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As the Securities and Exchange Commission continues to consider a controversial “noisy withdrawal” rule for attorneys, members of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprise weighed in on the question last month. The subcommittee, chaired by Rep. Richard Baker (R-La.), held a Feb. 4 hearing that focused on the withdrawal and notification proposals currently pending before the SEC. Under Section 307 of the Sarbanes-Oxley Act of 2002, the SEC was directed to create rules for the minimum standards of professional conduct for attorneys. One of the rules, which went into effect in August 2003, requires lawyers to report evidence of a material violation of securities law or breach of fiduciary duty “up the ladder” to the general counsel and chief executive officer, and, if necessary, the board of directors. More contentious, though, has been the so-called noisy-withdrawal provision, which is likely to be addressed by the commission this spring. Under the original proposal, if a company did not respond appropriately to a lawyer’s concerns, the lawyer would be required to file a “noisy withdrawal” from representing the company � and to notify the SEC of the move. A newer, alternate proposal would require the company, rather than the attorney, to report the withdrawal of counsel. Following are excerpts from the Federal Document Clearing House transcript of the hearing.
Michael Oxley (R-Ohio) Chairman, Financial Services Committee (written testimony) The active participation of attorneys in perpetuating corporate fraud has been well-documented and indeed, is quite troubling. Attorneys were violating not only the profession’s code of ethics, but they were also breaking the law. This attorney misconduct led to a legislative remedy in the Sarbanes-Oxley Act requiring attorneys to report securities law violations “up the ladder.” . . . While the SEC has implemented this sensible requirement as set forth in the act, the commission clearly went beyond congressional intent in proposing the noisy withdrawal mandate, but has since scaled back the provision.
Richard Baker (R-La.) Chairman, Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprise Significant debate continues over the appropriateness of the noisy withdrawal requirement and we are here today to receive perspectives as to the appropriate direction the committee should take in regard to the SEC’s consideration of this important matter. . . . I’m not sure that the noisy withdrawal rule as currently constructed achieves the goal it’s intended to achieve, but I do see circumstances, or I have seen circumstances where I think it should have been appropriate and it was not taken and shareholder interests were dissipated as a result of that failure to act. There has not been a corresponding responsibility for the attorney who did not engage in proper conduct.
Paul Kanjorski (D-Pa.) Ranking Democrat, Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprise Professionals like lawyers also have a responsibility to police themselves. If, however, such professionals fail to effectively monitor their actions and those of their peers, we have an obligation to protect investors by taking action in Washington. . . . Prior to a 1994 decision by the Supreme Court, individuals had the right to pursue a private cause of action against lawyers and other professions who helped public corporations to deceive the public. Although we partially overturned this decision when passing the Private Securities Litigation Reform Act of 1995 to allow the commission under certain circumstances to bring cases against aiders and abettors of securities fraud, we may have failed to do enough to protect investors. After all, past leaders of the Securities and Exchange Commission from both political parties have stressed the integral role of private lawsuits in maintaining investor confidence. Since 1994, however, the victims of securities fraud have been unable to bring claims against lawyers or other gatekeepers who abuse the public trust by aiding issuers in misleading shareholders. Rather than adapting either of the pending alternatives for reporting on attorneys who withdraw from representation because of concerns about the client’s potential or actual wrongdoing, it may make sense for the Congress to instead restore the right of individuals to pursue their legal claims in our courts.
Rahm Emanuel (D-Ill.) Member, Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprise (written testimony) The proposed “noisy withdrawal” rule is well-intentioned, but may put attorneys in the untenable position of running afoul of state laws and state codes of professional responsibility on attorney-client privilege issues. . . . I also believe it is critical to address the role of attorneys in the creation, marketing, and implementation of abusive tax shelters for corporations and wealthy individuals that are depriving the U.S. Treasury of billions in revenue each year.
Linda Madrid Managing director, general counsel, and corporate secretary, CarrAmerica Realty Corp., appearing on behalf of the Association of Corporate Counsel ACC strongly opposes mandatory reporting out requirements, which the SEC has kept on the table for consideration. We believe that they will damage the underlying relationship between in-house lawyers and their clients. Mandatory reporting out by lawyers inhibits legal compliance efforts because it discourages clients from welcoming lawyers into every aspect of the company’s most sensitive of matters. In-house lawyers are only effective if they are integrated and trusted members of corporate management teams. If lawyers are viewed as in-house cops whose regulatory duties to outside enforcement agencies outweighs the client’s need for confidential counsel, then the attorney-client relationship will have been undermined in a manner that is both counterproductive to the purpose and intent of the act, and a disservice to the effective protection of the public and the client.
Stanley Keller Palmer & Dodge Former chair, American Bar Association Committee on Federal Regulation of Securities To me it makes no difference if the mandate is that the lawyer withdraw, whether it’s the lawyer who ends up reporting that withdrawal, or it’s the company that then is put in the position of having to report that withdrawal. Problems I think are the same with either alternative, although one has a cosmetic appeal. . . . Because of the serious nature of having to withdraw, we may find lawyers discouraged from looking at the hard issues, the hard questions, so as not to turn over the stone and see the problems which would then put them in the position of having to report and potentially to withdraw. To me, that would be contrary to the best interests of promoting legal compliance.
Richard Painter Professor, University of Illinois College of Law Wherever possible I believe it is best to leave regulations to the states rather than to the federal government. There are, however, exceptions and section 307 [of the Sarbanes Oxley Act] is one of them. I pointed out in the early 1990s my frustration that out of dozens of lawyers accused by federal banking regulators of aiding and abetting savings and loan fraud, not one was disciplined by his state bar association, at least that I know of. This was so despite the fact that many of these lawyers settled cases brought by federal regulators for 20, 30, even over $40 million. The fact is that state bar discipline is virtually meaningless for policing the practice of securities and banking law. . . . I would support a requirement that the lawyer withdraw from representing a client when they’ve reported to the full board of directors known securities law violations and the full board of directors refuses to obey the law. The amount of noise, however, should perhaps be left to the lawyer. And indeed most lawyers who do not want to find themselves in a position where they could be exposed to civil liability for their client’s conduct, will take . . . steps once they have resigned to make sure that the fraud does not come to pass. So with respect to that issue, I agree partially with the SEC’s position that withdrawal should be required, but the noisy withdrawal proposal that has been so controversial is perhaps unnecessary.
George Cohen Professor, University of Virginia School of Law I think the [attorney conduct rules] need to be changed to apply not only to individual lawyers but to law firms. Law firms are the ones that are hired generally by corporations, not individual lawyers. The firm as a whole ought to be responsible. If the firm is not made responsible, there is a danger that work will be parceled out in such a way that no individual person, no individual lawyer, will have sufficient knowledge of what is going on, what the big picture is. . . . I think that it is important to go beyond the SEC rules and fixing the SEC rules to think about other ways to deal with some of the problems of lawyers assisting in corporate wrongdoing, the most important of which in my view, is to restore private lawsuits, private damage suits for aiding and abetting liability which were taken away by the Supreme Court decision in Central Bank in the mid-’90s and were not restored, even though Congress had the chance to do it in the Private Litigation Securities Reform Act. I think that that needs to happen in some sense. The potential for liability for aiding and abetting is the most effective deterrent, the most effective regulator for lawyer behavior, and I would urge Congress to restore the aiding and abetting cause of action. Finally, I think that it is important to recognize that although the SEC is an important federal agency that regulates lawyers, it is not the only one and I think . . . it would be wise for Congress to consider extending the SEC’s rules to other lawyers who also appear before other federal agencies, both in the name of uniformity and inconsistency, in an approach to the problem of corporate wrongdoing and lawyers’ assistance in that wrongdoing.
Thomas Morgan Professor, George Washington University Law School A comprehensive body of state and federal regulation already exists that renders doubtful the need for additional regulation. It includes under some circumstances a requirement of withdrawal and even permission of noisy withdrawal. Second, the role of corporate attorneys in actually formulating corporate policy, and in some cases even being aware of the intricacies of what the company is doing, very often tends to be much smaller than we sometimes think. And thus, that the responsibility for much of the corporate wrongdoing is not likely to be significantly at the feet of attorneys. . . . Third, that federally mandated noisy withdrawal in the face of possible wrongdoing would potentially create more problems than it would solve. . . . I suggest to you the disclosure of information, ambiguous information to securities markets is not an unvarnished good. Accurate, easily understood information makes markets work better, but confusing ambiguous information makes markets work less well. If investors are led to believe by the conscientious noisy withdrawal of a lawyer that they know facts about the company that later proved to be less significant than they once thought, real Americans are going to lose real dollars for no good reason. . . . I’d simply suggest to you that moving to . . . creating aiding and abetting liability for attorneys would not be a good idea. Under the Newby case, the Enron case in Texas, the judge has moved the law of primary violation of securities law much more in the direction of saying that if a lawyer is actively involved in reporting inaccurate information to the public, they may be guilty of a primary violation. Simply creating a rule that ropes into every investor lawsuit, every lawyer who might have touched the matter at some time, I’d suggest to you is a great overreaction to the problem. For more information about the Federal Document Clearing House, e-mail [email protected].

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