The Rise of Benefit Corporations: Show me the Money…and the Good

A large cardboard box with a hole in the top is labeled to accept donations for a book drive sponsored by the organization Better World Books.The “Benefit Corporation” is a new corporation class and it may be coming to a state near you (if it hasn’t already).  A benefit corporation (colloquially referred to as B-corp) is an entity type that seeks to blend profit and purpose.

In 2010, Maryland was the first state to adopt a benefit corporation law.  Since then, about 30 other states have followed suit. As of October 2017, the Wisconsin legislature had a bill under consideration to create a benefit corporation statute.

What Exactly Is a Benefit Corporation?

Benefit corporations seek to create a material positive impact on society and the environment. These companies focus beyond the entrenched corporate purpose of profit maximization.  Most states with benefit corporation statutes base these laws on the Model Benefits Corporation Legislation.  Benefit corporations are required to (a) espouse a general/specific public benefit, (b) be accountable, and (c) be transparent.

This pursuit of public benefit could take various forms, such as: providing low-income communities with beneficial services; preserving the environment; improving human health; promoting the arts; or any other nonpecuniary purpose that could be of benefit to society or the environment.

For example, Better World Books, a benefit corporation, is an online book retailer that sells used and new books.  For every book sold, it gives a percentage of its funds and unsold books to literacy foundations across the globe.  Some other famous companies who have decided to go the benefit corporation route include Kickstarter, Etsy, and Ben and Jerry’s.

Benefit corporations are usually required to have some measure of accountability. This often entails measuring the provision of the corporation’s stated public benefit goal against an independent third-party standard.

Most benefit corporation statutes also require specific disclosures. Corporations are required to provide an annual benefit report to their shareholders regarding the corporation’s success or failures in delivering the espoused public benefit. 

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Department of Labor Fiduciary Rule: The Good, the Bad, and the Ugly

The Department of Labor passed a new Fiduciary rule on June 9, 2017, that has shaken up the investment and retirement-advice market. The new rule holds financial advisers who provide investment advice and recommendations in retirement accounts to a fiduciary standard. This fiduciary standard, the on-going duty of care and loyalty, is higher than the previous suitability standard which only required that the investment advice or product was suitable at the time of recommendation. Therefore, when advisers are providing investment advice, they must act in the best interest of their clients in retirement accounts.

The Good: For investors, this new DOL rule should have been passed years ago because as clients, no one wants to be deceived or oversold on unnecessary products. With this new rule’s soft implementation on June 9, an investor can sue an advisor for breaching the fiduciary standard and will have a better chance of winning in court because of that contractual obligation. The obligation instilled in the DOL’s standards “are formal obligations to serve clients’ best interests, to charge only reasonable compensation and to avoid misleading statements,” according to InvestmentNews’ Fiduciary Corner blog by Blaine Akin.

The Bad: For many companies, the DOL rule comes with risks of lawsuits and legal complaints by investors who believe that they have been harmed by a financial adviser’s advice or recommendation of investment. For some companies, the DOL rule has instilled a fear of class-action lawsuits that has caused them to go as far as eliminating certain types of products that their advisers can sell to investors, thus removing the slight risk of conflict of interest which potentially reduces the amount of revenue.

The Ugly: The answer that remains unknown is whether the DOL rule is here to stay. Currently, under the Trump Administration, the DOL rule is undergoing review which could lead to repeal or modification. One argument is that the DOL rule is too complex and costly, and is dangerously close to entering the regulatory space that is traditionally governed by the Securities Exchange Commission. SEC Chair Jay Clayton submitted a six-page comment request asserting that the SEC should govern this regulatory space as provided by the Dodd-Frank financial reform law. On June 1, Clayton reached out to DOL Secretary Alexander Acosta to “engage constructively as the Commission moves forward with its examination of the standards of conduct applicable to investment advisers and broker-dealers.”

With many opinions and speculations surrounding the DOL rule, there are only three possibilities ahead: (a) nothing will be changed and the hard implementation will begin next year, (b) there will be changes made to the proposed rule, or (c) the rule will be entirely rescinded. As of now, there are signs that indicate that the final effective date of January 1, 2018, will likely be pushed back with expected changes to the rule. One of those signs is that the House Committee on Education and the Workforce approved legislation that would replace the DOL rule and the House Appropriations Committee approved a DOL spending bill that would prevent funding that enforces the fiduciary rule. Although this indicates that the House plans to kill the DOL rule, there is still no telling what the outcome will be.

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FCPA Enforcement in the Trump Administration: Nevertheless, It Persists

Whenever a new president transitions into the White House, there is almost always a level of uncertainty around how the new administration will handle certain hot button issues now in their purview. As logic dictates, we often look to the newly minted president’s campaign promises to ascertain their stance on these issues. But with the election of President Donald Trump, many of us looked to Twitter and old interviews from the then-businessman turned reality TV maven to determine what would come of a myriad of laws and loose ends. One of the laws that many speculated could come under attack is rooted in preventing corporate corruption, and geared towards the promotion of respectable business practices, both domestically and internationally – the Foreign Corrupt Practices Act of 1977 [“FCPA”].

What is the FCPA?

The FCPA ascended from a cauldron of toil and trouble – or more aptly stated, came into existence as a result of corruption, scandal, and an unveiling of the pervasive bribery of foreign officials perpetuated by U.S. companies. The botched break in of the Democratic National Committee (DNC) Shaking hands with hidden moneyHeadquarters at the Watergate office complex ultimately led to the discovery of slush funds used to bribe domestic political parties and certain foreign government officials. In order to conceal these payments, companies misrepresented their corporate financial statements, allowing the cycle of corruption to continue domestically and internationally. These findings not only tainted the view of U.S. businesses, but revealed just how awful corruption is for business. Recognizing the need to restore confidence in U.S. businesses and mitigate future corruption, Congress enacted the FCPA.

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