Risk & Compliance

Learn Ethics in Your Spare Time

Will Web-based ethics training catch on? Plus: estate tax sunset provision steaming small business owners.
Marie LeoneJune 23, 2003

The indictment of domestic doyenne and media mogul Martha Stewart” seems to have revitalized boardroom and water cooler debates about insider trading. In fact, there’s anecdotal evidence that board members, executives, and workers have been craving a clear definition of insider trading, as well as more information about how to spot and avoid missteps that could result in fines or jail time.

Meanwhile, corporate lawyers and compliance officers are pouring over training policies and procedures to ensure that companies are free of liabilities that might trigger shareholder lawsuits. It’s a good idea. Of late, plaintiffs have been taking aim at insiders caught violating trading regulations by blaming the employer for weak or non-existent ethics training programs.

One defense against such suits, say attorneys, is to blanket an entire corporation — not just the executive suite — with ethics training similar to harassment awareness programs now standard at many companies. Why the whole company? Because the definition of an insider doesn’t stop at the corner office.

An “insider” refers to any employ who buys or sells stocks based on material, non-public information, even if the information was overheard or stumbled upon.

The rising concern about insider training has led at least one law firm to take the unusual step of creating a Web-based ethics course to help companies train, test, and track training efforts. This do-it-yourself program, developed and sold by the law firm of Bryan Cave LLP, takes about 20 minutes to complete, and creates a paper trail. According to attorneys at the law firm, that paper trail can be used to defend a company if its commitment to training is called into question.

Dubbed Insider Zone, it’s the third training and testing program released by Bryan Cave — the first two being No Zone and FCPA Zone, which focus on harassment and Foreign Corrupt Practices Act issues. “Even sophisticated business people don’t understand all the issues and laws related to insider trading,” notes Jay Nouss, practice leader of the firm’s corporate finance and securities client service group, and the spokesman for the product. “This area is ripe for education,” he claims.

Nouss asserts that the Web-based format allows far-flung businesses to offer consistent and traceable training, although he says smaller companies like the ease of use, too.

As for how the program helps limit liability, Nouss contends that the program provides corporations with independently verifiable documentation — hard evidence — that a company attempted to widely distributed information about insider trading. He says it also shows that employers tried to train employees to spot and avoid violations, that the employer tracked and confirmed that workers took and passed a related ethics test.

Perhaps more important, Nouss speculates that the paper trail created by Insider Zone could help some companies avoid court altogether. How? Because, Nouss asserts, plaintiff attorneys will likely steer clear of claims related to poor training and uninformed employees if documentation to the contrary exists.

What’s more, officials at Bryan Cave say they are in talks with insurance companies about offering policy discounts to directors and officers at corporations that adopt such a training and testing regiment.

The cost of Insider Zone varies from client to client, depending on how the training program figures into other work the firm is handling. But Nouss did confirm that the program is available to clients, as well as non-clients, and the price is based on a per seat basis, with discounts kicking-in as the user level increases.

CFO.com tested Insider Zone and found that the designer’s ease-of-use claims were true. The course, test, and grading review took about 25 minutes. We were interrupted by a few phone calls, but the wait didn’t cause the program to “time out.” We picked up right where we left off each time.

The course is filled with examples, which from a practical perspective works well. (One involves a porn star; another a “dumpster diver.) It doesn’t get bogged down in legalese or regulatory statues, but instead prods students into critical thinking about real-world scenarios.

Thankfully, Bryan Cave didn’t use legal brief scholars to write the course. Instead, the firm hired a former associate who is now a best-selling author and movie screenwriter to pen the prose and test. Hence, the program is void of “the first party of the second party” type of language that causes eyes to glaze over. Also, the course tends to underscore the spirit of the law, rather than the letter.

For users who want to delve deeper into terms and examples, there are links that, for example, define “material” information, explain why insider trading is illegal, and clarify the misappropriation theory.

Don’t sweat the test. While it’s not a breeze, the 10 multiple-choice problems are taken straight from the course, and a user can take the test again and again. In fact, reading through the word problems and the answers reinforce the rules and, even bring up additional issues. (Are you considered an insider if you find a briefcase filled with sensitive, nonpublic information?)

We passed the course, but did err on the side of being too conservative on one of the answers. Then again, maybe that’s the point.

Small Business Owners Cheer House Estate Tax Repeal

Last Wednesday, the House of Representatives voted 264-163 to permanently abolish the estate tax, a move that brought small business owners one-step closer to their goal of wiping out the levy all together. But the owners face a tough road ahead now that the bill is headed to the Senate.

In an interview with The New York Times Senate Minority Leader Tom Daschle (D-S.Dakota) noted that he didn’t think the legislation had “the votes to repeal.” Many Republican lobbyists, who are pushing for repeal, agreed, pointing out that proponents of the bill probably lack the 60 votes needed to pass the measure. Recall that a similar bill made it through the House last year, only to die in the Senate.

In 2001, Congress repealed the so-called “death tax.” But lawmakers also slipped a sunset provision into the legislation. That rider means the death tax, which will gradually be phased out by 2010, will return in full force 2011.

Such a provision has estate planners scratching their heads — and keeping plenty busy. Indeed, officials at the National Federation of Independent Business, a national lobbying organization for small business interests, say a true rescinding of the estate tax would have reduced the “time, money, and energy spent by small business owners on estate planning.” In turn, that would preserve many businesses that might otherwise have to be sold because of the death tax.

The uncertainty surrounding the sunset provision is forcing owners to continue their “costly and cumbersome” estate-planning strategies say pro-repeal activists. In effect, say executives at the National Small Business Association, another pro-repeal group, the estate tax forces family members who inherit businesses to pay the government up to 55 percent in taxes, in cash, on all assets received.

In the view of NSBA members, if an owner cannot afford to draw up estate planning strategies, or does not take the proper steps, heirs can wind up selling the business after the owner’s death just to pay the estate taxes.

But Democrats argue that a full repeal of the estate tax is a bad idea at a time when budget deficits are ballooning. According to a report in Reuters the Republican led bill would cost the federal Treasury $162 billion over the next 10 years. As an alternative to wiping out the tax all together, Democrats suggest an exemption for all but the wealthiest estates.

But some critics claim that these politicians are missing the point. They argue that the death tax, which is a levy assessed against assets that (for the most part) have already been taxed, is a clear-cut example of double taxation.