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The Securities and Exchange Commission recently issued new rules regulating the conduct of attorneys practicing before it. The SEC has also proposed a new rule � open for a 60-day comment period � that would create an 8-K public reporting requirement by the board of directors, to be triggered by a lawyer’s mandatory withdrawal from the representation in the event of uncorrected client actions. The American Corporate Counsel Association has posted an executive summary providing an overview of the rule and the alternative proposal at www.acca.com/legres/ corpresponsibility/307/summary.pdf. (The SEC’s final and proposed rules can be found at www.sec.gov/rules/final/33-8185.htm and at www.sec.gov/rules/proposed/33-8186.htm.) What can legal departments do to prepare to comply with the new rules? Here are five practical suggestions that may help corporate counsel in private and public companies. 1. Call a department meeting to clarify the roles and responsibilities of attorneys under the new SEC rules and under the Model Rules of Professional Conduct 1.13 and 1.6. At your meeting, you might discuss the following questions: • Which attorneys are “practicing before the Commission”? (The definition is more inclusive than you might think.) • What events trigger “up the ladder” reporting requirements? • How does the SEC define (or not!) such crucial terms as material violation, credible evidence, and reasonable behavior by an attorney? • What protections are available to lawyers who act reasonably, and what penalties are mandated for those found lacking? • Who is the client under the SEC’s rule and how does that determination affect your ability to work with daily management in the resolving client problems? Even if you work in a private company, the standards set by the SEC on these critical matters will likely become a benchmark for courts and others looking to assess the role and response of lawyers investigating wrongdoing in their client companies. It’s reasonable to assume that other regulatory agencies will seek to copy these rules to regulate the behavior of attorneys practicing before them, and that state bar associations will seek to amend their rules of practice to “raise the bar” on these issues. Remember that Model Rule of Professional Conduct 1.13 (or your licensing state’s version of this rule) suggests, but does not mandate, an up-the-ladder reporting response by all corporate lawyers who encounter evidence of a client’s wrongdoing; since it is considered very weak in terms of practical guidance for corporate lawyers caught in a sticky ethical dilemma, the rule is probably ripe for reform by states in response to post-Enron concerns. And, unlike the new SEC rule, which applies only to lawyers for issuers who are practicing before the commission, this model rule applies to any lawyer working for an organizational client. Your department should consider adopting a policy that sets standards or specific guidelines for how you wish to conduct up-the-ladder reporting. Even if your department is just one person, consider adopting such a policy so that you can share it with your outside counsel, management, and the board. Likewise, you may want to take another look at Model Rule 1.6, which governs an attorney’s protection of a client’s confidences. When your lawyers are confronted with ethical and legal dilemmas that cannot be solved to their satisfaction by climbing up the ladder of management all the way to the board, this rule governs whether they may, must, or must not report their client to a third party. Of course, if the SEC’s new alternative proposal is approved, a new SEC-regulated system of withdrawal and reporting would be mandated for lawyers working for issuers that would “trump” Rule 1.6 in your state, if your state rules held you to a “lesser” reporting standard. Currently, every state permits lawyers to report evidence of a client’s imminent intention to do substantial bodily harm to another, but when it comes to the lawyer reporting evidence of a client’s ongoing or future financial fraud, state authorities are split. If your department includes lawyers admitted in multiple states, these lawyers may have conflicting professional responsibilities and thus could be “wild cards” to an approach based on the rules of the state where your office is located. The issue of lawyers as whistleblowers is a hot topic that may divide members of your department and executives to whom they report, especially in light of recent events and new provisions of Sarbanes-Oxley (Section 806) that protect whistleblowing employees, presumably including in-house lawyers. Whether you’re the lawyer who wants to blow the whistle or the lawyer-supervisor of another lawyer who’s on a mission to report over your head, you’ll need to understand how “up-the-ladder and out” reporting is supposed to be handled. 2. Review the policies of your department and your outside counsel to ensure a clear and consistent approach to investigating possibly inappropriate financial behavior. Such a policy may include the following elements: • Which attorneys are considered “supervising” and which are considered “subordinate” attorneys under the rule, and what that designation infers about their responsibilities. In larger departments, set out how the department’s chain of command will work. • Appropriate internal investigation procedures, including a decision tree for deciding when investigations will be done in-house and when they will be done outside. • The development of some “objective” criteria to be considered in reaching a consensus on whether alleged violations have been successfully remedied or addressed under the rule and to the reporting attorneys’ satisfaction. • Which outside firms can be considered “independent” and which cannot. • A pre-screening for firms that could be contacted in an emergency to conduct an independent review. • Approved methods for conducting witness interviews and collecting evidence. • Documentation standards and policies. • Client communication policies, including which in-house lawyers/teams will be charged with client contact regarding allegations of financial fraud � and circumstances under which outside counsel may work directly with client executives in investigating alleged wrongdoing. • Language and circumstances for issuing Miranda-type warnings to corporate employees being interviewed. • Policies on defense options for individuals named as corporate defendants. Gather the advice and experience of your outside firms on all these issues, especially if they have their own policies in place or experiences that they can share. 3. For SEC-regulated companies, assess the pros and cons of asking the board to designate the existing audit committee or a newly constituted board committee of independent directors to serve the role of a Qualified Legal Compliance Committee. Under the SEC’s new proposal, a QLCC can receive reports of wrongdoing from the legal staff, absolving lawyers from further reporting responsibilities. The QLCC is then responsible for all future decisions regarding assessment and remedy of the legal concerns forwarded to them, and may, for instance, hire outside counsel to investigate and report to them. Some of the issues you may want to consider include: • How much additional discretion or confidentiality can the QLCC add to the company’s deliberations of how to respond to allegations brought to the QLCC? Will it be more or less than what’s currently mandated as the process involving lawyers alone? • Will your board be receptive to creating a new legal audit committee or designating an existing committee (such as the audit committee) to fulfill that function, if the reason for doing so is to relieve the company’s lawyers of responsibility for investigating, remedying, and reporting on alleged financial misconduct? • Will independent directors who are already concerned about the level of financial acumen they need be even more reticent about additional accountability for the requisite legal expertise and acumen needed to serve on a QLCC? While ACCA is generally supportive of an alternative that may provide a desirable option for some companies, we still have some questions about how a QLCC would work in practice. For one thing, it is unclear under what circumstances, if at all, the QLCC is mandated to report the findings of its work to the SEC. Second, would lawyers in the company who believe that the QLCC has not appropriately addressed the matter still be responsible under the rule for withdrawal or additional reporting? Note: If you are interested in this option, a QLCC must be in place before the report of an allegation of wrongdoing arises; it cannot consider a pre-existing legal hot potato. 4. Collect, catalog, and audit all current compliance-oriented policies and procedures intended to help employees understand and live up to their legal responsibilities. For all of the headaches that corporate counsel tell us they now have as a result of Sarbanes-Oxley and its progeny, there may be a silver lining for legal departments that have been trying to take a pro-active approach to compliance and preventive counseling. Never has management had a higher interest in preventing wrongdoing through a stronger ethical corporate culture and institutionalized compliance programs. So take advantage of this advent, to educate your managers about how the legal department can help the company adopt or buttress its compliance agenda. Here are some ideas for you to begin with: • Conduct an audit of the company’s existing policies and how well they would work if any catastrophic scenarios were to occur. • Assess whether these policies are sufficient in breadth and coverage of your clients’ potential risks. • Assess whether such compliance initiatives are largely focused on “external” or field failures, rather than internal frauds or malfeasance. Since Enron, a lot of the focus on compliance has changed from a focus on problems in the field to include coverage of problems in the executive suite. • Assess whether the corporate culture makes employees feel comfortable reporting evidence of infractions and how those complaints are collected and responded to. Consider how you will handle whistleblower situations, especially in light of the new whistleblower protections afforded employees under Section 806. • Assess the role of lawyers versus the role of managers in creating, implementing, and accounting for the success of compliance initiatives. Use this opportunity to position the legal department as a center of ethical leadership for management interested in institutionalizing higher standards, ethics, and good corporate legal health through meaningful compliance initiatives. 5. Improve paths of communication (and the resources that support that communication) between law department leaders and relevant managers, executives, and directors with whom department leaders need to enjoy a respectful and trusting relationship. This assessment is as valuable for staff attorneys as it is for the chief legal officer: Both need to understand how to work more effectively within the proper “spheres” of their bosses, clients, and reports. • Do those with whom you feel comfortable communicating also feel comfortable communicating with you? Are you listening as well as talking and educating? • How regularly and under what circumstances do you communicate about your work or report to others? How might those opportunities be expanded or made more valuable for your audience? • Examine in greater depth the opportunities for the general counsel’s office to serve as a bridge between executive management and the board. While recent events have underlined some of the potential rifts between management and the board, these events have also created a tremendous opportunity for in-house counsel to step into that divide, showing personal leadership and reinforcing the value of the legal function. Susan Hackett is senior vice president and general counsel of the American Corporate Counsel Association. E-mail her at [email protected] with questions or comments on ACCA’s response to the Securities and Exchange Commission.

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