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When it comes to regulating lawyers, who has the final say � Washington State or Washington, D.C.? A judge may eventually have to settle the question. In August the Securities and Exchange Commission announced a new rule that allows lawyers to breach attorney-client privilege in order to report company fraud to the agency. Within days the Washington State Bar Association warned its attorneys that they face disciplinary action if they violate the state’s ban on revealing confidential information. The California bar quickly took the same position but went even farther, arguing that the SEC doesn’t have the authority to issue its rule. Corporate attorneys don’t see an easy resolution to the dispute. Keith Bishop, a leader in the California bar, says, “I believe this will come to a head in court” � probably when a lawyer gets caught between the state and the SEC. The regulation in question, rule 205, was adopted under the Sarbanes-Oxley Act of 2002. It states that corporate lawyers can tell the SEC about client wrongdoing that doesn’t rise to the level of a crime if they’ve already reported it within the company, but the response has been inadequate. An attorney who complies “shall not be subject to discipline or otherwise liable under inconsistent standards imposed by any state or other U.S. jurisdiction,” the regulation says. The SEC maintains its rule supersedes state prohibitions against disclosure. Don’t Listen To Them, Listen To Us In an August 11 letter the Washington bar basically tells the state’s lawyers to ignore the SEC. Disclosure, the association writes, is allowed only “to prevent the client from committing a crime,” or “pursuant to court order.” A spokesman for the Washington bar, Peter Ehrlichman, tries to downplay its disagreement with the SEC. “We did not find in fact a conflict, because the SEC rule is permissive and not mandatory,” says Ehrlichman, a partner in the Seattle office of Minneapolis-based Dorsey & Whitney. The State Bar of California, however, took a much more aggressive stance in its August 13 letter to the SEC. “We question whether Congress granted that authority [to breach attorney-client privilege] to the SEC, or intended to preempt state regulation of attorney conduct,” says Bishop. He adds that a California attorney who reports wrongdoing to outside authorities “would be at personal risk” for state disciplinary proceedings. A partner at Buchalter Nemer Fields & Younger in Newport Beach, Bishop signed the California bar’s letter along with a fellow cochairperson of its corporations committee. He says the letter speaks for the 24-member committee, but was not cleared through the full state bar. At press time the SEC hadn’t responded to either the Washington or California letter, and an agency spokesman declined to comment on the issue. Who’s The Top Dog In This Fight? The conflict between the states and the SEC ultimately hinges on whose rules take precedence. In July the agency’s general counsel, Giovanni Prezioso, previewed a Washington bar interim ethics opinion at the association’s request. The opinion, Prezioso wrote in a letter, contained “potential areas of conflict.” He maintained that federal regulations preempt any state law that frustrates their purposes. To support his position, Prezioso cited several U.S. Supreme Court decisions, including Sperry v. State of Florida and Fidelity Federal Savings & Loan Association v. de la Cuesta. Richard Painter, a law professor at the University of Illinois, sides with Prezioso and the SEC. With the Sarbanes-Oxley Act, he says, Congress gave the agency broad authority to set standards of conduct for attorneys practicing before it. Michael O’Sullivan, a partner at Munger, Tolles & Olson in Los Angeles, disagrees. He studied the cases Prezioso cited � 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,” O’Sullivan says, and were told no.

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