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Corporate lawyers sighed with relief in January when the Securities and Exchange Commission decided not to subject them to a “noisy withdrawal” reporting obligation. But their relief may prove short-lived. As the SEC continues to refine its new rules for attorneys who advise public companies, it looks likely to adopt some variation of the controversial regulation this month. The SEC’s rule making is mandated by the Sarbanes-Oxley Act, last year’s sweeping corporate governance law. Initially the commission proposed a rule that would have compelled both in-house attorneys and outside counsel who learned of misconduct at a company to withdraw from representing the client and notify the agency. The proposal, quickly labeled “noisy withdrawal,” drew fierce opposition from the corporate bar, which denounced it as an intrusion into the confidential relationships between attorneys and clients. Bowing to pressure, the SEC voted against adopting the provision in January. But commissioners didn’t abandon the proposal entirely, instead offering it up for another 60 days of comment. They also added a new proposal, which includes several alternative forms of noisy withdrawal. Under one variation, an outside attorney could still be required to stop representing a lawbreaking company under certain circumstances. But the client, not the attorney, would then be required to notify the SEC of the withdrawal. That duty would likely fall to in-house lawyers, because they typically oversee filings with the agency. During their January vote, a majority of commissioners signaled their intention to adopt some form of noisy withdrawal in their final rules. Commissioner Harvey Goldschmid, the most forceful proponent, said that “the absolute emphasis on client confidentiality found among so many [lawyers who oppose noisy withdrawal] is incomprehensibly out of balance.” But one of the commissioners supporting a tougher rule in January was outgoing chairman Harvey Pitt. His subsequent departure means noisy withdrawal may have lost one vote, because Pitt’s replacement, William Donaldson, has yet to state his position on the subject. And though three commissioners remain in favor of the proposal, Donaldson’s stature as chairman could enable him to create a different majority. Still, former SEC officials expect that some form of noisy withdrawal will be adopted if the commissioners revisit the issue this month as expected. “I think it’s something that’s definitely going to happen,” says Paul Huey-Burns. A litigation partner in the Washington, D.C., office of Morgan, Lewis & Bockius and former assistant director of the SEC’s enforcement division, Huey-Burns adds, “The clouds are on the horizon.” Shifting the reporting obligation from outside to inside attorneys might alleviate potential conflicts with some state bar rules, as well as with ethics rules in some foreign jurisdictions, say legal ethics experts. Those rules strictly forbid an attorney from disclosing confidential client information, even evidence of fraud. However, several corporate lawyers say that it doesn’t matter who’s required to reportthe consequences will be equally dire. No matter who tells the SEC about an outside lawyer’s withdrawal, the client will likely view the defector as a turncoat. And faced with either version of the reporting obligation, companies that uncover evidence of potential fraud or looting may opt to avoid, rather than seek, legal advice. “We’re all concerned that some clients might not be as free with outside counsel,” says Robert Wise, head of the securities litigation practice at Davis Polk & Wardwell. Huey-Burns agrees, saying that “the chilling effect will be the same” under either version of the withdrawal rule. Law firms, meanwhile, are trying to determine whether they need to implement new procedures to comply with the SEC’s regulations. At the heart of the rules adopted by the commission in January is a so-called up-the-ladder reporting requirement. In essence, the new rules aim to prevent lawyers from turning a blind eye to misconduct within a company by requiring them to alert senior management, and ultimately the company’s board, to evidence of securities law violations. A few firms, such as Wilmer, Cutler & Pickering, are already forming internal compliance committees to tackle the issues posed by the new rules. And at least one firm, Foley & Lardner, is considering building a full-fledged in-house compliance department. ExSEC officials say that firms are right to take notice. “I would urge any firm to have a consultative process in place,” says James Doty, a former SEC general counsel who is now a securities partner in the D.C. office of Baker Botts. “The assumption here is that the person with the direct obligation to report these things will be right. But sometimes they’re wrong.” But even if an internal compliance committee determines that a firm should withdraw from a representation, would it actually do so? The general counsel of a Fortune 100 corporation is skeptical. “I want to be a fly on the wall in the boardroom of a big law firm when they’re discussing whether or not they’re going to withdraw from a major client,” this GC says. “If you think that’s going to help their marketing in getting hired for another major project, well, that’s very problematic.”

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