Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Two state bar groups, one in Washington and the other in California, have told federal securities regulators that lawyers in their states are ethically bound to follow state bar rules prohibiting disclosure of client information. Their stance, in letters in August to the Securities and Exchange Commission, is in defiance of new SEC rules that permit corporate attorneys to “report out” civil violations by business clients to the SEC in some situations. California went further, questioning the SEC’s authority to adopt rules diluting attorney-client privilege and challenging its power to pre-empt state ethics rules. The letters appear to be the first volley in a battle that some corporate lawyers say will inevitably end up in court. The SEC hasn’t responded to either state. A spokesman said the agency declines comment. The Washington State Bar Association’s Aug. 11 letter outlines an interim state ethics opinion that, in effect, warns corporate lawyers to follow state rules or face disciplinary action. The state allows disclosure only “to prevent the client from committing a crime; or . . . pursuant to court order.” The bar “is not trying to thwart” the SEC, said spokesman Peter Ehrlichman, who helped write the ethics opinion. “We did not find in fact a conflict because the SEC rule is permissive and not mandatory,” said Ehrlichman, a partner in the Seattle office of Minneapolis-based Dorsey & Whitney. The Aug. 13 State Bar of California letter recognizes the conflict. “We question whether Congress granted that authority [to breach attorney-client privilege] to the SEC or intended to pre-empt state regulation of attorney conduct,” said Keith P. Bishop, who signed the letter with a fellow co-chairperson of the bar corporations committee. Bishop, a shareholder at Buchalter Nemer Fields & Younger in Newport Beach, Calif., said the letter speaks for the 24-member committee but was not cleared through the full state bar. The SEC’s regulations, adopted under the Sarbanes-Oxley Act of 2002, took effect on Aug. 5. Rule 205 says corporate lawyers may disclose to the SEC civil violations that do not rise to the level of crimes if they have been reported up the corporate ladder and the response has been inadequate. The SEC rule says it supersedes state rules against disclosure. A lawyer who complies in good faith “shall not be subject to discipline or otherwise liable under inconsistent standards imposed by any state or other U.S. jurisdiction,” the rule says. The clash with the state bars began on July 26 when the Washington bar adopted its ethics opinion. It says that “with the current lack of case law on the pre-emption issue, a Washington attorney cannot as a defense against [a state violation] fairly claim to be complying in ‘good faith’ with the SEC regulations.” The bar’s board of governors unanimously adopted the opinion, despite a firmly worded letter from Giovanni P. Prezioso, the SEC’s general counsel, warning that it contained “potential areas of conflict.” Prezioso previewed the opinion at the bar’s request. The first conflict, Prezioso said, was the statement that “[Washington bar] members appearing and practicing before the Commission are prohibited-under threat of liability and bar disciplinary action-from disclosing to the Commission certain information that the Commission’s rules permit them to disclose.” The second conflict, Prezioso said, was prohibiting a Washington attorney from claiming as a defense that he was complying in good faith with the SEC rules. Prezioso said federal regulations pre-empt any state law that frustrates their purposes. He cited several U.S. Supreme Court precedents including Sperry v. State of Florida, 373 U.S. 379 (1963), upholding the authority of federal agencies to implement rules of conduct that supersede state laws, and Fidelity Fed Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 155 (1982), “holding that a conflict between an agency’s regulations and state law does not evaporate because the [agency's] regulation simply permits, but does not compel, what state law prohibits.” In a follow-up letter to Prezioso, Washington bar President J. Richard Manning downplayed any conflict, saying the state rule was an interim one until the state can consider the new model rules of professional conduct adopted in August by the American Bar Association. The new ABA rules would permit, but not require, a lawyer to reveal client information in certain situations. Manning cited the voluntary nature of the SEC rules, saying that if the SEC “mandated such disclosure, the question of conflict and preemption, among other questions,” would be joined. Bishop said the questions of conflict and pre-emption have already been addressed in California. This prohibits a corporate attorney from reporting a violation outside the company. One who did “would be at personal risk” for state disciplinary proceedings as well as for being sued by a harmed client, he said. “I believe this will eventually come to a head in court,” Bishop said, probably when a lawyer is caught between the state and the SEC. Richard Painter, a law professor at the University of Illinois, who helped lead the push for Sarbanes-Oxley, disagreed with the states’ position. States called wrong “I think they are wrong, and that they will lose,” he said. He said Congress gave the agency broad authority to set minimum standards of conduct for attorneys practicing before it. The SEC knew that only a minority of states prohibit reporting out, Painter said. “So the purpose of the rule was to pre-empt those minority-state rules. Why else have it?” he asked. Michael O’Sullivan disagrees with Painter. O’Sullivan, a corporate partner at the L.A.-based Munger, Tolles & Olson and the writer of an online corporate law newsletter, said that he studied Prezioso’s cited cases, which are based on congressional intent, and then read the legislative history of Sarbanes-Oxley. “On three or four separate occasions, members of Congress specifically asked if [the bill] would require corporate lawyers to report to the SEC,” and were told no, he said.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.