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Lately, it’s been all Sarbanes-Oxley, all the time. At a recent meeting of chief legal officers, after a bit of discussion, the group concluded that each was spending about 60 percent of his or her time focused on issues of one sort or another that were related to the new rules. Clearly, many general counsel have spent a significant amount of time over the past few months obsessing over governance issues; now they are focusing on improving compliance systems, and of course — my personal full-employment act — interpreting and preparing for the implementation of Section 307 regulation of attorneys by the Securities and Exchange Commission. But what about changes to the daily routine? How will Sarbox affect the average relationship between in-house counsel and outside counsel in their shared professional and service commitment to their corporate clients? SECTION 307 I’m not going to dwell on this, as important as this topic is, since it has been covered so many times by so many others. Suffice it to say, the SEC’s final rules and still-pending noisy withdrawal proposals could have an enormous impact on the roles of chief legal officers, their staff, and outside lawyers, as well as on the inside-outside partnership. This means that CLOs will likely ask outside counsel to join them for detailed discussions, perhaps leading to programs and written policies, to decide who will be designated to play what roles, how reports of allegations will be taken up the ladder in a coordinated and appropriate fashion, who will communicate about reports and investigations to senior management and the board, and how to handle issues that raise questions of reporting out (rather than just up). Some firms may be asked to help develop these practical policies and responses; others will simply receive new marching orders. But I predict that everyone should fasten their seat belts; while this should be relatively clear-cut, I think we’re in for a bumpy ride. REPORTING UP THE LADDER While Model Rule 1.13 and the SEC rules clearly anticipate a working knowledge by all lawyers of up-the-ladder reporting, not many outside counsel have had a lot of practical experience in the matter. In-house counsel know that reporting up the ladder is a very delicate process involving a number of folks on different rungs of the ladder, more than a bit of creative intelligence gathering, negotiating internal politics, and so on. If your outside counsel regularly works directly with your clients, perhaps your law department would simply prefer to inform your outside counsel that any intransigence by nonlegal managers should be reported to the CLO or other senior counsel, and that the in-house staff will take it from there. Outside counsel are probably focusing very hard on their newfound knowledge of Sarbox responsibilities (and liabilities). You might want to talk with them about how you want them to proceed, should reporting up the ladder be necessary, especially if a matter needs to go to the C-suites or the board. PREFERRED ‘INDEPENDENT’ COUNSEL A number of law departments are working with their executive management and board to designate law firms that can be used in the event an independent outside opinion is needed. Boards, especially, are making an art form of the practice of hiring independent advisers of all kinds. But when it comes to outside law firms, some CLOs are concerned that they’ll have a situation of “dueling counsel,” with each board member hiring (and not properly supervising) their own personal favorite firm or golf partner, with disastrous and expensive results for the company. One solution is to work with senior management and the board to create a panel of partners at preferred outside firms who will be consulted when independent legal advice is needed. The CLO may prearrange some of the terms of retention should a matter arise. These firms will not be used for other matters, thus ensuring that they will be a truly independent voice on any matter brought before them, and, perhaps most important, preserving the firm’s ability to stay out of the witness box and assert privilege on those matters. WHAT ABOUT PRIVILEGE? Post-Sarbox, there’s a new focus on lawyer-client communication policies, document retention and destruction policies, use of shared document repositories, e-mail policies, and so on. No one has the single solution to how these matters should be resolved, but some best practices are emerging. First and foremost is a renewed focus on written records. No CLO suggests improperly destroying documents or evidence, but everyone is talking about simply not putting as much in writing, especially when it comes to e-mail. More in-house lawyers are just going down the hall to have a conversation with someone, rather than recording it for posterity. (Given the huge civil and criminal liabilities that can attach to lawyers who don’t comply with Sarbox, some in-house counsel are now conflicted about whether to fill their files with “CYA” memos. I don’t have a silver-bullet solution to this concern, except to note my personal belief that if you find yourself or your services under an investigatory microscope, your files probably ain’t going to save you. “Reasonable” behavior will be judged by the public’s level of outrage and 20/20 hindsight.) Those CLOs with document retention programs are in a quandary as to whether they will ever again be able to destroy documents on a regular schedule without fear that such acts will later be seen as destruction of evidence, even in the absence of a suit or investigation. Questions about written records are faced not only by the internal department but also by law firms. Do you know what your firm’s e-mail and document retention policies are? Do their policies mesh with your company’s? You’d better find out. All of these communications issues will have a significant impact on the assertion of privilege when the time comes. CONDUCTING AN AUDIT OF POLICIES A number of CLOs, especially those in smaller departments, are working with their firms to conduct a legal health audit of sorts. The idea is to have the firm come in and check out corporate policies and procedures, governance documents and structure, compliance initiatives, employee awareness of legal standards, and specific compliance with the formal requirements of Sarbox. This is not a cheap or painless process, but for those CLOs without the resources or expertise to know if they’ve properly prepared their client, this is money well-invested. Those interested in having an audit done should look for a law firm with experience. Your audit may also benefit from the best practices and ideas gleaned from other clients of the firm, especially if they are in your industry. The audit also presents the perfect opportunity to plan the coordination of some of the policies and procedures discussed above, should the need arise. MISCELLANEOUS • Make sure that your firms (and members of your department) understand the proper use of the “Corporate Miranda” warning issued to employees under scrutiny. Likewise, make sure that your firms understand your policies on joint representations when individual executives are named as co-defendants. • Take another look at your firms’ internal policies that may come into play in representing your company if sensitive matters arise under Sarbox. For instance, post-Sarbox, will the firm be unwilling to give a legal opinion on a matter crucial to a deal, or only under certain terms? What are their liability standards? • A lot of firms have been charging premium prices for Sarbox-related work, and some of them are worth it. The silver lining for those in-house folks worried about busting the budget is that every firm with expertise in this area has issued a blizzard of free advice in the form of advisories, white papers, and free programs. Make use of these wonderful services. And check out your firms’ (and their competitors’) Web sites. Many have created excellent Sarbox and corporate responsibility pages filled with resources, memos, references, and other helpful material. • You may want to look at your firms’ internal ethics structure, as well. Do they have regular training on professional responsibility issues? Are there designated ethics experts to help lawyers understand how to navigate thorny ethical situations? Are associates working on your matters well-supervised and given lots of practical training? When a Sarbox matter arises, you need rock-solid confidence that your outside firm knows how to respond professionally and practically. The basics of working with your law firms since the passage of Sarbanes-Oxley have not changed. You may be spending more time and money on your outside counsel outside of your anticipated budget, but your relationship with those firms may be stronger than ever. Just make sure that you are using your firms to do more than put out fires or revamp your governance structure and executive compensation packages: Make sure that you are engaging them in a cooperative effort to safeguard your company from future violations — and avoid the uncoordinated and frantic scramble to respond that a crisis situation can bring. Susan Hackett is senior vice president and general counsel for the American Corporate Counsel Association in Washington, D.C. She can be reached at [email protected].

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