Presentation on theme: "Regulations Impacting Law Firm Risk Management"— Presentation transcript:
1 Regulations Impacting Law Firm Risk Management August 22, 2007Maureen SirhallMatt Kesner
2 GoalExpose you to a few new risk management issues that arise because of data vs. paperWe don’t claim to have all the answersOften the analogy to the pre-data world helps keep the discussion calm and rationalWhether you are in Risk Management or IT, it is your job to mitigate these risks
3 OverviewCorporate compliance schemes generally do not effect law firms. Yet.There are a number of laws, regulations, and bar association rules and opinions that do affect risk management in a law firm.International laws & standards regarding the handling of data are the biggest hurdle we face now
4 Not covered today E-Discovery Advertising limitations & Web sites/Limitations on SPAMAncillary businesses
5 How do we define Risk Management? Protection of the firm from risks associated with the practice of lawProtection of the firm from business risksProtection of the firm from malpractice and liability claimsIncludes:Client intake processConflictsDocket ControlRecords ManagementEthical Screens
6 Common Sense or Regulation? Common sense once prevailedPost-Enron era has shifted the balance to regulatory obligationCommon sense now required to understand and interpret Federal requirementsDo the laws that bind the clients also bind the law firms that represent them?Inconsistency among state laws, ethical rules and bar opinions further complicates successful risk management
7 FUDs Role—to ruin your day (Fear, Uncertainty and Doubt) Sarbanes-Oxley (SOX)Gramm-Leach-Bliley(G-L-B)Health Insurance Portability & Accountability Act (HIPAA)Fair Credit Reporting Act (FCRA)Fair/Accurate Credit Transactions Act (FACTA)IRS Circular 230European Union Directive on Data ProtectionState laws, ethical rules & bar rules and opinionsISO & 27001, COBIT & ITIL
8 Summary SOX does not apply to lawyers GLB does not apply to lawyers HIPAA does apply to lawyers and law firmsFCRA/FACTA does apply to lawyers and law firmsSimple rules if you collect credit reports or background checksEU & State laws and state bar rules and opinions do apply to data security breaches and lost dataNo consistency to laws/rules/opinions
9 Sarbanes-Oxley Sarbanes-Oxley: Internal Controls SOX § 404 [15 U.S.C. § 7262]<Applies to public companies, those cos. planning to go IPO, and certain foreign cos. traded on a US stock exchangeSection 404: SEC to make rules re: “responsibility of [public co.] management for establishing and maintaining an adequate internal control structure and procedures for financial reporting”
11 G-L-B – FTC “Safeguard” Regs. Security measures include:Designating coordinator[s] of program;Addressing risks to security/integrity of info.;Security program to control risks;Requiring service providers, by contract, to implement appropriate safeguards;Adapting program in light of material changes to businesses16 C.F.R. Part 314 <<
12 Does G-L-B Apply to Law Firms? NO, because:not “financial institutions;”no clear intent in G-L-B to cover attorneys; andattorneys heavily regulated by states thatlicense them; andprovide consumers with greater privilege protections.NYSBA, ABA v. FTC, 276 F. Supp. 2d (D.D.C. 2003) (denying FTC’s motion to dismiss) <
13 Does G-L-B Apply to Law Firms? (con’t) D.D.C. Case (c’t’d)REJECTED: FTC’s denial of exemptionNYSBA, ABA v. FTC, 2004 WL (D.D.C ) (granting summary judgment to Plaintiffs, upon receipt of cursory administrative record)<D.C. Circuit AppealAFFIRMED (12/6/05)<
14 Does G-L-B Apply to Law Firms? (con’t) D.C. Cir. Case (c’t’d):“Congress ‘does not hide elephants in mouse holes.’ ” GLB shows no intent to regulate lawyers.Even if a law firm is an “institution,” its business is “the practice of the profession of the law,” NOT “engaging in financial activities.”Practice of law traditionally province of the states.FTC did not file appeal
15 FUDs Role—to ruin your day (Fear, Uncertainty and Doubt) Sarbanes-Oxley (SOX)Gramm-Leach-Bliley(G-L-B)Health Insurance Portability & Accountability Act (HIPAA)Fair Credit Reporting Act (FCRA)Fair/Accurate Credit Transactions Act (FACTA)IRS Circular 230European Union Directive on Data ProtectionState laws, ethical rules & bar rules and opinionsISO & 27001, COBIT & ITIL
16 HIPAA – Health Care eInfo. Health Insurance Portability & Accountability ActPrivacy and security of medical informationRestrictions on disclosure, even to employer (e.g., your law firm) providing coverage for its employeesStatutes and Regs – including Security Rule (compliance deadline 4/21/05 or 4/21/06) – linked at <
17 HIPAA—EPHI (con’t)“Electronic Personal Health Care Info. (EPHI) RULES FOLLOW THE INFO., NOT THE PROVIDER”Adam Hansen, “HIPAA in the Law Firm?” (Peer to Peer May 2005) <www,HIPAA-Hansen-Article.notlong.com>Enter into a Business Associate Agreement (BAA) covering:Incident ResponseNotificationDurationTerminationId.
18 HIPAA – EPHI (con’t) How info. protected at rest and in transit Because no set technology requirements, consider:How info. protected at rest and in transitAuthorization/authentication schemes[Not in article but encryption helps here too.]<As to client’s data LAW UNSETTLED re: whether attorney-client privilege could preclude claim of law firm liability as a “business associate”Alex L. Bednar, HIPAA Implications for Attorney Client Privilege, 35 St. Mary’s L.J. 871, , , , (2004)
19 FCRA/FACTAAdded to the Fair Credit Reporting Act (FCRA) <Fair/Accurate Credit Transactions Act (FACTA):“Any person that maintains or otherwise possesses consumer information, or any compilation of consumer information, derived from consumer reports for a business purpose[, must] properly dispose of any such information or compilation.”FACTA § 216, 15 U.S.C. 1681w(a)(1) (emphasis added)<Businesses – including law firms – must take reasonable measures to dispose of sensitive info from credit reports and background checksFTC’s June 1, 2005 Disposal Rule<
20 FACTA Disposal Rules Paper and electronic Must implement– and monitor compliance with – procedures.(Incorporate policies into GLB Safeguards.)FTC Comments:Use “wiping” utilitiesBut can cheaply destroy media by "simply smashing the material with a hammer."<<<
21 FACTA Disposal Rules—Unanswered questions As to client’s data, same concepts as above re: HIPAA (you probably should wipe)Different contextIF client a G-L-B-covered financial institutionClient must incorporate disposal policies into its G-L-B-mandated safeguardsSo, for those clients . . .Disposal obligation accompanies data now residing at law firm?
22 IRS Circular 230 Only applies if have attorneys practicing before IRS Treasury Dep’t Regs Governing Practice of Attorneys, CPA’s, etc. before IRSCircular 230Changes effective 6/20/0531 C.F.R. §§ 10 to (2005) <amending §§ and 10.52; adding §§ to <Goals:“[I]mprove ethical standards for tax professionals”“[C]urb abusive tax avoidance transactions”<
23 IRS Circular 230 (con’t)Treasury Dep’t (TD) got more tax-shelter-fighting power from American Jobs Creation Act of 2004So, TD amended its regs to require:DISCLAIMER for ALL WRITTEN ADVICE re: tax avoidance transactions; and“PROMINENTLY DISCLOSED”“readily apparent to a reader of the written advice depend[ing] on the facts and circumstances”“set forth in a separate section (and not in a footnote) in a typeface that is the same size or larger than the typeface of any discussion.”31 C.F.R. § 10.35<
24 IRS Circular 230 (con’t)DISBARMENT or SUSPENSION from practicing before IRS are no longer the exclusive penalties.CENSURE (“public reprimand”)MONETARY PENALTY for rep.’s/advisor’s firm, up to amount of gross income derivedTo learn more:18 U.S.C. § 33031 C.F.R. §§ 10.50, (as amended)Richard A. Shaw, “Planning Tax Advice Under Circular and the Jobs Act” (RIA Business Entities 3/1/05)<
25 Circular 230 take-aways Exemplar IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice in this communication (including attachments) is not intended or written by Fenwick & West LLP to be used, and cannot be used, for the purpose of(i) avoiding penalties under the Internal Revenue Code or(ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.”See generally ILTA Survey 2006<
26 FUDs Role—to ruin your day (Fear, Uncertainty and Doubt) Sarbanes-Oxley (SOX)Gramm-Leach-Bliley(G-L-B)Health Insurance Portability & Accountability Act (HIPAA)Fair Credit Reporting Act (FCRA)Fair/Accurate Credit Transactions Act (FACTA)IRS Circular 230European Union Directive on Data ProtectionState laws, ethical rules & bar rules and opinionsISO & 27001, COBIT & ITIL
27 EU Directive on Data Protection TITLE: “Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data”Broad definitions:(a) 'personal data 'shall mean any information relating to an identified or identifiable natural person ('data subject'); an identifiable person is one who can be identified, directly or indirectly, in particular by reference to an identification number or to one or more factors specific to his physical, physiological, mental, economic, cultural or social identity;(b)'processing of personal data' ('processing') shall mean any operation or set of operations which is performed upon personal data, whether or not by automatic means, such as collection, recording, organization, storage, adaptation or alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment or combination, blocking, erasure or destruction;
28 EU Directive on Data Protection (con’t) Data requirements:Adequate and up-to-dateProcess to correctKept no longer than necessarySubject has given her/his consentProcessing is per a contract with or legal obligation of the subjectMust disclose nature of processingRight to review dataOur opinion: The data is the individuals, not the firm’s.Can’t send data to third countries unless “third country in question ensures an adequate level of protection.”The United States does not meet this standard
29 EU Directive on Data Protection (con’t) Our opinion: The data is the individuals, not the firm’s.Can’t send data to third countries unless “third country in question ensures an adequate level of protection.”The United States does not meet this standardBIG Problems for Int’l firms:Centralized IT infrastructureCentralized records systems & storageDisaster recovery sitesSmaller Problem for all firms:Gathering data
30 State laws, ethical rules, & bar opinions Obligations concerning records management policiesWho owns the file?Storage vs. destructionWhat is confidential in an electronic world?Notice and disclosure duties on data loss
31 Obligations concerning records management policies ABA Model Rule 1.15: requires firms to safeguard client’s propertyABA Model Rule 1.16: requires firms to make files available to other parties or to the client upon termination of representation.ABA Model Rule 3.4(a): requires firms to allow other party’s access to files that are considered to have evidentiary value.ABA Model Rule 5.1: requires firms to have procedures that insure that the firm’s lawyers comply with the rules of professional responsibility.Many states have adopted and/or amended the ABA rules incorporated and them into their codes or rules; all vary.
32 Who owns the file? Controversial, with three schools of thought: The most recent opinion states that the client owns the complete file, without exception. (See Iowa Supreme Court Attorney Disciplinary Board v. Don E. Gottschalk, 729 N.W.2d 812, Iowa Sup.Ct. 2007)Other jurisdictions have ruled that the client is only entitled to the “end product” documents and that the firms can deny access to those documents that are considered “internal”. (See Corrigan v. Armstrong, Teasdale, Schlafly, Davis & Dicus, 824 S.W. 2d 92, Mo. App., 1992)The minority view feels that the law firm is entitled to all documents in the file, without question. (See Michigan Ethics Op R-019 and Fl Op )
33 Storage vs. Destruction There is general agreement that the client’s interests must be protected. The ABA addressed the issue in Informal Opinion 1384 states:“Clients (and former clients) reasonable expect…that valuable and useful information in the lawyers’ files, and not otherwise readily available to the clients, will not be prematurely and carelessly destroyed, to the clients’ detriment.”In most jurisdictions the ethics authorities suggest retention periods between 5 and 10 years. (AZ Ethics Op , MI Ethics Op. R-12, WV L.E.I )However, documents may also be subject to independent legal requirements, determined by the type of document.Applicable statutes of limitations, which vary among jurisdictions, must also be considered, even with closed cases.
34 What is confidential in an electronic world? Unencrypted Messages’ OKABA requires “reasonable precautions to prevent information from coming into the hands of unintended recipients“[D]oes not require that the lawyer use special security measures if the method of communication affords a reasonable expectation of privacy.“Special circumstances, however, may warrant special precautions.”ABA Model Rules of Prof’l Conduct Rule 1.6(a), Comment, ¶ 17 (2002)<
35 What is confidential in an electronic world (con’t) Unencrypted messages OK (con’t)“[N]o greater risk of interception or disclosure than other modes of communication commonly relied upon as having a reasonable expectation of privacy.”ABA Formal Op (1999)Metadata can be problematic.“Lawyers have a duty under DR to use reasonable care when transmitting documents by to prevent the disclosure of metadata containing client confidences or secrets.”NY Ethics Op. 782
36 What is confidential in an electronic world (con’t) To learn more:Terry L. Hill and Jennifer S. Johnson, “Impact Of Electronic Data Upon An Attorney’s Client,” 54 FED'N DEF. & CORP. COUNSEL. Q. 95, § V, at nn and accompanying text (2004)<Reno v. Reno Police Protective Ass’n, 59 P.3d 1212, n.28, 118 Nev. Adv. Op. No. 90 (12/26/02)<
37 Statutory obligation to disclose data breaches OVERVIEW Goal is protection vs. Identity Theft . . .STATES’ Statutory Notice Requirements . . .32 States (+ 1 pending = Utah) as of 1/1/07<Trigger:16 – “acquisition-based” (pro-consumer; based simply on loss of information)17 – “risk-based” (analysis must show that degree of risk meets threshold)
38 Obligation to disclose data breaches (con’t) Acquisition-based laws Examples . . .CA – SB 1386 – Civ. Code § (a)-(b)When CA resident’s UNENCRYPTED personal data is ostensibly hacked, then:OWNER/LICENSOR of data must notify individualPOSSESSOR of data must notify owner/licensor<NY – Gen. Bus. L. § 89-aa(2)-(3); State Tech. Law § 208Same; based on SB 1386; effective 12/8/05<See also Gary Gentile, Universities vulnerable to ID thieves, AP (12/17/06) <
39 Obligation to disclose data breaches (con’t) CA SB 1386/Civil Code :Applies to cos. doing business in CAPersonal Information: FIRST NAME/INITIAL and LAST NAME AND at least one of:SOCIAL SECURITY NUMBERDRIVER’S LICENSE or CA ID NUMBERFIN. ACCOUNT # and SECURITY/ACCESS CODE (PASSWORD) to accountMany ambiguities, e.g., “discovery,” “notification,” timing of notification and contents of notification.
40 More States’ Notice Statutes Risk-based – Recent Examples:UtahSB 69, codified at to 301 (1/1/07)<OhioH.B. 104, codified at Rev. Code §§ , , , , et al. (2/17/06)<To learn more:<<<
41 Notice—Proposed Federal Legislation Data Accountability and Trust Act (DATA) – Stearns bill – H.R. 4127Referred to Judiciary Committee 10/25/05<AS AMENDED, got through Judiciary Comm and two other House committees by 6/2/06<But, before summer recess, full House vote postponed<Trigger is risk-based, though on more consumer-friendly end of spectrumSee also S (“Personal Data Privacy and Security Act of 2005”)<
42 Practical Consideration: Encryption Most proposed Federal legislation and many state laws are more lenient where the data is encrypted.LaptopsDesktopsBlackBerries?Phones?
43 Best Practices: Example OMB Security Guidelines for Federal Gov’tIssued June 23, 2006; compliance by August 7, 2006Encrypt all data on mobile computers/ devices unless data marked “non-sensitive”Allow remote access only with two-factor authentication“Time-out” function for remote access after 30 minutesLog all computer-readable data extracts and verify sensitive data is erased within days unless use is still required<Frankly more important to teach good data practices.
44 Statistics on Breaches “A third of IT managers report data breaches: survey” (Network World 4/11/07) <Computer Associates Study (July 5, 2006)642 large companies surveyed84% experienced a security incident38% internal breachSecurity breaches increased 17% since 200340% don’t take IT security risk management seriously37% security spending is too lowWhere to? Identity and Access Management (IAM) technology<
45 Data Breach: Financial Impact Data Loss Cost Calculator <
46 ISO 17999 & 27001, COBIT & ITIL Data system best practices Most of “records” is now “data”VERY high standardsISO certification now requested/required by some clientsCOBIT & ITIL practicesVery few US firms measure upDe facto compliance schemes
47 ISO & 27001International Org. for Standardization (ISO) Protocol (as revised 6/20/05)Process for establishing, implementing, operating, monitoring, reviewing, maintaining and improvingDetailed set of non-mandatory standards for developing security policies, including:Security Policy + OrganizationAccess ControlIncident ManagementBusiness Continuity ManagementCompliance<<
48 COBIT COBIT = CONTROL OBJECTIVES FOR INFORMATION + RELATED TECHNOLOGY Issued by IT Governance Institute (ITGI)Reference framework for: management; users; and IS audit, control + security practitioners.Increasingly internationally accepted.< (registration required)To learn more:“Aligning COBIT, ITIL and ISO for Business Benefit”<
49 COBIT (con’t)Provides tools to assess an enterprise’s IT capability for IT processes in 4 domains:Planning + OrganizationAcquisition + ImplementationDelivery + SupportMonitoring
50 ITIL Information Technology Infrastructure Library European effort to create library of best IT practicesAligning IT services with businessBest Practices, not a MethodologyProvides guidance re:Service DeskIncident ManagementProblem ManagementChange ManagementConfiguration Management<
51 ISO, COBIT & ITIL Summary/Comparison Service Support and Service DeliveryISO 17799:2000Security requirementsCOBITControl objectivesManagement guidelines (metrics)Audit guidelinesITILBasic ConceptsActivitiesCost/BenefitPlanning for Implementation
52 ISO, COBIT & ITIL final thoughts Are these the future standards for malpractice actions?How to insure or at least buy Insurance for compliance?
53 Thank You For questions, comments or suggestions, please contact us: Maureen Sirhall –Matt Kesner –