© 2014 The Texas Lawbook.
By Marsha Gerber and Richard Smith
Contributing Writers to The Texas Lawbook
(April 15) – Regulatory/investigations are near the top of the list of litigation concerns for senior in-house counsel, and more time is being spent on government or regulatory investigations in company legal departments.
Unlike previous surveys in this series, this year’s study is focused just on U.S.-based companies. Companies were categorized by size: smaller, mid-sized and larger companies (based on annual gross revenues of less than $100 million, $100-$999 million, and $1 billion or more respectively). The data were also analyzed by nine industry sectors.
One of the core questions each year asks respondents to list the three to five most numerous types of litigation matters pending against their companies in the previous 12 months. This year, regulatory/investigations matters were the fifth most frequently listed category with 19% of all respondents placing them on their most numerous list. This follows a dip to 9% in the 2012 survey and a return to approximately the 2011 level (18%).
The return to 2011 levels for these types of matters is apparent throughout companies of all sizes and the various industry groups covered in the survey. Among the latter category, technology/communications companies showed the largest increase from their 2012 level of 10%, rising to 27% in 2013.
Texas-based companies followed the overall trend, rising to 18% in 2013 that cited regulatory/investigations matters on their most numerous list, compared with just 11% in the 2012 survey.
Approximately half of the Texas sample this year reported that one or more regulatory proceedings had been commenced against their companies in the past 12 months, and 16% had five or more proceedings in that time span.
As for high-value matters, 13% of companies nationally faced one or more regulatory proceedings commenced in the past 12 months with more than $20 million at issue. Ten percent of Texas companies had regulatory proceedings with that much at stake launched against them. Within the energy sector, which accounts for just over a third of the Texas sample, the figure was 16%.
Recent History Colors Near-future Concerns
A related, follow-up question in the survey asked respondents to list the three to five types of litigation matters that most concern their companies. In the national sample, regulatory/investigations (41%) was a close second to labor and employment (44%) in listings. The same percentage of Texas respondents put it on their list, a close third behind contracts and labor and employment (46% each).
This year, nine percent of respondents across the country reported the far less frequent occurrence of their companies commencing a regulatory proceeding in the past 12 months. Larger companies were slightly more likely to do so, with 13% having commenced one or more proceedings in the past year. The industry most likely to have commenced regulatory proceedings was energy at 23%, well above the next most aggressive sector which was technology/communications at 13%.
New Investigations in the Last 12 Months
Sixty percent of all the companies in the survey had retained outside counsel for assistance with a government or regulatory investigative matter in the past 12 months. This is a level that has remained stable over the past three years, and as would be expected, the larger the company the more likely it is to be dealing with this type of matter. This year, the figure was 40% of the smaller companies, just over half of the mid-sized companies and three-quarters of the larger companies.
Three-quarters of insurance companies and two-thirds of those in the energy, financial services and healthcare sectors have retained outside counsel for this purpose.
The government or regulatory entities most often involved were the DOJ (in one-third of these matters), followed by the SEC and EPA (a little more than twenty percent each). Sectors most often involved to some degree in a DOJ investigation were healthcare, manufacturing and energy. More than half of the financial services sector and nearly a third of the insurance sector were involved in SEC investigations. A quarter of the retail/wholesale and technology/communications companies also reported SEC matters.
State attorneys general showed up on a quarter of financial services company lists and on four out of ten of the retail/wholesale responses. FINRA was also prominent in both of these industries’ responses. Although the new Consumer Financial Protection Bureau (CFPB) registered just 8% among all of the survey’s respondents, it made its presence felt in both the financial services and retail/wholesale sectors.
Looking at Texas companies, the prevalence of new government or regulatory investigative matters is 51% for the sample, a bit lower than the 60% national rate. However, the figure for the large Texas energy component was just over 60%. The smaller Texas insurance and technology/communications samples were also above the total state sample in these types of matters commenced in the last 12 months.
In Texas, the order of the entities most often involved varied slightly from the national picture with the DOJ and EPA at the top of the list, and the SEC a distant third.
Primary Targets
Respondents were also asked if their companies had been primary targets of these investigations. Sectors throughout the national sample that were most often primary targets of DOJ investigations were healthcare and technology/communications (over 70% each of the sector’s companies involved in a DOJ investigation) followed closely by manufacturing and energy (both between 60% and 70%). Over 60% of energy companies in SEC investigations were primary targets, compared with just a third of the insurance sector.
Over half of all the national sample with EPA investigations had been primary targets, including two-thirds of the energy companies. Other frequent primary targets of the EPA were engineering/construction and manufacturing companies. Just over 60% of the Texas energy companies reporting an EPA investigation were primary targets.
Internal Investigations
Internal investigations requiring the assistance of outside counsel have increased over the past year across the country. In the 2011 survey, 46% of US companies had commenced one or more internal investigations in the previous 12 months; in 2012, 42% had done so. In the 2013 survey, 55% of respondents to this question reported one or more internal investigations. Among smaller companies (less than $100 million in annual gross revenues), the rate was nearly four in ten, and nearly half of the mid-sized companies ($100 million – $999 million). Two-thirds of the larger companies ($1 billion or more) had commenced one or more internal investigations.
Among healthcare respondents to this question, almost 70% of the companies had begun an internal investigation and a quarter of those had commenced five or more. Sixty percent of energy companies reported at least one internal investigation and 16% of those had commenced five or more.
Figures for Texas-based companies were comparable to the national numbers, including those for the healthcare and energy sectors.
The internal investigations cited in the national sample resulted in one-quarter of the companies reporting the matter to a regulatory agency. That figure is in keeping with comparable reporting figures over the past three years of the survey. The figure for the current Texas sample was a bit lower with 18% of the companies reporting the matter to a regulator, following an internal investigation.
Growing Time Demands
The majority of respondents reported an increase in time spent addressing regulatory investigative requests or enforcement proceedings. When asked if they spent more, less or the same amount of time on such matters over the past three years, 52% answered “more,” and just 9% responded “less.” This is a jump from the previous two years when the “more” responses accounted for just 40% of all U.S. respondents in 2011 and 43% in 2012.
Industry sectors with a majority answering “more” in the national sample were led by financial services (almost 70%) and insurance (two-thirds). More than half of respondents in the energy, healthcare and retail/wholesale sectors also spent more time on these types of matters.
In summary, the 2013 survey underscores the fact that the regulatory/investigations area is a highly active one, requiring companies of all types and sizes throughout the United States to devote more time, attention and resources to these matters.
Marsha Gerber is a partner in the Houston office of Norton Rose Fulbright. She specializes in corporate governance, FCPA inquiries and white collar investigations. Richard Smith is a partner in the firm’s Washington, DC office. He chairs the firm’s Global White Collar Crime and Government Investigations practice group and previously served as the Acting Chief for Litigation of the Fraud Section of the U.S. Department of Justice.
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