, Again)].

I thinks its a good thing to have a national standard in this area. The transient nature of personal data makes it hard to associate with a particular state. That means the most restrictive of the various state laws ends up becoming the national standard.

The downside is that we would have to wait for the FTC to draft the rules, go through the comment period and wait for implementation.

Of course, the Data Accountability and Trust Act is not the law yet. As I learned in School House Rock, H.R. 2221 is singing:

I’m just a bill.
Yes, I’m only a bill.
And I’m sitting here on Capitol Hill.
Well, it’s a long, long journey
To the capital city.
It’s a long, long wait
While I’m sitting in committee,
But I know I’ll be a law someday
At least I hope and pray that I will,
But today I am still just a bill.

SEC Goes After Sub-Prime Lender

new-century

The Securities and Exchange Commission charged three former top officers of New Century Financial Corporation with securities fraud for misleading investors as New Century’s subprime mortgage business was collapsing in 2006. At the time of the fraud, New Century was one of the largest subprime lenders in the nation.

In its complaint, the SEC alleges that New Century disclosures generally sought to assure investors that its business was not at risk and was performing better than its peers. However, New Century failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. The complaint also alleges that Dodge and Kenneally fraudulently accounted for expenses related to bad loans that it had to repurchase.

The SEC’s complaint names as defendants:

  • Former CEO and co-founder Brad A. Morrice
  • Former CFO Patti M. Dodge
  • Former Controller David N. Kenneally

It was interesting to see the SEC bring this case after the Department of Justice lost a similar case against two former Bear Stearns hedge fund managers. In both cases, there were some public statements about how they would weather the subprime crisis. In the Bear Stearns case, it was a private fund. In this New Century it was a public company. The argument is both cases is that the principals were hiding their knowledge of the underlying losses.

The SEC is charging the New Century trio with accounting fraud as part of their scheme to hide the losses from the subprime loans going bad. Part of the downfall may have been its conversion in 2004 to become a mortgage REIT. While this structure reduces the amount of taxes it needs to pay, it also requires the company to distribute at least 90% of its annual taxable income. That means New Century would have trouble accumulating capital for operations and keeping reserves for future losses.

The complaint is a fun read because it takes you through the greed of the subprime marketplace as New Century introduces new products that, in hindsight, are increasingly riskier. As the losses accumulated, the disclosure got murkier and murkier. The SEC sees the disclosure as “false and misleading.”

New Century’s trademarked byline was “A new shade of blue chip.” It seems like red (as in the ink) would have been a better color choice.

References:

subprime 25

International Anti-Corruption Day

Corruption Your No Counts

The theme of this year’s observance of the International Anti-Corruption Day is

“Don’t let corruption kill development.”

“When public money is stolen for private gain, it means fewer resources to build schools, hospitals, roads and water treatment facilities. When foreign aid is diverted into private bank accounts, major infrastructure projects come to a halt. Corruption enables fake or substandard medicines to be dumped on the market, and hazardous waste to be dumped in landfill sites and in oceans. The vulnerable suffer first and worst.”

What can you do?

The Your No Counts website has a number of things you can do.

  • Ratify and enact the UN Convention against Corruption.
    Countries that successfully attack corruption are far more legitimate in the eyes of their citizens, creating stability and trust.
  • Know what Convention requires of your government and its officials.
    Rooting out corruption allows social and economic development.
  • Educate the public about the government’s responsibility to be corruption-free.
    Equal and fair justice for all is a crucial element for a country’s stability and growth. It also helps to effectively fight crime.
  • Raise awareness with the public, media and government about the costs of corruption for key services such as health and education.
    All of society benefits from functioning basic services.
  • Engage the youth of your country about what ethical behavior is, what corruption is and how to fight it, and to demand their right to education.
    Ensuring that future generations of citizens are brought up to expect corruption-free countries is one of the best tools to ensure a brighter future.
  • Report incidents of corruption.
    Create an environment where the rule of law prevails.
  • Refuse to participate in any activities that are not legal and transparent.
    Increases both domestic and foreign investment. Everyone is more willing to invest in countries when they see that funds are not being siphoned off into the pockets of corrupt officials.
  • Foster economic stability by enforcing zero-tolerance practices towards corruption.
    A transparent and open business community is a cornerstone of any strong democracy.

Positioning yourself for Tomorrow’s Social Media Today: Practical Approaches for Legal Professionals

lexisnexis

Join Compliance Building’s Doug Cornelius for a 60-minute Webinar at 11:00 am Eastern time on Wednesday, December 9. It’s free, sponsored by Martindale-Hubbell Connected.

The webinar will give you examples of social media web-based tools helping legal professionals become more efficient and productive. Will we soon say goodbye to email?

Panel

The webinar panel includes:

Summary

I will start with my hatred of the term “social media.” For me it’s all about communication, self-interest, finding information and saving that information for later use. I have no snake-oil to sell, claim no expertise as a “social media expert” and have not written a book. My part of the panel is just focused on how I personally take advantage of these tools and where I see them going.

Nicole will talk about why you should care about intermedia.

Greg show how to use web based communication  tools as information resource tools and ways to filter the information.

Rex has the perspective of social media as an opportunity aggregator, looking at Twitter, Google Wave, blogging and blog participation.

Lee will end things by looking at the social business design for the legal sector and look at how some law firms are using web-based communication internally.

You will notice that we are not talking about Martindale-Hubbell Connected.

You can register for the webinar here: http://www.interaction.com/LNMH/connected/webinars/index.cfm?wid=127

Twitter

For those of you on Twitter, we are using the #MHCO hashtag for the webinar.

Materials

The materials and some of the questions and answers are available in the Martindale-Hubble Connected group on Social Media for Lawyers. (registration required. I couldn’t get permission to post the materials publicly.)

Tuesday Morning Quarterback of Free Enterprise v. PCAOB

pcaob logo

On Monday, the Supreme Court listened to the oral arguments in Free Enterprise Fund v. Public Company Accounting Oversight Board (08-861). For me in the compliance world, the case is about the viability of PCAOB under Sarbanes-Oxley. For the constitutional scholars it is an important separation of powers case.

Responding to concerns about accounting that led to the collapses of Enron and WorldCom, Sarbanes-Oxley established PCAOB as an independent body to oversee the firms that do accounting for public companies. The law gives the Securities and Exchange Commission power to name the members of the Public Company Accounting Oversight Board.

The trouble is that the President has no power to remove the Commissioners of the SEC, other than the Chair. The President can only appoint them. Similarly, the SEC selects the board members of PCAOB, but cannot remove them. The Free Enterprise group says that violates a clause of the Constitution giving the president the power to appoint government officials except for certain instances involving inferior officers.

If the Supreme Court agrees that PCAOB isn’t constitutional, it could force a revisit of Sarbanes-Oxley, or at least the portion of it that creates PCAOB. In a broader view for constitutional scholarship, the case could also call into question other independent agencies and how they appoint members of those agencies.

David Zaring in The Conglomerate thinks that the Supreme Court is unlikely to get in the way of an important government agencey. After all eliminating an agency is a sever sanction.

Orin Kerr in The Volokh Conspiracy> got the impression that the arguments did not go well for the challengers to the constitutionality of the Public Company Accounting Oversight Board.

Fawn John Johnson and Jess Bravin in The Wall Street Journal look to Justice Kennedy as the key to which way the Supreme Court will decide. The liberal justices are less likely to find fault with the independent agencies. For conservative legal scholars, the case is less about the accounting board itself than about the “unitary executive” theory, which holds that because the president is accountable to the electorate, he must be able to remove federal officials at will.

The transcript and reports seem to focus on how much control the SEC has over PCAOB. Hans Bader points out that the SEC had previously expressed its frustration about how little control it had over PCAOB, seemingly contrary to the arguments made in front of the Supreme Court.

David Zaring in The Conglomerate points out that the number of law review articles referring to “PCAOB”: 1021.  Number referring to “PCOAB”: 29. So much for the higher scholarship and editing of law review articles over blogs.

UPDATE:

Broc Romanek, of The Corporate Counsel.net provides a great first-hand account of the hearing and his experience at the Supreme Court the day of the hearing: My SCOTUS Experience: The Full Monty.

References:

Global Ethics Summit

Global Ethics Summit

Dow Jones and Ethisphere Institute are teaming up to present the 2010 Global Ethics Summit on February 23-24, 2010 at the Grand Hyatt New York City.

I just confirmed that I will be attending, thanks to an offer from the event’s organizers.

“In an effort to help companies deal with anti-corruption compliance and other significant issues, Dow Jones and Ethisphere Institute are teaming up to present the 2010 Global Ethics Summit.  The event will offer participants the opportunity to gain critical and timely insight into the challenging facets of conducting business successfully and ethically.  The event will bring together government and regulatory officials, FCPA attorneys and consultants, NGOs and nonprofit directors, corporate compliance officers and other top executives.  Attendees will get insight on the rulings and legislative changes that are shaping corporate compliance.  They’ll also receive an in-depth and multi-faceted learning experience that encourages the sharing of best practices for navigating an increasingly complex and daunting global corporate legal landscape.”

They have a good-looking agenda:

  • Compliance 2010 – What’s Next?
  • Doing More with Less: Compliance During Tough Economic Times
  • Global Insights into the Anti-Corruption Landscape
  • Training a Diverse Workforce: Best Practices
  • Transparency –What, How Much and When?
  • When the Government Comes Knocking: Trends and Tips for Dealing with Regulators and Enforcement Officials
  • Telling the CEO No
  • Picking Your Partners
  • Emerging Markets – Opportunities, Challenges and Obligations

and a good line-up of speakers:

  • Brackett Denniston, Senior Vice President & General Counsel, General Electric
  • Andy Hinton, Chief Compliance Officer & Associate General Counsel, Google
  • Georg Kell, Executive Director, United Nations Global Compact
  • Genie Gavenchak, Senior Vice President, Chief Compliance and Ethics Officer & Deputy General Counsel, News Corp.
  • Grace Renbarger, Chief Ethics and Compliance Officer, Dell Computer
  • Nan Stout, VP, Business Ethics, Staples
  • … and many others

If you are interested in attending I can offer you a 15% discount on regular conference fees, available by registering online (http://www.globalethicssummit.com/register) with the code “GES10P”.

I also need to disclose that they gave me a pass to attend as a media sponsor of the event. You can see Compliance Building listed as a media sponsor. In exchange, I’m writing a few blog posts leading up to the summit and will be live-blogging from it.

Global Ethics Summitt main banner

An Effective Workplace Investigation

Crime scene

The California Supreme Court in Cotran v. Rollins Hudig Hall International, Inc. found that for an employer to have “good cause” to terminate an employee, the employer does not have to prove that allegations of misconduct are true, just that the employer fairly formed a reasonable belief that they were true.  So an employer must show not just that it honestly believed the charges, but also that it was reasonable to believe them.

“We give operative meaning to the term “good cause” in the context of implied employment contracts by defining it … as fair and honest reasons, regulated by good faith on the part of the employer, that are not trivial, arbitrary or capricious, unrelated to business needs or goals, or pretextual. A reasoned conclusion, in short, supported by substantial evidence gathered through an adequate investigation that includes notice of the claimed misconduct and a chance for the employee to respond.”

An “adequate investigation” is good, but an effective investigation is better. The EEOC published some guidelines on what they think are the elements of an effective investigative process for a sexual harassment claim.

First, figure out if you need an investigation. If the alleged perpetrator does not deny the accusation, then there is little need for an investigation. You can go right to corrective action.

The investigation needs be started and completed promptly.

The investigator should not be subject to the supervisory authority of the accused. After all, its really hard to conduct an objective investigation of the person who determines your paychecks and promotion.

Follow the same note-taking procedure for all of your witnesses, including the Complainant and the accused employee.

Interview the Complainant first and get a complete story. This is your baseline of data to which others statements will be measured. Other interviews and documents will either confirm or dispute this data.

Then interview the alleged perpetrator and third parties who could reasonably be expected to have relevant information.

Do not reach a determination until all of the interviews are finalized and any credibility issues are resolved.

Even if the evidence is inconclusive and a determination cannot be made, preventive action should be made. There are always lessons to be learned from a bad situation or complaint.

References:

Voting is Open for the ABA’s Blawg 100

ABA blawg 100 2009 logo

The American Bar Association is running its third annual Blawg 100 contest. They winnowed a list of nominees down to 100 and divided them into 10 categories: News, Legal Theory, IMHO, Geo, Practice Specific, Business, Careers, Tech, Justice, and Lighter Fare.

I decided to throw my support behind those blogs that I read and enjoy among those 100. You’re only supposed to vote for 10, but I was only able to narrow down the list to my top 15.

  1. 3 Geeks and a Law Blog. Texans Greg Lambert, a law librarian at King & Spalding, Lisa Salazar, Internet marketing manager at Fulbright & Jaworski, and Toby Brown, Fulbright’s head of marketing and knowledge management do a great job addressing legal technology, the business of law and knowledge management.
  2. Above and Beyond KM. Mary Abraham takes knowledge management to the next level.
  3. Above the Law. We all need a little gossip now and then. Above the Law provides a look at the messy underbelly of practicing law.
  4. Adam Smith, Esq. Bruce MacEwen has an insightful look at large law firms topics of compensation, partnership models and practicing in a global marketplace
  5. AdamsDrafting. Ken Adams is the head cheerleader for drafting contracts in standard English.
  6. The Client Revolution. My neighbor, Jay Shepherd does a great job of thinking about how lawyers should re-think the relationships with their clients. He also runs the employment law blog Gruntled Employees.
  7. The Conglomerate. This crew of academics provide great information and insights into business, law, and economics.
  8. Connecticut Employment Law Blog. Dan Schwartz offers thoughtful, original posts on the latest news and trends in labor and employment law.
  9. TheCorporateCounsel.net. Broc Romanek provides  coverage of corporate governance issues and the Securities and Exchange Commission.
  10. Law21. Jordan Furlong writes great analyses of the present and future of the practice of law.
  11. Legal Blog Watch. Robert Ambrogi and Bruce Carton find newsworthy stories in the legal field.
  12. Real Lawyers Have Blogs. Kevin O’Keefe has been posting for years on how lawyers should embrace social media.
  13. Robert Ambrogi’s LawSites. Boston area lawyer Robert Ambrogi posts reviews of Web-based research and practice management tools and directs readers to publications and events that help them bone up on Web 2.0.
  14. Simple Justice Scott Greenfield provides great thoughts on criminal justice.
  15. Strategic Legal Technology. Ron Friedmann first introduced me to blogging. He does a great job covering issues that can help law firms with efficiency, including outsourcing, technology and knowledge management.

CLawBie Nominations

clawbie

The Canadian Law Blog Awards, a.k.a. the Clawbies, are a project started back in 2006 with the goal of highlighting great blogs published by the Canadian legal industry. Steve Matthews and his team at Stem Legal have been working to advance Canadian legal blogging. They just opened up the nominations for your favourite Canadian law blogs in 2009.

My old blog, KM Space, won a CLawbie in 2007, sharing the Friend of the North Award (Getting US bloggers to link into Canada.) with Jason Eiseman’s Jason the Content Librarian. KM Space shared the 2008 award with blogging superstar Mary Abraham’s Above and Beyond KM.

I am offering a few nominations for 2009.

SLAW.ca It’s hard to compete with the blog when it comes to Canadian legal content. They have all-star list of contributors to this and cover a broad swath of legal issues and the business of law.

Thoughtful Legal Management. David Bilinsky does a great job of looking at the business of law.

Canadian Privacy Law Blog. David T.S. Fraser puts together great content on the issues of privacy.

Unfortunately, I have not run across many Canadian legal blogs that address the issues of compliance I cover here at Compliance Building. Let me know if I am missing a good blog to read.