hot topics in lawyers professional liability: the increasing obligations on lawyers
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Adam Sharaf AXIS PRO Marian C. Rice L'Abbate, Balkan, Colavita & Contini LLP William Redington American Re-Insurance Company Ken Gross Skadden, Arps, Slate, Meagher & Flom LLP. Hot Topics in Lawyers Professional Liability: The Increasing Obligations on Lawyers. - PowerPoint PPT PresentationTRANSCRIPT
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Hot Topics in Lawyers Hot Topics in Lawyers Professional Liability: Professional Liability:
The Increasing Obligations on The Increasing Obligations on LawyersLawyers
Adam SharafAdam SharafAXIS PROAXIS PRO
Marian C. RiceMarian C. RiceL'Abbate, Balkan, Colavita & Contini LLPL'Abbate, Balkan, Colavita & Contini LLP
William RedingtonWilliam RedingtonAmerican Re-Insurance CompanyAmerican Re-Insurance Company
Ken GrossKen GrossSkadden, Arps, Slate, Meagher & Flom Skadden, Arps, Slate, Meagher & Flom
LLPLLP
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Philadelphia ~ May 16 & 17, 2006
2006 PLUS2006 PLUSE&O SymposiumE&O Symposium
Tax Shelter Litigation and the Tax Shelter Litigation and the Legislative Response:Legislative Response:
American Jobs Creation Act of 2004 American Jobs Creation Act of 2004 and Circular 230and Circular 230
Marian C. RiceMarian C. RiceL’Abbate, Balkan, Colavita & Contini, LLPL’Abbate, Balkan, Colavita & Contini, LLP
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American Jobs Creation Act American Jobs Creation Act of 2004of 2004
• Requires every “material advisor” to timely file an information return with respect to any “reportable transaction”
• Requires a “material advisor” to maintain a list of the identity of every investor and to make it available to IRS upon request
• Expands authority of the IRS and Treasury to impose standards for written advice and to impose monetary penalties against practitioners not in compliance
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Circular 230Circular 230
Subpart B – Duties and Restrictions
• Aspirational “best practices”
• Written communications Covered opinions Other written advice
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Circular 230Circular 230Aspirational “Best Practices”Aspirational “Best Practices”
• Compliance with all other Circular 230 provisions
• Communicate clearly with the client regarding the terms of the engagement
• Evaluation of facts and law Cannot rely blindly on client’s representations or
assumptions• Must advise the client of the import of the
conclusions reached Extent to which client can rely on opinion to avoid
accuracy-related penalties• Must act with fairness and integrity
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Circular 230Circular 230 “Best Practices” Concerns“Best Practices” Concerns
• Just one more set of rules• Although not mandatory in nature, failure to
comply will eventually become an issue in civil cases
• Imposes an obligation upon the tax practitioner who oversees the firm’s practice to take reasonable steps to ensure that all firm employees comply with best practices
• Places a heavy burden of due diligence on practitioner
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Circular 230Circular 230Written CommunicationsWritten Communications
• Must follow the standards for a “covered opinion” or
• Insert the appropriate opt-out disclosure statement (but not if Listed or Principal Purpose)
IRS CIRCULAR 230 -- DISCLOSURE NOTICE: IRS Circular 230 regulates written communications about federal tax matters between tax advisors and their clients. To the extent the preceding correspondence and/or any attachment is a written tax advice communication, it is not a full “covered opinion”. Accordingly, this advice is not intended and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed herein. In addition, the materials communicated herein are intended solely for the addressee and are not intended for distribution to any other person or entity, or to support the promotion or marketing of the transaction or matters addressed herein. Any subsequent reader should seek advice from an independent tax advisor with respect to the transaction or matters addressed herein based on the reader’s particular circumstances.
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Circular 230Circular 230“Covered Opinions”“Covered Opinions”
• Any Reliance Opinion, Marketed Opinion, opinion subject to confidentiality or contractual protection that concerns one or more federal tax issue arising from
A “listed” transaction A partnership or other entity, any investment
plan or arrangement, or any other plan or arrangement,
• the principal purpose of which is the avoidance or evasion of any tax (Principal Purpose Transaction);
• a significant purpose of which is the avoidance or evasion of tax (Significant Purpose Transaction)
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Circular 230Circular 230“Covered Opinion” Standards“Covered Opinion” Standards
All factual matters;
The relationship of the law to the facts;
An evaluation of significant federal tax issues;
An overall conclusion; and
A disclosure of any limitation on the scope of the written advice and explicit disclosure if the opinion does not reach a “more likely than not” confidence level for success in the event of challenge by the IRS.
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Circular 230Circular 230“Other Written Communications”“Other Written Communications”
With respect to a federal tax issue, a tax professional may not
• base written advice on unreasonable factual or legal assumptions, including assumptions as to future events
• unreasonably rely on representations, statements, findings, or agreements of the taxpayer or any other person
• fail to consider all relevant facts the practitioner knows or should know; or in evaluating a federal tax issue
• take into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or, if raised, that the issue will be settled
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Circular 230Circular 230“Written Communication” Concerns“Written Communication” Concerns
• Client’s perception of Increased cost of preparing Covered Opinion Advice with warning client cannot rely on content
• Scope of application to attorneys dealing tangentially with tax issues
• Concern more advice will be transmitted orally – documents are key to presenting a defense in al legal malpractice case
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Circular 230Circular 230“Written Communication” Concerns“Written Communication” Concerns
• Significant v. Principal – judgment call with serious consequences
• Responsibility of tax department head For using reasonable effort to ensure compliance
with best practices For ensuring that “covered opinion” standards
are met – buttressed by possible sanctions• IRS’s assurance that it will apply the
regulations to non-tax shelter areas with “common sense” of little comfort
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Risk ManagementRisk Management
• Circular 230 compliance committee Firm management Uniformity
• Client education• Implementation of Circular 230 disclaimers• “Marketed opinion” disclaimers• Fee structure
No contractual protection No minimum fee
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Risk ManagementRisk Management
• Familiarity with “listed transactions”• Firm policy prohibiting “promotion” of tax
shelters• Circular 230 cheat sheet• “Covered opinion” review• Second opinions on applicability and
compliance• Client statement of principal purpose• Conflicts
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Philadelphia ~ May 16 & 17, 2006
2006 PLUS2006 PLUSE&O SymposiumE&O Symposium
Lawyers Professional Liability Lawyers Professional Liability Underwriting in the Post Underwriting in the Post
Sarbanes-Oxley Era and the Sarbanes-Oxley Era and the Bankruptcy Abuse Consumer Bankruptcy Abuse Consumer
Protection Act of 2005Protection Act of 2005
William C. Redington, SVPWilliam C. Redington, SVPAmerican Re-Insurance CompanyAmerican Re-Insurance Company
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Sarbanes–Oxley ActSarbanes–Oxley Act
• Passed into Law July 30th, 2002.
• Primarily deals with responsibilities and actions of Corporate Officers, Directors and Independent Accountants.
• However, it affects the underwriting of Lawyers Professional Liability.
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of PracticeSample Financial Reporting Questions
• Does the firm provide professional services relating to periodic financial reporting as required by Sarbanes-Oxley such as the certification of financial reports, Audit Committee disclosures, and Off-Balance Sheet Transactions?1
• The underwriter should look for potential exposures arising from legal services associated with the various reporting provisions of the Act such as Section 302 and 906 certifications.
1. Sections 302, 906, 301, and 401 of the Act.
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of PracticeSample Corporate Governance & Accounting
Questions• Does the firm assist in the selection and evaluation
of outside Directors?
• The underwriter should look for potential exposures arising from legal services associated with the selection of Directors. The Act requires a certain makeup and qualification of the issuer’s Audit Committee members.2
2. Section 301 of the Act.
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of PracticeSample Corporate Governance & Accounting
Questions• Does the firm provide professional services relating
to compliance with the various provisions of the Sarbanes-Oxley Act (particularly regarding Section 404 addressing “Control on Financial Reporting”)?3
• The underwriter should look for potential exposures arising from legal services associated with Section 404 requirements for “Control on Financial Reporting”.
3. Section 404 of the Act.
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of Practice Sample Control on Financial Reporting Questions• Are the firms practitioners familiar with Control on
Financial Reporting requirements4 and the principles and concepts of “The Committee of Sponsoring Organizations of the Treadway Commission (COSO) such as the Enterprise Risk Management framework’s
• Objective Setting• Event Assessment• Risk Assessment• Risk Response
4. Section 404 of the Act and www.coso.org.
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of Practice
Sample Control on Financial Reporting Questions
• Control Activities• Information and Communication• Monitoring
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of PracticeSample Response to Independent Auditors
Questions• Does the firm reply to outside auditors regarding
contingent liabilities?5
• Are the firm practitioners familiar with the following information?
• The American Institute of Certified Public Accountants “Statement of Financial Accounting Standards (FAS No. 5) Accounting for Contingencies”.
• Statement on Auditing Standards (SAS No. 12).• The American Bar Association, Statement of Policy
Regarding Lawyer’s Response to Auditor’s Requests for Information.
5. Section 303 (a) of the Act.
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of PracticeThe Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005• Passed into law April 20, 2005
Exposures arising from the following practices by a Law firm
• Certification of debtor’s schedules and list of assets.• Requirement to make an investigation into the
circumstances leading to the petition for bankruptcy.• Certification of the debtor’s ability to make payments
in the reaffirmation of debt.• Other requirements.
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Underwriting Questions to Underwriting Questions to Consider in the Evaluation of Consider in the Evaluation of
Areas of PracticeAreas of PracticeSample Bankruptcy Abuse Prevention and
Consumer Protection Questions
• Are the firms practitioners familiar with the provisions of the Act and the required duties of attorneys?
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Political Contributions, Political Contributions, Ethics, and LobbyingEthics, and Lobbying
Kenneth A. GrossKenneth A. GrossSkadden, Arps, Slate, Skadden, Arps, Slate, Meagher & Flom LLPMeagher & Flom LLP
[email protected]@skadden.com
May 16, 2006May 16, 2006
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Areas of RiskAreas of Risk
Current climate Federal and state government relations scandals Many changes to federal and state regulation of
government affairs activitiesEvery corporation should have a compliance program that addresses government affairs compliance
Political contributions Gifts and gratuities Lobby disclosure Conflicts of interest
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Implications of Implications of Non-ComplianceNon-Compliance
• Fines
• Reputational damage
• Loss of business – pay-to-play rules
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Pay-to-Play RulesPay-to-Play Rules• Emergence of RFPs asking if in compliance with
applicable lobbying and pay-to-play laws If not in compliance, deal may be jeopardized
• Prohibit a company from doing business or entering into a contract with a governmental entity if the company or its employees make political contributions
• MSRB Rule G-37, model of pay-to-play rules, carries severe SEC and NASD penalties
• New Jersey recently implemented a replica of G-37 for investment management professionals and broader rules for state contractors that have contracts in excess of $17,500
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Pay-to-Play Rules (Cont.)Pay-to-Play Rules (Cont.)
• We are aware of pay-to-play laws in the following state and local jurisdictions, and the list is growing: California, Connecticut, Florida, Hawaii, Illinois,
Kentucky, Missouri, New Jersey, Ohio, South Carolina, Vermont, and West Virginia
In California: All California Counties, Los Angeles City, L.A. County MTA, Oakland, San Francisco, and Culver City
Houston, Philadelphia, and numerous localities in New Jersey
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Pay-to-Play Rules (Cont.)Pay-to-Play Rules (Cont.)
• Connecticut (effective December 31, 2006) Prohibits officers and employees of state
contractors, their spouses and dependent children, and PACs established by them or on their behalf from making or soliciting contributions to state candidates and parties
Prohibits lobbyists, their spouses and dependent children, and PACs they established or control from making or soliciting contributions to state candidates and parties
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Compliance with Compliance with Lobbying Laws:Lobbying Laws:
New DevelopmentsNew DevelopmentsProcurement LobbyingProcurement Lobbying
Beyond “traditional” lobbying (attempting to influence legislation or rulemakings), trend toward regulation of Category 3 lobbying (including financial arrangements and contracts) Idaho and New Hampshire (effective this summer) Pennsylvania (effective March 31, 2006) New York (effective January 1, 2006) Indiana (effective January 1, 2006) Georgia (codifies Executive Order effective January 9,
2006) New Jersey (must spend 20+ hours per year lobbying) Ohio (which was already a Category 3 state) created
separate filing requirements if a company is seeking business from State Pension Funds
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States and Major Local Jurisdictions Requiring Registration and Reporting for Legislative Lobbying
and Executive Branch Lobbying which includes efforts to influence all non-ministerial official actions of the executive branch, including approval of financial arrangements on
behalf of the jurisdiction:Arizona (regarding underwriting
business only)ArkansasChicagoConnecticutCook CountyDelawareDade CountyFloridaGeorgiaIdaho (effective July 1, 2006)IllinoisIndiana (effective January 1, 2006)Kansas KentuckyLos Angeles CityLos Angeles CountyLouisianaMaryland
Massachusetts MichiganMinnesota (as to official action of
metropolitan governmental unit)MississippiMissouriNew Hampshire (effective June 2,
2006)New JerseyNew York (effective January 1, 2006)New York CityOhioOklahomaPennsylvania (effective March 31, 2006)Tennessee (effective October 1, 2006,
registration is not required but certain lobbyist restrictions apply)
Texas
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BCRA SENTENCING GUIDELINES (§2C1.8)
VIOLATION (amount involved in the violation)
Offense Level
Prison Time (Mandated Minimum)
Fine
$2,000-$5,000 8 0-6 Months $1,000-$10,000
$5,001-$10,000 10 6-12 Months $2,000-$20,000
$10,001-$24,999 12 10-16 Months (Capped at 12 months by BCRA)
$3,000-$30,000
$25,000-$30,000 12 10-16 Months $3,000-$30,000
$30,001-$70,000 14 15-21 Months $4,000-$40,000
$70,001-$120,000 16 21-27 Months $5,000-$50,000
$120,001-$200,000 18 27-33 Months $6,000-$60,000
$200,001-$400,000 20 33-41 Months $7,500-$75,000
$400,001-$1,000,000 22 41-51 Months $7,500-$75,000
$1,000,001-$2,500,000 24 51-63 Months (Capped at 60 months) $10,000-$100,000
$2,500,001-$7,000,000 26 63-78 Months (Capped at 60 months) $12,500-$125,000
$7,000,001-$20,000,000 28 78-97 Months (Capped at 60 months) $12,500-$125,000
$20,000,001-$50,000,000 30 97-121 Months (Capped at 60 months) $15,000-$150,000
$50,000,001-$100,000,000 32 121-151 Months (Capped at 60 months) $17,500-$175,000
$100,000,001-$200,000,000 34 151-188 Months (Capped at 60 months) $17,500-$175,000
$200,000,001-$400,000,000 36 188-235 Months (Capped at 60 months) $20,000-$200,000
$400,000,000+ 38 235-293 Months (Capped at 60 months) $25,000-$250,000