The Sarbanes-Oxley Act: A Spotlight on Individual Officers, Directors and Legal Counsel
by Edward Poll, J.D., M.B.A., CMC
"... SEC Regulation of Attorney Conduct (Section 307)
In one of the most far-reaching provisions of the Act, Section 307 grants authority to the SEC to federalize standards of conduct applicable to securities lawyers.... The SEC is required, within 180 days of enactment, to issue rules setting forth "minimum standards of professional conduct for attorneys "appearing and practicing before the Commission in any way in the representation of issuers." This new law marks a reversal of the SEC's twenty-year policy against attempting to regulate the professional conduct of attorneys, except insofar as their conduct violates the federal securities laws.
"In the 1970's and early 1980's, the SEC drew a firestorm of criticism from the legal profession for bringing administrative proceedings against lawyers based on alleged "unethical or improper professional conduct" on the theory that lawyers are "gatekeepers" to the securities markets. As the SEC itself acknowledged, however, the agency had no legislative mandate nor special expertise to regulate the qualifications of lawyers, nor was there any single national standard of legal ethics. Opponents of regulation argued that SEC action against lawyers interfered with the undivided duty of loyalty that lawyers owe to their clients and may even cause issuers to avoid obtaining legal advice, knowing that it could be colored by the lawyer's interest in self-protection. The SEC backed off, as reflected in a 1982 speech by Edward Greene, then General Counsel of the SEC:
"With respect to attorneys, the Commission generally has not sought to develop or apply independent standards of professional conduct. . . [T]he Commission, as a matter of policy, generally refrains from using its administrative forum to conduct de novo determinations of the professional obligations of attorneys.
"Congress now has charged the SEC with developing rules of professional conduct for securities lawyers. The rules must require that an attorney "report evidence of a material violation of securities law or breach of fiduciary duty or similar violation" by a public company (or any agent of a public company) to the chief legal counsel or the CEO of the company. If the legal counsel or CEO "does not appropriately respond to the evidence," the attorney must report the evidence to the audit committee or another committee of the Board of Directors comprised solely of independent directors.
"These 'minimum' rules of conduct are fraught with ambiguity. Among other things, attorneys are left to speculate about what the SEC may regard as a 'similar violation' to a violation of securities law or breach of fiduciary duty. The rules force attorneys to make judgments about whether evidence reflects a 'material violation' which, with hindsight, easily may be second-guessed. Moreover, the rules require attorneys to assess whether the chief legal counsel or CEO has 'appropriately respond[ed]' to the reported evidence. As challenging as these vague judgmental requirements may be for in-house counsel, the Act appears to impose them equally on outside counsel who may have no means of knowing how, if at all, matters are resolved in the corporate executive suite or board room.
"The Act limits the attorney reporting obligation to the corporate client—and hence preserves the attorney-client privilege in the first instance. The privilege belongs, however, to the company and may be waived in a subsequent malpractice suit, SEC investigation, or any other context in which the company may find it advantageous to do so. These new rules of conduct thereby expose the reporting attorney and the company's chief legal counsel or CEO to potential liability for malpractice or other breach of duty, as well as SEC regulatory action."
(From the Latham & Watkins Litigation Department, Bulletin No. 218 August 19, 2002)
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