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Bowing to intense lawyer pressure, the Securities and Exchange Commission on Thursday adopted a watered-down version of proposed rules for lawyer conduct that left out a controversial provision that turned lawyers into whistle-blowers. The SEC decided to give lawyers another two months to comment on the so-called “noisy withdrawal” provision, which would force lawyers to stop representing clients that they suspect of securities law violations. Lawyers would then be forced to tell the SEC they suspect wrongdoing. Regulators also opened up for comment an alternate plan that would shift the onus for reporting when a lawyer quits from the attorney to the client. Companies are already required to disclose to the SEC when auditors quit. The delay suggests that the SEC may be having second thoughts about how far they are willing to go to police lawyers. Securities lawyers speculate that once the pressure to reform corporate governance is off, the issue could die on the vine. “The SEC is showing signs that it’s going to be reasonable and listen to the reasonable objections that have been raised,” Mark Perlow, a Kirkpatrick & Lockhart partner in San Francisco, said. “There’s a possibility it could languish, or there’s a possibility it could take much longer for the game to be over.” Thursday’s action came in response to the Sarbanes-Oxley Act — the sweeping corporate governance reform legislation that ordered the SEC to enact rules for lawyer conduct. Regulators floated proposed rules in November that took aggressive and controversial steps toward governing how lawyers should behave if they suspect a client is breaking securities laws. But the rules — particularly the noisy withdrawal provision — ran into the thresher of corporate lawyer opposition. Attorneys complained that the SEC would be impinging on client confidentiality and violating state ethics rules that already govern lawyer actions. They also said noisy withdrawal and other provisions improperly exceeded the scope of Sarbanes-Oxley. In adopting final rules, the SEC dropped some of the provisions that lawyers considered most onerous. Aside from delaying implementation of a noisy withdrawal provision, the SEC abandoned a requirement that lawyers document their conversations with executives about suspected wrongdoing and how the company officials respond. Regulators also limited the number of lawyers who must abide by rules to attorneys who have direct attorney-client relationships with companies that file disclosure statements with the SEC. The final rules also clarified when lawyers must begin notifying corporate executives of potential problems. That chain of events, known as “up-the-ladder” reporting, is a pivotal part of the rule and one that drew fewer objections from lawyers. Alfred Carlton Jr., president of the American Bar Association, said he is pleased with the final rules and the SEC’s decision to delay adopting the withdrawal provisions. Carlton had previously expressed grave doubts about the SEC’s proposed rules. “We are very appreciative,” Carlton said. “We look forward to continuing our constructive dialogue regarding outstanding issues.” The response among legal academics, which led the charge at the Congressional level to incorporate rules for lawyers in the Sarbanes-Oxley Act, was more tentative. Stephen Bainbridge, a law professor at UCLA School of Law, applauded the SEC for clarifying some of the thorny questions over how a lawyer should determine wrongdoing. But Bainbridge added that the SEC shouldn’t abandon the noisy withdrawal issue. “They are going to have to look at that again,” Bainbridge said. “There is certainly an argument for saying the lawyer ought to have to withdraw — whether or not the lawyer should have to notify the SEC is the more controversial.” Joseph Grundfest, a leading securities professor at Stanford Law School and former Securities and Exchange commissioner, said if the SEC still plans to adopt rules beyond the scope of the act, like a noisy withdrawal, the agency must ask for further congressional support or risk litigation. “Let’s assume it’s a good policy idea,” Grundfest said. “Then the SEC should go back to Congress to adopt such rules because that authority does not exist in the statute as currently written.”

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