January 27, 2011

Top Ten Topical Trends

Arnold & Porter Advisory
  1. Insider Trading Developments
  2. Stricter Enforcement of Labor and Employment Laws
  3. SEC's Proposed New Whistleblower Program
  4. Health Benefits for Executives
  5. Cloud Computing
  6. Incentive Stock Options and Employee Stock Purchase Plan Reporting
  7. Social Media
  8. Major Overhaul of Estate, Gift and Generation-Skipping Transfer Taxes
  9. Investment Advisers and the Dodd-Frank Act
  10. Law Firm Dissolutions

  1. Insider Trading Developments. The SEC and other enforcement agencies recently unveiled a major insider trading probe targeting research analyst and expert networks that provide customers with information about particular industries, segments and companies. While it's too early to speculate about the longer-term implications of these enforcement efforts, we recommend that investment banks, hedge funds, mutual funds, research analysts and other investment professionals closely review their current insider trading policies to determine whether new guidelines and procedures should be implemented to limit their exposure. Contact: Julia Vax

  2. Stricter Enforcement of Labor and Employment Laws. The Obama administration is pushing for enforcement of labor and employment laws in a manner that is more pro-worker and pro-union. In 2011, we expect that the Department of Labor will aggressively pursue employers who misclassify workers as independent contractors, and that the National Labor Relations Board will attempt to remove impediments to union organizing. Employers should take steps now to determine whether their independent contractors are properly classified and to adopt proactive employee relations measures to avoid unionization. Contact: David J. Reis

  3. SEC's Proposed New Whistleblower Program. The SEC's proposed new whistleblower program seeks to provide monetary rewards to individuals who voluntarily provide the SEC with tips that lead to enforcement actions that recover more than $1 million. Public companies long have created and maintained rigorous compliance programs to encourage individuals to come forward with allegations of any impropriety or wrongdoing. Public companies often have instigated internal investigations into allegations of misconduct received through their compliance programs and, if wrongdoing occurred, have self-reported such activities to governmental and regulatory authorities. The proposed SEC rules undercut public companies' compliance programs by creating very powerful monetary incentives for employees to report potential wrongdoing to the SEC and not through their company's compliance program. As a result, many rightly have criticized the proposed SEC rules. However, it remains to be seen if the SEC will listen to the numerous criticisms and modify the proposed rules before they are finalized by mid-April 2011. Contact: Sarah A. Good

  4. Health Benefits for Executives. The new health care law provides that employers with a fully insured group health plan cannot discriminate in favor of highly compensated individuals when determining eligibility or benefits. Previously, these nondiscrimination rules applied only to self insured plans. The IRS recently announced that fully insured group health plans do not need to comply with the nondiscrimination rules until the IRS issues guidance on how the rules will apply. The application of these rules to fully insured plans raises concerns among employers about whether practices such as paying a departing executive's COBRA premiums (without paying the premiums for other departing employees) would be discriminatory. While these arrangements can remain in place at least until the IRS issues further guidance, employers with fully insured plans should carefully consider current eligibility and benefit practices. Contact: Edward A. Frueh

  5. Cloud Computing. The transition of many services to the "cloud" (public or private cloud computing resources) - from payroll to customer relationship management and more - has raised significant concerns about security and user privacy, as well as accessibility of critical information and services in the event of a natural disaster or bankruptcy. It also complicates enforcement of intellectual property rights because the actual location and identity of infringing websites may be obscured through use of cloud computing. As with many quickly changing technologies (e.g., social media), the law and legal practice itself have not caught up with the issues raised by this transition. Clients should consider carefully how best to manage the risks of transitioning services to the cloud and, in each instance, whether the benefits of doing so outweigh those risks. Contact: Thomas A. Magnani

  6. Incentive Stock Options and Employee Stock Purchase Plan Reporting. Effective for 2010 transactions, employers must file reports with the IRS about the exercise of incentive stock options ("ISOs") and the transfer of shares acquired under employee stock purchase plans ("ESPPs"). An employer must file a separate form with the IRS for each transaction: a Form 3921 to report ISO exercises and a Form 3922 to report transfers of ESPP stock. An employer can file electronically or by paper (but only if it has less than 250 forms to file). The deadline for paper filing is February 28; the deadline for electronic filing is March 31. As in previous years, employers must provide an information statement for each transaction to employees no later than January 31. Contact: Julia Vax; Edward A. Frueh

  7. Social Media. Social media will continue its expansion, raising issues for both clients and their lawyers. Clients should adopt social media policies that proactively address privacy and surveillance concerns, employer liability, endorsements, contests, and ownership and use of intellectual property created or shared through social media. For lawyers, social media can provide significant professional (and personal) benefit, although they must take care to maintain client confidentiality, avoid improper communications with represented parties and judges, avoid the inadvertent creation of attorney-client relationships, and comply with restrictions on trial publicity and attorney advertising. Contact: Thomas A. Magnani (for clients); Sean M. SeLegue (for lawyers)

  8. Major Overhaul of Estate, Gift and Generation-Skipping Transfer Taxes. The Tax Relief Act of 2010 restores the estate and generation-skipping transfer (GST) tax beginning in 2011 and unifies the exemptions from estate, gift and GST taxes at $5 million. While this last change is a positive development, the long-term availability of the $5 million unified exemption is in doubt as it expires in two years. High-net worth individuals should consider taking advantage of the current exemption by making sizable, tax-free gifts to children and grandchildren in the near term and should have their current estate planning documents reviewed to determine whether an update is necessary in light of the new exemption limit and other recent changes. Contact: Meredith R. Bushnell

  9. Investment Advisers and the Dodd-Frank Act. The Dodd-Frank Act significantly changes the regulatory regime governing investment advisers, including advisers to private funds such as hedge funds and private equity funds. Many investment advisers who were previously exempt from registration with the SEC or a state will be required to register. Even investment advisers who are exempt from registration will be subject to robust new reporting requirements. Contact: Ellen Kaye Fleishhacker

  10. Law Firm Dissolutions. The legal community will continue to experience the far-reaching impact of a number of unprecedented law firm dissolutions. Among those feeling the sting are law firms (Hiring Firms) that hired partners from dissolved firms. These Hiring Firms are finding themselves the target of lawsuits brought by trustees for dissolved firms seeking to recover profits earned by Hiring Firms on work that was transferred to the Hiring Firm. 2010 brought several developments on this front. In Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harrison LLP), the court upheld the ability of the partners of Brobeck to agree that they would have no obligation to account back to Brobeck for profits earned from client work at Hiring Firms. At the same time, however, the court held that law firm partners and their new Hiring Firms may be liable for fraudulent transfers. Most recently, Heller Ehrman LLP sued more than 50 Hiring Firms for fraudulent transfer claims seeking profits those Hiring Firms earned from what Heller claims was its "unfinished business." The law in this area will undoubtedly continue to evolve as these and other cases are litigated. Contact: Jonathan W. Hughes
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