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The Securities and Exchange Commission is proposing conduct rules that encourage lawyers to keep dossiers on clients and to blow the whistle with regulators when wrongdoing is suspected. The SEC announced Wednesday it will publish the proposed rules in a matter of days and then give lawyers 30 days to comment. Securities lawyers, spurred by fears the SEC will weaken the attorney-client privilege and fundamentally change the way they interact with their clients, have been anxiously waiting for the rules. “[They] almost deputize attorneys to become quasi-governmental inspectors, and it goes to the heart of the attorney-client relationship,” said A. John Murphy Jr., a partner at Sheppard, Mullin, Richter & Hampton. The SEC is responding to a federal mandate, contained in the Sarbanes-Oxley Act, to draft minimum standards of conduct for lawyers. Passed in the wake of the corporate governance scandals of the last year, the law calls for lawyers to report suspected violations of securities laws to company executives or even to regulators. It’s up to the SEC to draft the details on how the Sarbanes-Oxley provision will be implemented. The actual rules aren’t public yet, but the SEC issued a four-page summary of them Wednesday. Based on the glimpse the summary provided, the SEC is likely inviting what Murphy called a “firestorm” of criticism. Under the proposed rules, lawyers will have a chain of command within a company to follow when reporting a suspected violation of securities laws. And they must document their every move in records the SEC may demand to see. Murphy balked at the SEC’s suggestion that after reporting a suspected violation of securities laws to executives, lawyers keep detailed records of their conversations within the company and anything that results from the talks. “No good could come of that record,” Murphy said, adding it could end up becoming an exhibit in an action against the client. The SEC seems to have thought of that, and has included in the proposed rules “circumstances under which an attorney is authorized to disclose confidential information,” according to the SEC’s summary. The rules also appear to enable lawyers to yank an SEC filing without technically breaching client confidentiality in the eyes of securities regulators. But defining the boundaries of confidentiality isn’t up to the SEC, say securities lawyers. The American Bar Association set up a committee to address the provisions in Sarbanes-Oxley that affect lawyers, and a spokesman said the ABA will respond to the SEC’s proposal shortly. Marcia Sterling, general counsel of Autodesk Inc. in San Rafael, said she worries the rules will hinder her interaction with company employees, not just her communications with outside counsel. “Traditionally lawyers have been able to talk freely with anyone within [a company] about anything, knowing the lawyer’s first responsibility is to [the company] and not outsiders,” Sterling said. The rules suggest that won’t be the case because lawyers will also be beholden to market regulators and ultimately, investors, she said. The rules may also help the SEC feel more comfortable about disciplining lawyers, something it did on one occasion during the 1970s, said Richard Swanson, a Thelen Reid & Priest partner in New York. Swanson said the SEC has been respectful of the attorney-client privilege when there have been questions about a lawyer’s actions. But the summary of the rules suggests that may be about to change. The comments the SEC can expect from attorneys in the next 30 days, Swanson said, “are going to range from technical changes to a fundamental assault on what they’re doing.”

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