Attorneys Face a Paradox in the SEC’s Conduct Rules
By Judith Burns
Wall Street Journal, August 19, 2003
Now it is the lawyer’s turn to squirm. As part of a broader quest to curb unseemly corporate behavior, Securities and Exchange Commission ethical rules for lawyers too effect this month, and the 410,000-member American Bar Association has revised its own model rules on attorney conduct.
Here is a look at what has happened and how the rules have changed for lawyers and their clients:
Q. What exactly has happened?
A. In passing the Sarbanes-Oxley Act to combat corporate accounting scandals like those at Enron Corp. and WorldCom Inc., Congress cracked down on accountants and replaced the self-regulation process with a Public Company Accounting Oversight Board. Attorneys also fell under new scrutiny in provisions of the law.
Sen. John Edward (D., N.C.), a former trial lawyer, Sen. John Corzine (D., N.J.), former co-chairman and co-chief executive officer at Goldman Sachs Group Inc., and Sen. Mike Enzi (R., Wyo.), a former accountant, added a requirement that the SEC set “minimum standards of professional conduct” for public-company lawyers.
Lawmakers left little doubt about their intentions, calling the SEC rules requiring corporate lawyers to report evidence of problems, such as cooking the books, to a firm’s top executives or chief counsel. If that doesn’t produce results, the Sarbanes-Oxley Act calls for lawyers to go to the firm’s board.
The SEC adopted a rule that compels lawyers who see signs of “material” wrongdoing to bring it up the corporate ladder. The rule took effect Aug. 5.
A more contentious proposal by the SEC hasn’t been put into effect, and a decision on it has been put off until at least the fall. Lawyers balked when the SEC went beyond the “reporting up” requirement to propose that lawyers directly disclose misdeeds if “reporting up” doesn’t prod firms to confront evidence of fraud or other violations. In such cases, the SEC would have lawyers resign in very public fashion through a so-called noising withdrawal.
Q. Why has that caused such a fuss?
A. Lawyers are forbidden under ethics results and laws in some states from making some of the required disclosures, and critics say the SEC would put lawyers in the untenable position of having to chose between federal and state rules.
Federal-state tensions were underscored when the Washington State Bar Association’s board of governors voted in July to reaffirm state ethical rules that bar lawyers from revealing confidences without a client’s permission.
Washington State lawyers can’t give information to the SEC if they would be barred from doing so under the state’s own lawyer-conduct rules, the bar association decreed. It said cautious lawyers should refrain from making any disclosure that violates state conduct rules and warned those who release information could be sued or barred from practice in the state.
SEC general counsel Giovanni Presioso issued a stern warning to the Washington State Bar Association, saying that when conflicts arise between state and federal ethics rules, federal regulation takes priority. He added that SEC rules for lawyers would be “frustrated” if Washington state disciplines attorneys who comply with them.
Washington State Bar Association President J. Richard Manning said the group isn’t trying to pick a fight with the SEC, but believes it would be wrong to force a lawyer to break a client’s confidence.
Q. What about the American Bar Association? Where does it stand?
A. The ABA voted this month to soften some rules on client confidentiality, a move it rejected just two years ago. The ABA’s House of Delegates amended the ABA’s model rules to allow lawyers to sound alarms, and in some cases compel them to do so within the company. The ABA model rules, however, take effect only if adopted by state bar associations.
One change, directed at corporate lawyers, closely parallels the SEC’s “reporting up” rule, and clarifies that a lawyer must bring concerns of corporate wrongdoing to top executives of the company’s board. An ABA group had urged that change, saying in the post-Enron age, corporate lawyers represent the company and its shareholders, not the corporate executives to whom they report.
In a second change, the ABA voted to permit – but not require – lawyers to break a client’s confidence if they believe it necessary to prevent fraud or crime that would cause financial harm. Previously, the ABA rule allowed lawyers to do so only to prevent physical injury or death. In many ways, the ABA is playing catch-up, as the change brings its model rule on confidentiality in line with those in place in 42 states. Unlike the “reporting up” rule, the confidentiality rule applies to all lawyers.
Opponents of the rules view the changes as part of a dangerous trend to undercut the attorney-client privilege. Opponents said lawyers have to protect client confidences, or risk becoming government tools.
Q. Where does this leave “noisy withdrawal”?
A. The amended ABA rules don’t require that, and the SEC’s proposal is still pending. Some opponents say the SEC doesn’t have authority to require lawyers to break client’s confidences. As a practical matter, opponents say a disclosure rule won’t protect investors, because corporate executives will cut lawyers out of meetings and conversations.
An alternative floated by the SEC calls for companies to report whenever a lawyer resigns out of frustration with inaction on the part of the company in addressing material problems, in effect making firms blow the whistle on themselves.
Q. What are the prospects?
A. Uncertain. The American Corporate Counsel Association supported changing the ABA’s model rules, arguing a “reporting up” requirement may alleviate the threat of additional “reporting out” rules from the SEC. The SEC has extended the period for public comment and isn’t expected to take up the matter until late this fall
Q. Who is bound by the new SEC rules?
A. U.S. attorneys who work on public company issues. Lawyers outside the U.S. who don’t do SEC-related work are exempt. But lawyers outside the U.S. who do handle SEC-related work, such as corporate filings, would have to comply with U.S. corporate-reform regulations.
What can the SEC do to lawyers who defy the “reporting up” requirement?
The SEC can’t disbar lawyers, but it can prevent them from “appearing and practicing before the Commission,” precluding them from doing any work for a public company. Lawyers also could be subject to fines and other civil penalties.
--Dow Jones Newswires |
