Corporate Monitors Need Better Regulation

When a corporation engages in misconduct, courts, regulators, or prosecutors often arrange for the appointment of a monitor—an independent, private outsider—to oversee remediation efforts at the firm.  As I’ve described previously, the expansive use of monitors has become common, with some private companies even appointing them voluntarily.  Monitors oversee an array of remediation efforts, from ending collusive activity, to compensating foreclosure victims, to ensuring that healthcare providers adhere to legal and regulatory mandates.

The variety of situations involving monitors has made regulating them a challenge.  Creating a single regulatory or statutory scheme would be difficult, given that so many different kinds of federal and state officials use monitors.  Monitors also come from a variety of professions and include lawyers, auditors, and even consultants of some kind.

In a recently published article, I recount the lack of regulation of monitors and argue that they are   constrained primarily by their desire to preserve their own reputations.  Monitors will only obtain repeat business if they demonstrate qualities that make them acceptable to regulators or prosecutors and the corporations found to have engaged in wrongdoing.  They must demonstrate independence and the ability to be firm with the monitored corporation without being unreasonable or onerous from that corporation’s point of view.

My article argues that the reliance on reputation, while understandable and possibly even beneficial, leaves a variety of common questions surrounding monitorships unanswered.  For example, when and how to disclose information obtained and generated by the monitor was again left undecided by the Second Circuit last summer.  Additionally, legal scholarship has not addressed how to appropriately facilitate monitor independence from the monitored corporation and the interested government agent.  Moreover, there are currently no reliable mechanisms for punishing monitor misconduct.

Regulators and prosecutors at both the state and federal levels have indicated that they will continue to use monitors, which means these important questions need to be answered sooner rather than later.

This post comes to us from Professor Veronica Root at the University of Notre Dame Law School.  It is based on her recent article, “Constraining Monitors,” available here.