On July 25, 2002, the United States Congress passed, and on July 30, 2002, President Bush signed, the Sarbanes-Oxley Act of 2002 which is a broad ranging effort to impose additional responsibility and penalties regarding the conduct of officers and directors of public companies, as well as professionals who advise them. Section 307 of the Act created a new rule of professional responsibility for attorneys “appearing and practicing” before the Securities and Exchange Commission (“SEC”) “in any way in the representation of” publicly held companies. Supplanting the traditional role of each state to regulate the attorneys in each state, the Act requires the SEC to enact rules within 180 days to set forth “minimum standards of professional conduct for attorneys,” including the following two rules:
1)Requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof); and
2)If the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.
The regulation of attorneys’ professional conduct by Congress, and the SEC, instead of the individual states, was not quite as onerous as the new board that the Act established for oversight of the accounting profession, which in many ways brings to an end the self-regulation of the accounting profession. Nonetheless, it will be necessary to be aware of, and novel to watch, how the SEC will prepare rules of professional conduct within 180 days, compared to the work product proposed by the commission of the American Bar Association recently, that updated the Model Rules of Professional Conduct, after several years of analysis, scholarly debate and commentary by the best of our profession. Of course, even those new rules, once approved by the ABA, must be adopted by each state, a process that often takes many more years.
The interface between the ABA Model Rules of Professional Conduct with Section 307 of the Act, can be seen with Rule 1.13 of the rules of professional conduct which deals with the “organization as client.” Rule 1.13 of Delaware’s Rules of Professional Conduct, provides that if a lawyer for an organization knows that an officer or employee or other person associated with the organization is engaged in a violation of law, the lawyer shall proceed “in the best interest of the organization.” However Rule 1.13 does not require that the attorney report such wrongdoing to the same extent as Section 307 of the Act. Rather Rule 1.13(b) provides that the measures taken shall be “designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization.” Rule 1.13(b) provides three suggestions for attorneys in this situation, which include referring the matter to the board of directors, but does not require it. Moreover, Rule 1.13(c) gives the option to a lawyer of simply resigning his or her representation in this situation.
The interplay of Section 307 of the Act with Rule 1.6 of the rules of professional conduct is also instructive. Rule 1.6(b) of Delaware’s Rules of Professional Conduct provides that a lawyer “may” reveal confidential information to the extent that the lawyer reasonably believes necessary to prevent the client from committing a criminal act “that the lawyer believes is likely to result in imminent death or substantial bodily harm …” Presumably, no matter how sinister or nefarious, the types of securities law violations that seem to be the focus of section 307 of the Act, would, generally speaking, not likely be the type of criminal act that would result in imminent death as referred to in Rule 1.6.
In any event, while the American Bar Association is in the process of adopting a new and updated revision of the Model Rules of Professional Conduct for minimum standards of professional behavior required by attorneys, after an appropriate deliberative period of years of analysis and debate, the United States Congress has in a matter of weeks preempted the states and imposed its own professional conduct rules on attorneys, at least in a limited area involving publicly held companies. Although it often takes several years for all 50 states to consider adoption of the ABA’s model rules, Congress has given the SEC a mere 180 days to issue rules pursuant to the two principles of attorney governance enacted in Section 307. All attorneys should be interested in the result of the SEC’s work product that is due within 180 days of the Act’s effective date.