Regulations Impacting Law Firm Risk Management

August 22, 2007

Maureen Sirhall

Matt Kesner

Goal

Expose you to a few new risk management issues that arise because of data vs. paper

• We don’t claim to have all the answers

• Often the analogy to the pre-data world helps keep the discussion calm and rational

Whether you are in Risk Management or IT, it is your job to mitigate these risks

Overview

Corporate 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

Not covered today

E-Discovery

Advertising limitations & Web sites/e-mail

Limitations on SPAM e-mail

Ancillary businesses

How do we define Risk Management?

Protection of the firm from risks associated with the practice of law

Protection of the firm from business risks

Protection of the firm from malpractice and liability claims

Includes:

• Client intake process

• Conflicts

• Docket Control

• Records Management

• Ethical Screens

Common Sense or Regulation?

Common sense once prevailed

Post-Enron era has shifted the balance to regulatory obligation

Common sense now required to understand and interpret Federal requirements

Do 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

FUDs Role—to ruin your day(Fear, Uncertainty and Doubt)

High FUD/low relevance

Low FUD/high relevance

Sarbanes-Oxley (SOX)Sarbanes-Oxley (SOX)

Gramm-Leach-Bliley(G-L-B)Gramm-Leach-Bliley(G-L-B)

Health Insurance Portability & Accountability Act Health Insurance Portability & Accountability Act

(HIPAA)(HIPAA)

Fair Credit Reporting Act (FCRA)Fair Credit Reporting Act (FCRA)

Fair/Accurate Credit Transactions Act (FACTA)Fair/Accurate Credit Transactions Act (FACTA)

IRS Circular 230IRS Circular 230

European Union Directive on Data ProtectionEuropean Union Directive on Data Protection

State laws, ethical rules & bar rules and opinionsState laws, ethical rules & bar rules and opinions

ISO 17999 & 27001, COBIT & ITILISO 17999 & 27001, COBIT & ITIL

Summary

SOX does not apply to lawyers

GLB does not apply to lawyers

HIPAA does apply to lawyers and law firms

FCRA/FACTA does apply to lawyers and law firms

• Simple rules if you collect credit reports or background checks

EU & State laws and state bar rules and opinions do apply to data security breaches and lost data

• No consistency to laws/rules/opinions

Sarbanes-Oxley

Sarbanes-Oxley: Internal Controls

• SOX § 404 [15 U.S.C. § 7262]

<http://SOX-404.notlong.com>

Applies to public companies, those cos. planning to go IPO, and certain foreign cos. traded on a US stock exchange

Section 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”

Graham-Leach-Bliley

“Financial Services Modernization Act”

Financial institutions (broadly defined) must:

• disclose when they are sharing data—aka have a privacy policy

• notify [some annually] individuals of policies re: use of any non-public personal information;

• limit use and disclosure of such information;• provide opt-out opportunity; and • implement safeguards

15 U.S.C. §§ 6801- 6810 (1999)<http://uscode.house.gov/download/pls/15C94.txt>

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 businesses

–16 C.F.R. Part 314 <http://www.ftc.gov/os/2002/05/67fr36585.pdf>

–<http://www.ftc.gov/privacy/privacyinitiatives/safeguards.html>

Does G-L-B Apply to Law Firms?

NO, because:

• not “financial institutions;”

• no clear intent in G-L-B to cover attorneys; and

• attorneys heavily regulated by states that

–license them; and

–provide consumers with greater privilege protections.

NYSBA, ABA v. FTC, 276 F. Supp. 2d 110 (D.D.C. 2003) (denying FTC’s motion to dismiss) <http://www.dcd.uscourts.gov/02-810.pdf>

Does G-L-B Apply to Law Firms? (con’t)

D.D.C. Case (c’t’d)

• REJECTED: FTC’s denial of exemption

–NYSBA, ABA v. FTC, 2004 WL 964173 (D.D.C. 2004) (granting summary judgment to Plaintiffs, upon receipt of cursory administrative record)

<www.dcd.uscourts.gov/02-810a.pdf>

D.C. Circuit Appeal

• AFFIRMED (12/6/05) <http://pacer.cadc.uscourts.gov/docs/common/opinions/200512/04-5257a.pdf>

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

FUDs Role—to ruin your day(Fear, Uncertainty and Doubt)

High FUD/low relevance

Low FUD/high relevance

Sarbanes-Oxley (SOX)Sarbanes-Oxley (SOX)

Gramm-Leach-Bliley(G-L-B)Gramm-Leach-Bliley(G-L-B)

Health Insurance Portability & Accountability Act Health Insurance Portability & Accountability Act

(HIPAA)(HIPAA)

Fair Credit Reporting Act (FCRA)Fair Credit Reporting Act (FCRA)

Fair/Accurate Credit Transactions Act (FACTA)Fair/Accurate Credit Transactions Act (FACTA)

IRS Circular 230IRS Circular 230

European Union Directive on Data ProtectionEuropean Union Directive on Data Protection

State laws, ethical rules & bar rules and opinionsState laws, ethical rules & bar rules and opinions

ISO 17999 & 27001, COBIT & ITILISO 17999 & 27001, COBIT & ITIL

HIPAA – Health Care eInfo.

Health Insurance Portability & Accountability Act

Privacy and security of medical information

Restrictions on disclosure, even to employer (e.g., your law firm) providing coverage for its employees

• Statutes and Regs – including Security Rule (compliance deadline 4/21/05 or 4/21/06) – linked at <http://aspe.hhs.gov/admnsimp/index.shtml>

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 Response• Notification• Duration• Termination

Id.

HIPAA – EPHI (con’t)

Because no set technology requirements, consider:

• How info. protected at rest and in transit• Authorization/authentication schemes• [Not in article but encryption helps here too.]<www.HIPAA-Hansen-Article.notlong.com>

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, 898-900, 909-10, 933-37, 944-47 (2004)

FCRA/FACTA

Added to the Fair Credit Reporting Act (FCRA) <

http://www.ftc.gov/os/statutes/031224fcra.pdf> . . . 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)

<http://15USC1681w.notlong.com>

Businesses – including law firms – must take reasonable measures to dispose of sensitive info. from credit reports and background checks

• FTC’s June 1, 2005 Disposal Rule

<http://www.ftc.gov/os/2004/11/041118disposalfrn.pdf#page=32>

FACTA Disposal Rules

Paper and electronic

Must implement– and monitor compliance with – procedures.

(Incorporate policies into GLB Safeguards.)

FTC Comments:

• Use “wiping” utilities

• But can cheaply destroy media by "simply smashing the material with a hammer."

<http://www.ftc.gov/os/2004/11/041118disposalfrn.pdf#page=30>

<http://www.ftc.gov/bcp/conline/pubs/alerts/disposalalrt.htm>

<http://www.ftc.gov/opa/2005/06/disposal.htm>

FACTA Disposal Rules—Unanswered questions

As to client’s data, same concepts as above re: HIPAA (you probably should wipe)

Different context

• IF client a G-L-B-covered financial institution

–Client must incorporate disposal policies into its G-L-B-mandated safeguards

• So, for those clients . . .

–Disposal obligation accompanies data now residing at law firm?

IRS Circular 230 Only applies if have attorneys practicing before IRS

• Treasury Dep’t Regs Governing Practice of Attorneys, CPA’s, etc. before IRS

–Circular 230

–Changes effective 6/20/05 >31 C.F.R. §§ 10 to 10.88 (2005) <www.irs.gov/pub/irs-pdf/pcir230.pdf>

>amending §§ 10.33 and 10.52; adding §§ 10.35 to 10.38 <www.irs.gov/pub/irs-utl/td9165.pdf>

Goals:

• “[I]mprove ethical standards for tax professionals”

• “[C]urb abusive tax avoidance transactions”

<http://www.irs.gov/irs/article/0,,id=132445,00.html>

IRS Circular 230 (con’t)

Treasury Dep’t (TD) got more tax-shelter-fighting power from American Jobs Creation Act of 2004

So, 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

<www.irs.gov/pub/irs-pdf/pcir230.pdf#page=26>

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 derived

To learn more:• 18 U.S.C. § 330

• 31 C.F.R. §§ 10.50, 10.52 (as amended)

• Richard A. Shaw, “Planning Tax Advice Under Circular 230 and the Jobs Act” (RIA Business Entities 3/1/05)

<http://www.higgslaw.com/engine/pubs/getdoc.aspx?id=69&dl=1>

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

<www.zoomerang.com/reports/public_report.zgi?ID=L22DDZ4KTJ3Z

FUDs Role—to ruin your day(Fear, Uncertainty and Doubt)

High FUD/low relevance

Low FUD/high relevance

Sarbanes-Oxley (SOX)Sarbanes-Oxley (SOX)

Gramm-Leach-Bliley(G-L-B)Gramm-Leach-Bliley(G-L-B)

Health Insurance Portability & Accountability Act Health Insurance Portability & Accountability Act

(HIPAA)(HIPAA)

Fair Credit Reporting Act (FCRA)Fair Credit Reporting Act (FCRA)

Fair/Accurate Credit Transactions Act (FACTA)Fair/Accurate Credit Transactions Act (FACTA)

IRS Circular 230IRS Circular 230

European Union Directive on Data ProtectionEuropean Union Directive on Data Protection

State laws, ethical rules & bar rules and opinionsState laws, ethical rules & bar rules and opinions

ISO 17999 & 27001, COBIT & ITILISO 17999 & 27001, COBIT & ITIL

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”

•  http://www.cdt.org/privacy/eudirective/

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;

EU Directive on Data Protection (con’t)

Data requirements:• Adequate and up-to-date• Process to correct• Kept no longer than necessary• Subject has given her/his consent• Processing is per a contract with or legal obligation of the

subject• Must disclose nature of processing • Right to review data

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 standard

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 standard

BIG Problems for Int’l firms:

1. Centralized IT infrastructure

2. Centralized records systems & storage

3. Disaster recovery sites

• Smaller Problem for all firms:

1. Gathering data

State laws, ethical rules, & bar opinions

Obligations concerning records management policies

Who owns the file?

Storage vs. destruction

What is confidential in an electronic world?

Notice and disclosure duties on data loss

Obligations concerning records management policies

ABA Model Rule 1.15: requires firms to safeguard client’s property

ABA 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.

>http://www.abanet.org/cpr/mrpc/home.html

Many states have adopted and/or amended the ABA rules incorporated and them into their codes or rules; all vary.

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. 88-11)

Storage vs. Destruction

There is general agreement that the client’s interests must be protected. The ABA addressed the issue in 1977. 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.”

>http://www.abanet.org/cpr/ethicsearch/lawyer.html

In most jurisdictions the ethics authorities suggest retention periods between 5 and 10 years. (AZ Ethics Op. 91-01, MI Ethics Op. R-12, WV L.E.I. 2002-1)

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.

What is confidential in an electronic world?

Unencrypted Messages’ OK

• ABA 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)

<http://www.abanet.org/cpr/mrpc/rule_1_6_comm.html>

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. 99-413 (1999)

www.abanet.org/cpr/fo99-413.html

Metadata can be problematic. • “Lawyers have a duty under DR 4-101 to use reasonable care

when transmitting documents by e-mail to prevent the disclosure of metadata containing client confidences or secrets.”

NY Ethics Op. 782

www.nysba.org/Content/NavigationMenu/Attorney_Resources/Ethics_Opinions/Opinion_782.htm

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. 55-64 and accompanying text (2004)

<http://fdcc.digitalbay.net/documents/hill-W04.htm>

–Reno v. Reno Police Protective Ass’n, 59 P.3d 1212, n.28, 118 Nev. Adv. Op. No. 90 (12/26/02)

<http://Nevada-eEthics.notlong.com>

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<www.pirg.org/consumer/credit/statelaws.htm#breach>

Trigger:

• 16 – “acquisition-based” (pro-consumer; based simply on loss of information)

• 17 – “risk-based” (analysis must show that degree of risk meets threshold)<www.pirg.org/consumer/credit/statelaws.htm#breach>

Obligation to disclose data breaches (con’t)

Acquisition-based laws . . . Examples . . .

• CA – SB 1386 – Civ. Code § 1798.82(a)-(b)–When CA resident’s UNENCRYPTED

personal data is ostensibly hacked, then:>OWNER/LICENSOR of data must notify individual

>POSSESSOR of data must notify owner/licensor

<http://1798-82.notlong.com>

• NY – Gen. Bus. L. § 89-aa(2)-(3); State Tech. Law § 208–Same; based on SB 1386; effective 12/8/05

<http://www.cscic.state.ny.us/security/securitybreach/index.htm>

• See also Gary Gentile, Universities vulnerable to ID thieves, AP (12/17/06) <http://ucla-sec-breach-ap-article.notlong.com>

Obligation to disclose data breaches (con’t)

CA SB 1386/Civil Code 1798.29:• Applies to cos. doing business in CA

• Personal Information: FIRST NAME/INITIAL and LAST NAME AND at least one of:

–SOCIAL SECURITY NUMBER

–DRIVER’S LICENSE or CA ID NUMBER

–FIN. ACCOUNT # and SECURITY/ACCESS CODE (PASSWORD) to account

• Many ambiguities, e.g., “discovery,” “notification,” timing of notification and contents of notification.

More States’ Notice Statutes

Risk-based – Recent Examples:• Utah

–SB 69, codified at 13-42-101 to 301 (1/1/07)

<www.le.state.ut.us/~2006/bills/sbillint/sb0069.htm>

• Ohio–H.B. 104, codified at Rev. Code §§ 1347.12, 1349.19, 1349.191, 1349.192, et al. (2/17/06)

<www.legislature.state.oh.us/bills.cfm?ID=126_HB_104>

To learn more:• <www.pirg.org/consumer/credit/statelaws.htm#breach>• <http://Sec-Breach-WPost-6-1-05.notlong.com>• <http://Data-Breach-NYT-11-1-05.notlong.com>

Notice—Proposed Federal Legislation Data Accountability and Trust Act

(DATA) – Stearns bill – H.R. 4127• Referred to Judiciary Committee 10/25/05

<http://thomas.loc.gov/cgi-bin/bdquery/z?d109:h.r.04127:>

• AS AMENDED, got through Judiciary Comm. and two other House committees by 6/2/06

<http://h4127rh.notlong.com>

• But, before summer recess, full House vote postponed <www.law.com/jsp/law/LawArticleFriendly.jsp?id=1155114329143>

Trigger is risk-based, though on more consumer-friendly end of spectrum

See also S. 1789 (“Personal Data Privacy and Security Act of 2005”)

<http://thomas.loc.gov/cgi-bin/query/z?c109:S.1789.RS:>

Practical Consideration: Encryption

Most proposed Federal legislation and many state laws are more lenient where the data is encrypted.

• Laptops

• Desktops

• BlackBerries?

• Phones?

Best Practices: Example

OMB Security Guidelines for Federal Gov’t

• Issued June 23, 2006; compliance by August 7, 2006

–Encrypt 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 minutes

–Log all computer-readable data extracts and verify sensitive data is erased within 90 days unless use is still required

<www.whitehouse.gov/omb/memoranda/fy2006/m06-16.pdf>

Frankly more important to teach good data practices.

Statistics on Breaches

“A third of IT managers report data breaches: survey” (Network World 4/11/07) <www.networkworld.com/news/2007/041107-survey-data-breaches.html>

Computer Associates Study (July 5, 2006)• 642 large companies surveyed

–84% experienced a security incident

–38% internal breach

• Security breaches increased 17% since 2003• 40% don’t take IT security risk management seriously• 37% security spending is too low• Where to? Identity and Access Management (IAM) technology

<http://www3.ca.com/Press/PressRelease.aspx?CID=90751>

Data Breach: Financial Impact

Data Loss Cost Calculator <http://www.tech-404.com/calculator.html>

ISO 17999 & 27001, COBIT & ITIL

Data system best practices

• Most of “records” is now “data”

• VERY high standards

ISO 17999 certification now requested/required by some clients

COBIT & ITIL practices

• Very few US firms measure up

De facto compliance schemes

ISO 17999 & 27001

International Org. for Standardization (ISO) 17799 Protocol (as revised 6/20/05)

• Process for establishing, implementing, operating, monitoring, reviewing, maintaining and improving

• Detailed set of non-mandatory standards for developing security policies, including:

–Security Policy + Organization

–Access Control

–Incident Management

–Business Continuity Management

–Compliance

<http://www.iso.org/iso/en/prods-services/popstds/informationsecurity.html>

<http://www.encase.com/corporate/downloads/whitepapers/ISO17799.pdf>

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.

<http://COBIT.notlong.com> (registration required)

To learn more:

• “Aligning COBIT, ITIL and ISO 17799 for Business Benefit”

<http://Aligning.notlong.com>

COBIT (con’t)

Provides tools to assess an enterprise’s IT capability for 34 IT processes in 4 domains:

• Planning + Organization

• Acquisition + Implementation

• Delivery + Support

• Monitoring

ITIL

Information Technology Infrastructure Library

• European effort to create library of best IT practices

–Aligning IT services with business

–Best Practices, not a Methodology

–Provides guidance re:

>Service Desk

>Incident Management

>Problem Management

>Change Management

>Configuration Management

<http://www.itil.co.uk/>

ISO, COBIT & ITIL Summary/Comparison

Service Support and Service Delivery• ISO 17799:2000

–Security requirements

• COBIT–Control objectives

–Management guidelines (metrics)

–Audit guidelines

• ITIL–Basic Concepts

–Activities

–Cost/Benefit

–Planning for Implementation

ISO, COBIT & ITIL final thoughts

Are these the future standards for malpractice actions?

How to insure or at least buy Insurance for compliance?

Thank You

For questions, comments or suggestions, please contact us:

• Maureen Sirhall – msirhall@fenwick.com

• Matt Kesner – mkesner@fenwick.com