Change Management Law Firm by nfb18092


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									Regulations Impacting Law
Firm Risk Management
August 22, 2007
Maureen Sirhall
Matt Kesner

   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

   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
                  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

   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
                            Sarbanes-Oxley (SOX)

                            Gramm-Leach-Bliley(G-L-B)
                            Health Insurance Portability & Accountability Act

                            Fair Credit Reporting Act (FCRA)

                            Fair/Accurate Credit Transactions Act (FACTA)

                            IRS Circular 230

                            European Union Directive on Data Protection

                            State laws, ethical rules & bar rules and opinions

                            ISO 17999 & 27001, COBIT & ITIL
Low FUD/high relevance
   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: 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

   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‖
   “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)
             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
            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)
      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)

   D.C. Circuit Appeal

      • AFFIRMED               (12/6/05)
      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
                            Sarbanes-Oxley (SOX)

                            Gramm-Leach-Bliley(G-L-B)
                            Health Insurance Portability & Accountability Act

                            Fair Credit Reporting Act (FCRA)

                            Fair/Accurate Credit Transactions Act (FACTA)

                            IRS Circular 230

                            European Union Directive on Data Protection

                            State laws, ethical rules & bar rules and opinions

                            ISO 17999 & 27001, COBIT & ITIL
Low FUD/high relevance
                HIPAA – Health Care eInfo.

   Health Insurance Portability & Accountability

   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
                     HIPAA—EPHI (con‘t)
   ―Electronic Personal Health Care Info. (EPHI) . . .
      •   Adam Hansen, ―HIPAA in the Law Firm?‖ (Peer to
          Peer May 2005) <www,>

   Enter into a Business Associate Agreement (BAA)
       • Incident Response
      •   Notification
      •   Duration
      •   Termination

                        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.]

   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)
   Added         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 checks
        •   FTC‘s June 1, 2005 Disposal Rule
                       FACTA Disposal Rules
   Paper and electronic
   Must implement– and monitor compliance with –
   (Incorporate policies into GLB Safeguards.)
   FTC Comments:
       •   Use ―wiping‖ utilities
       •   But can cheaply destroy media by "simply smashing
           the material with a hammer."
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) <>

                   > amending §§ 10.33 and 10.52; adding §§ 10.35 to 10.38 <

   Goals:
       •   “[I]mprove ethical standards for tax professionals”
       •   “[C]urb abusive tax avoidance transactions”

                   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:
          re: tax avoidance transactions; and
             –“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
                     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)
                  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
                 FUDs Role—to ruin your day
                (Fear, Uncertainty and Doubt)
High FUD/low relevance
                            Sarbanes-Oxley (SOX)

                            Gramm-Leach-Bliley(G-L-B)
                            Health Insurance Portability & Accountability Act

                            Fair Credit Reporting Act (FCRA)

                            Fair/Accurate Credit Transactions Act (FACTA)

                            IRS Circular 230

                            European Union Directive on Data Protection

                            State laws, ethical rules & bar rules and opinions

                            ISO 17999 & 27001, COBIT & ITIL
Low FUD/high relevance
              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;
       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
       •   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

   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.
   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‘

   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
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)

   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
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

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

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)
    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

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

       •   See also Gary Gentile, Universities vulnerable to ID thieves,
           AP (12/17/06) <>
    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:
             –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)

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

   To learn more:
      •   <>
      •   <>
      •   <>
           Notice—Proposed Federal Legislation
   Data Accountability and Trust Act
    (DATA) – Stearns bill – H.R. 4127
       •   Referred 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 spectrum
   See also S. 1789 (―Personal Data
    Privacy and Security Act of 2005‖)
           Practical Consideration: Encryption

   Most proposed Federal legislation and many
    state laws are more lenient where the data is
      •   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

   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) <>

   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
          Data Breach: Financial Impact
Data   Loss Cost Calculator <>
           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
      •   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
          17799 for Business Benefit‖
                       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
   Information Technology Infrastructure Library
      •   European effort to create library of best IT
             –Aligning IT services with business
             –Best Practices, not a Methodology
             –Provides guidance re:
                >Service Desk
                >Incident Management
                >Problem Management
                >Change Management
                >Configuration Management
     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
            –Planning for Implementation
         ISO, COBIT & ITIL final thoughts

   Are these the future standards for malpractice

   How to insure or at least buy Insurance for
                   Thank You

For questions, comments or suggestions, please
  contact us:
    •   Maureen Sirhall –
    •   Matt Kesner –

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