Our third rail: Compliance within the legal department

Rebecca Walker (rwalker@kaplanwalker.com) and Jeffrey M. Kaplan (jkaplan@kaplanwalker.com) are partners in the law firm of Kaplan & Walker LLP in Santa Monica, California, and Princeton, New Jersey, USA.

The issue of whether the chief ethics and compliance officer (CECO) should report to the general counsel (GC) has been a hot-button issue in the compliance community for many years. Indeed, as far back as 2003, US Senator Charles Grassley famously said, “It doesn’t take a pig farmer from Iowa to smell the stench of conflict in that arrangement.”

But does this reporting relationship necessarily create conflicts of interest? Can CECO-to-GC reporting be effective? These questions are somewhat contentious, even in our very civil and civilized compliance and ethics (C&E) community. Indeed, if there is any “third rail” in the C&E field, it is this.

A CECO who reports directly to the CEO with a seat at the senior leadership table, a budget on par with the law department, a strong voice in strategic decision-making, and a close relationship with the chair of the audit committee certainly sounds ideal, but that structure is simply not feasible in many organizations. And—hold on to your hats—it is not, in our experience, typically necessary for the program to report directly to the CEO for it to be effective. We have seen numerous empowered, independent, effective compliance functions that exist inside the law department, reporting to the GC.

There can, of course, be disadvantages to the CECO-to-GC reporting relationship, and there are issues to consider in this—as in any—reporting relationship. In this article, we will explore the advantages and disadvantages of this reporting relationship and provide some practical suggestions for enhancing the independence and authority of the CECO, regardless of the reporting structure.

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