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1. Program Integrity Webinar Series Surviving Without Safe Harbors: Negotiating the Narrow Passages of the New Incentive Compensation Rule January 14, 2011 Ron Holt, Esq.
Dunn & Davison, LLC
Kansas City, Missouri
2. Incentive Compensation Agenda I. The Beginning: the 1992 Statute
II. Where We’ve Been: Past Interpretation
III. A New World Without Safe Harbors
IV. Renewed Focus on Enforcement
V. Oversight: Audits & Reviews
VI. Paying the Price: Possible Sanctions
VII. Validity of the New Regulations
3. I. The Beginning – 1992 Statute • Evil Addressed by Congress:
“‘Bounty hunters’ paid on a per-head basis to bring students to a particular school.” Congressman Buck McKeon, 6-20-01
“Bad people” doing “bad things” to vulnerable students, FSA policy specialist Jeff Baker at 2001 CCA Convention
• Purpose: “preventing…institution from providing incentives to its staff to enroll unqualified students” 2002 Reg Preamble
4. The Beginning…Statutory Terms of Ban
5. The Beginning – Congressional Intent Congressional Intent – Not to Ban But Rather Limit Consideration of Success in Salary Determinations: “The conferees wish to clarify that , however, that the use of the term “indirectly” does not imply that institutions cannot base employee salaries on merit. It does imply that such compensation cannot solely be a function of the number of students recruited, admitted, enrolled or awarded financial aid.” House Conf. Rep. No. 102-630, at 499 (1992)
Quoted by Secretary in Preamble to August 8, 2002 NPRM on Safe Harbors, 67 Fed. Reg. 51718, 51723
6. II. Where We’ve Been – Past Interpretation A. 1994 – 2002:
Regulation repeating statutory language
Patchwork collection of several dozen private letters and email messages from various DOE policy personnel
CLC 12-8-00 FPRD: $187 Million fine for frequent “compensation adjustments…based exclusively on success in securing enrollments…[and] other performance standards…[were] mere window-dressing.”
7. II. Where We’ve Been – Past Interpretation CLC FPRD: “…the Department has said that a school may base annual compensation decisions for [covered] employees in part on consideration of success in recruiting, enrolling or awarding Title IV aid to students, but only so long as the school at the same time takes into consideration other substantial performance factors that are not related to recruiting, enrolling or awarding Title IV aid.”
8. II. Where We’ve Been – Past Interpretation 2002 – 2010:
Regulation with 12 Safe Harbors outlining compensation arrangement determined by the Secretary to not violate the statutory ban
Purpose: to provide guidance because of Secretary’s “belief that the statute is not clear” March 2001 Paige to McKeon Letter (re CLC)
Goal of Law: “protect students from being exploited by…high pressure sales tactics as a method to boost enrollment…and compensation plans integrally tied to those tactics” Id.
9. II. Where We’ve Been – Past Interpretation At 2001 CCA Convention, Jeff Baker outlined 4 part test he described as basis for expected DCL, which later became the 12 Safe Harbors:
(1) Is there a ‘covered activity’ (recruiting/fin. aid)?
(2) Is there a ‘covered person’ (involved in covered activities)?
(3) Does ‘covered person’ have direct contact with prospective students in covered activities
(4) Is compensation a covered payment, meaning based directly or indirectly on success in covered activity?
10. III. New World Without Safe Harbors A. Why DOE Eliminated the Safe Harbors
“Unscrupulous actors routinely rely upon these safe harbors to circumvent the law.” Final Reg, Preamble, 75 FR 66872
“[A]dmissions professionals can only discharge their ethical obligation if they are free of vested interests in the enrollment decisions made by the prospective students they advise.” Id
11. III. New World Without Safe Harbors DOE claims it was told “repeatedly by [former?] institutional employees that “qualitative factors are not really considered…[and that] compensation decisions are based exclusively on the number of students enrolled.” Id. at 66873
If first safe harbor were retained, DOE says it would need “enormous amounts of resources” in order to “look behind the documents.” Id.
12. III. New World Without Safe Harbors B. New Standards Replacing Safe Harbors: compensation decisions evaluated under a two-part test:
Whether payment is a “commission, bonus or other incentive payment,” i.e., anything of value given in exchange for services?
Whether payment is based directly or indirectly on success in enrollments or financial aid awards?
34 CFR 668.14 (b)(22)(i) (2011), 76 FR 66876
13. III. New World Without Safe Harbors C. Who is Covered by New Regulations?
(1) All school employees or entities engaged in any student recruitment or admission activity or in making decisions about award of financial aid
(2) Any higher level employees with responsibility for recruitment or admission of students or making decisions about awarding of federal aid.* Much Uncertainty About the Lines Here
*Not ‘cameo’ appearances at open house talking about virtues of particular institution, 75 FR 66874
*Coaches: bonuses OK for team performance but is that a sort of retention measure?
14. III. New World Without Safe Harbors D. What Activities Are Covered?
Securing enrollments or T4 aid awards includes “activities [from pre-admission] through … completion of…educational program” for “admission” or “matriculation” 34 CFR 668.14 (b)(22)(iii)(B)
*Implies attendance & SAP cannot be comp factors
E. Is All Conduct Previously Allowed by Safe Harbors Now Banned? Not Necessarily
(1) Actions permitted under past safe harbors “will neither be automatically prohibited nor automatically permitted.” 75 FR 66873
15. III. New World Without Safe Harbors (2) If particular safe harbor “created an exception to the statutory prohibition…its removal would establish that such an exception no longer exists.” Id.
*“Exception” to statutory ban – did safe harbors change the law?
*How determine whether DOE considers a particular safe harbor to have been an “exception” to the statutory prohibition?
DOE has answered this question in the Preamble for certain safe harbors
16. III. New World Without Safe Harbors F. Treatment of Conduct from Certain Safe Harbors
(1) Setting Salaries for Covered Persons
(a) Salaries can be “merit” based, but success in covered activity cannot be part of “merit”
(b) Permissible factors include:
(i) levels of job responsibility,
(ii) seniority or length of employment, and
(iii) a “variety of standard evaluative factors” such as ones already identified by schools under the current first safe harbor. 75 FR at 66877.
17. III. New World Without Safe Harbors (c) Possible student centered factors/job functions not involving hype or deception (per rlh):
i) Student ratings: knowledge, candor, style
ii) Compliance record: as measured from audits, reviews, shoppers
iii) Student success: attendance & SAP (might be impermissible retention factors?)
iv) Efficiency: effective use of time (processing of leads and FA applications)
v) Basic Characteristics: communication skills, program knowledge, professional demeanor, reliability, teamwork 17
18. III. New World Without Safe Harbors (d) Multiple upward salary adjustments over 12 months may be seen to “create compensation” for success in covered activity, 75 FR 66876
(e) Promotions/Demotions cannot be based on success in covered activity?? Id. But contra is 2008 case US ex rel Bott v Silicon Valley Colleges
(f) COLA for all employees seems permissible
(2) Graduation Bonuses – not allowed since goal is program completion & “employees should not be rewarded beyond…standard salary or wages for …contribution to this fundamental duty.” Id. 66874
19. III. New World Without Safe Harbors *Any bonuses based on retention, completion or placement are prohibited 75 FR 66784
(3) Profit-Sharing Plans: allowed but cannot include any covered persons Id. 66878
* Year-end bonuses: cannot include covered persons if based on institution achieving revenue or profit targets; tenured based bonuses may be OK?
*Unclear whether “profit-sharing plans” includes ERISA qualified plans like 401K or 403(b) plans Violate ERISA?
*Pending inquiries to DOE, but Marty Guthrie declined to answer
20. III. New World Without Safe Harbors (4) Lead Generator /Services Agreements:
Can pay fixed fees for leads, but cannot pay amounts based on student response, e.g., visits, completing apps, enrolling, starts, etc., or overall volume of student action. Id. 66878
*Click-through pay OK, if not enrollment based
Service agreements with tuition revenue splits are permissible as long as no covered person compensated for covered activity Id. 66875
*Institution responsible for actions of any entity performing functions and tasks on its behalf. Id.
21. III. New World Without Safe Harbors (5) Owner Dividends – still permissible if based solely on equity ownership. NPRM called this safe harbor unnecessary.
(6) Third Party Service Contracts Not Involving Admissions or Financial Aid – still permissible arrangements if not involving covered activities; NPRM also called this safe harbor unnecessary
(7) Student Gifts – apparently gone completely, based on FSA view this violates law and invites students to act for wrong reasons; even $25 token gift from earlier regulation was not restored
22. III. New World Without Safe Harbors (8) Ineligible Students/Programs. Incentives can be paid only for recruiting of foreign students, only because this is in statute. FSA’s view is that ban applies to all recruiting for all programs at a school whether T4 eligible or not; FSA claims risk of gateway to T4 programs
*FSA is wrong – no authority if no T4 aid (rlh)
(9) Corporate Training: Same reasoning as above, except FSA concedes incentives may be permissible for certain contracts where only employer pays tuition and training is clearly not T4 eligible and would not lead to T4 program
23. III. New World Without Safe Harbors G. Interpretation & Application of New Regulation
DOE “will enforce the regulations as written”
DOE will not provide private guidance
If ongoing questions on particular aspects of the regulations, DOE will respond “appropriately” in “broadly applicable format,” meaning possible FSA Handbook guidance or DCL (75 FR 66879)
So send questions to [email protected] , as a volume of questions may lead to a DCL
Validity of Informal Pre-Safe Harbor Guidance, e.g., trips for recruiters: doubtful, per 12/10 FL federal court decision involving Kaplan
24. IV. Renewed Focus on Enforcement 2008 HEOA, Section 1124 called for GAO study and report to Congress on Secretary’s enforcement of incentive compensation rule; investigations and findings and penalties; and impact of Safe Harbors – specifically whether more violations found since 2002.
February 2010 GAO Report: before Safe Harbors, 17 schools found to violate rule; after Safe Harbors, 15 schools found to violate rule, 2-23-10 GAO Rpt. P.4
25. IV. Renewed Focus on Enforcement Schools with Violations – 19 proprietary, 12 private nonprofit, 1 public
Another 27 Schools with ‘Potential Violations’: 22 entered settlements (pay based on enrollment numbers), 3 under review & 2 found not to be in violation (teacher completion bonuses and volume bonus to 3rd party on student responses)
Violations: commissions, bonuses, salary increases, car payments & gift certificates to reps and telemarketers, referral “fees” to students, and tuition splits with 3rd parties assisting admissions
26. IV. Renewed Focus on Enforcement (4) 5000 compliance audits conducted each year and “these audits have checked for incentive compensation violations” Footnote 8, P.3
C. October 2010 GAO Report:
DOE’s “methods to detect [incentive compensation] violations and track monitoring activities are limited”
DOE’s “varying approaches” on sanctions could lead to “inconsistent treatment” of schools
27. IV. Renewed Focus on Enforcement (3) “Weaknesses in the audit process” limit detection:
(i) “auditors did not always document testing of school compliance with the ban”
(ii) OIG does not provide specific instructions” Rpt p.3
(4) Audit Insufficiencies: 53 schools reported in GAO February 2010 report as having violations, but auditors detected incentive compensation violations only at 21 schools
28. IV. Renewed Focus on Enforcement *11% of audits reviewed by GAO did not document testing for incentive comp violations
*12% of audits reviewed failed to document follow up on prior year incentive comp violations
(5) Guidance Requested by Auditors:
Minimum standards for analyzing school comp plans and evaluating school compliance
Examples of ‘red flags’ (e.g., bonuses at end of recruiting cycle)
29. IV. Renewed Focus on Enforcement How to select random/appropriate payroll files
Examples of types of records to review
(6) GAO Recommended:
(i) strengthen suggested procedures for auditors to review compliance with ban; and
(ii) Update guidance used to set fines and settlement payments. Rpt p.4
(7) DOE Response: FSA will provide OIG with “suggestions to strengthen the procedures provided to auditors” P.53 On 11-19-10, Robin Minor said sometime in 2011
30. V. Oversight – Audits & Reviews A. Current Audit Guide (2000) New Version 2011
(1) Required Management Assertions include: statement that no person or entity has been paid any bonus, commission or other incentive based on success in enrollments, financial aid or retention, Pg II-4
(2) Suggested Procedures include: testing payroll and other disbursement records to see if any incentive payments to covered persons, Pg. II-7
* 2009 Program Review Guide tells reviewer to ask for “recruiter compensation/incentive programs” P. 2-3
31. V. Oversight – Audits & Reviews B. Substantive Audit Issues (per rlh):
(1) Multiple FY compensation adjustments
(2) Institution bonus or profit sharing plans
(3) Covered personnel compensation plans: any reference to goals for covered activity functions - calls, appointments, tours, apps, enrollment contracts, starts, FA awards
(4) Any special payments/bonuses: attendance bonuses, completion bonuses, student referral gifts, year end company bonuses
32. V. Oversight – Audits & Reviews (5) Third party service arrangements: no student response premium fees; beware mixed services
C. Audit Process Actions ( per rlh)
Request/review information & documents on comp arrangements for all covered personnel: include payroll & disbursement records
Interview executive management about application of compensation plans
Request/review profit sharing & bonus plans
Review third party contracts re leads and services in covered activities
33. V. Oversight – Compliance Audits D. Further FSA/OIG Guidance:
* DOE and OIG likely to follow up on October 2010 GAO Report in early to mid 2011 with auditor guidance (per Robin Minor in 11/10)
E. Program Reviews – Expect More in 2011
*DOE has hired 50-60 new program reviewers
*DOE plans to do at least 100 more program reviews in 2011 than in 2010 (about 200)
*Given GAO criticism of DOE, incentive comp is sure to be special area of focus
34. VI. Paying the Price - Sanctions A. Incentive Compensation - PPA provision: but now viewed as basic integrity measure, since incentive compensation violations believed to be often coupled with misleading hype
B. Criticism of Past FSA Record by OIG: likely to lead to more consistent imposition of fines based on such criteria as: severity & duration of violations, enrollment growth, Title IV $$ growth
C. LS&T Actions??: In October 2010 GAO Report, FSA noted it has not attempted to terminate T4 eligibility of any school due to resources needed for likely legal challenge
35. VI. Paying the Price - Sanctions *View may change in current environment
*Flagrant incentive compensation violations, as PPA violations, might support termination
*Alternatives: fines, provisional certification, HCM2, liabilities for prior T4 aid (CLC)? Doubtful since it implies retroactive loss of T4 eligibility
D. Provisional Certification: violations considered flagrant could lead to revocation of T4 eligibility
E. Enforcement: qui tam cases, class actions, state investigations, program reviews, OIG referrals, more audit findings & follow up by FSA
36. VII. New 2010 Regulations - Validity A. Legal Challenges: if any, likely to arise in context of institution challenging findings of violations and severe sanctions
B. Elimination of Safe Harbors: might be attacked
as arbitrary change in interpretation of statute without articulation of sufficient and valid reasons, but no Safe Harbors for first 8 years and DOE can point to abuses
C. DOE Express Ban of Any Consideration of Success in Covered Activity: alters intent of Congress expressed in 1992 conference report
37. VII. New 2010 Regulations - Validity FSA recognizes its weakness on this point
FSA rejected proposals for a safe harbor allowing some consideration of success in covered activity if compensation was not “primarily” or “substantially” based on success
FSA claims qualified standard “would foster the same sort of abuses” occurring with the “not solely” test, as bad actors would just fake compliance with a higher standard, 75 FR 66877
38. VII. New 2010 Regulations - Validity “Given the Department’s experience…[it] does not believe it serves congressional intent to limit the ban” to payments based solely on success. 75 FR 66877
Difficulty implementing the intent of Congress does not authorize an agency to disregard it (rlh)
D. New Incentive Compensation Regulation:
becomes the law on July 1, 2011, unless and until overridden by Congress or the courts, and must be followed by schools and their auditors in annual compliance audits
39. VII. New 2010 Regulations - Validity Preamble to regulations is not law, but courts tend to accept agency’s interpretation expressed in preamble, unless contrary to language of statute or legislative intent
The Department ‘s prohibition of any consideration of success in covered activity in the context of merit-based compensation decisions is contrary to the 1992 Conference Report and might be struck down in a federal court challenge
** How risk tolerant or averse are you??
40. Incentive Compensation 2011 Association of Private Sector Colleges & Universities
Ron Holt – Dunn & Davison LLC