Thank you for sharing!

Your article was successfully shared with the contacts you provided.
When Congress enacted the Sarbanes-Oxley Act, it placed a heavy burden on in-house-counsel to comply with sweeping corporate governance measures. Section 307 of the act, in calling for company lawyers to report “material violations . . . up-the-ladder,” represented perhaps its trickiest provision. Last year, law departments began to train attorneys and established procedures to comply. Some offered seminars. Others distributed written policies. The smallest departments often held �307 discussion sessions, according to in-house counsel. The act led the U.S. Securities and Exchange Commission (SEC) to issue guidelines for in-house attorneys to report “evidence of a material violation of securities law or breach of fiduciary duty” up to the company’s chief legal officer or CEO. The SEC’s guidance as to what qualified as a “material violation” left behind an amorphous standard, lawyers say. Law departments have encouraged staff to communicate even their smallest concerns. But at this point few of these concerns have evolved into �307 reports, which are generated by in-house attorneys who suspect a material violation has occurred. General Motors, for instance, with thousands of employees and nearly $200 billion in annual revenue, has not seen a single report, according to Anne Larin, an in-house attorney. Still, general counsel have overseen comprehensive training and procedural programs and have launched investigations to root out potential violations, even if they turned out to be trivial. The reason: general counsel are worried. If the U.S. Securities and Exchange Commission (SEC) investigates a violation, law department heads fear, it will judge their actions with prosecutorial hindsight. Their efforts � at times costly and excessive � reflect this “better safe than sorry” mindset, they said. Lingering Concerns One of the biggest open questions, said experts, dealt with the scope of the act’s coverage. The commission applied �307 only to attorneys “appearing and practicing” before it. The SEC spent a great deal of energy defining which attorneys are subject to �307′s reach, said Susan Hackett, senior vice president and general counsel of the Association of Corporate Counsel, but in-house counsel still were left with a vague sense of the law’s application. Does �307 apply to an in-house lawyer who drafts a small portion of a 10K, asked Michael Cahn, Textron’s senior associate general counsel of securities. Does it apply in perpetuity to that person or only until the company issues its next 10K report? To avoid the time and effort of drawing distinctions, and to ensure they were in compliance, many large law departments adopted broad policies on the scope of the attorneys covered. Xerox, for example, which notes in its policy that “the SEC’s definition of ‘appearing and practicing’ presents difficult interpretative questions,” applies �307 to all attorneys admitted to practice within the United States “regardless of whether they believe they are appearing and practicing before the SEC, and regardless of whether they participate in securities law matters.” General Electric, with 950 attorneys in its counsel’s office, also instituted this policy, according to Tom Kim, a member of its staff. Some smaller departments have also elected the blanket approach. For example, Union Bank of California, with 26 lawyers, saw advantages in “sensitizing the entire legal division” to the reporting requirements, said its executive vice president and general counsel John McGuckin. Bart Schwartz, who leads MONY Group’s 36 member department, said it was safer to include all attorneys rather than potentially exempt those on the periphery of the act’s application. With fears of SEC scrutiny lingering, in-house counsel have tried to protect themselves from what they believe will be “20-20 hindsight” from the SEC, according to sources. Both in-house counsel and their advisors in law firms said that they have seen few �307 reports seven months after the SEC issued regulations (known as Part 205) to govern “up-the-ladder” reporting. How companies will investigate these allegations remains to be seen, but they have developed guidelines. Lawyers said a large corporate law department, particularly one with experts on staff, would tackle smaller issues in-house, unless it lacked the manpower or skills to manage the inquiry. The costs in time and money of bringing in outside firms, particularly new firms with little knowledge of the company, are tremendous, Ms. Hackett said. And by bringing in outsiders, she said, the company increases the risk of leaks and anxiety among staff. High profile cases, however, make an in-house inquiry nearly impossible. “If the allegation [of material violation] is directed at the general counsel . . . or someone at very senior management, then it does make sense to consult with someone from the outside,” said John Olson, a partner at Gibson, Dunn & Crutcher and chairman of the American Bar Association’s committee on corporate governance. General counsel must handle such accusations “in the most impeccable way possible,” to protect both the company and themselves from investor and governmental scrutiny, Ms. Hackett said. They will likely choose outside firms with which they do not have any business relations in order to dispel any accusations of misconduct, she said. “I’m definitely doing more full blown investigations and using more outside counsel,” said Mr. McGuckin, who also sits as the chairman of the Association of Corporate Counsel. He said that expenses for investigations last year surpassed the combined total for all of his 19 years as general counsel at Union Bank. For a financial institution, he said, any concerns related to company finances now compels him to look to outside firms � even if doing so is borne more out of a desire to protect himself rather than necessity. Section 307 “places a heavy burden on general counsels to make Solomon-like decisions,” said Richard White, general counsel of The Auto Club Group. They must balance between protecting themselves from potential liability and taking a more pragmatic approach by conducting investigations in-house. The QLCC Option Law department heads can avoid these thorny issues by establishing a Qualified Legal Compliance Committee, a board of directors committee of independent members that resolves �307 allegations. The SEC endorsed its implementation because once an attorney reports a potential “material violation” to the compliance committee, he or she faces no further obligation to decide whether he is satisfied with the company’s response. “It lets lawyers off the hook,” said Linda Madrid, general counsel and managing partner of CarrAmerica Realty Corporation. Almost no company has implemented one, however, according to those interviewed. “Politically, it’s not a very popular thing to go to the board with” said Ms. Hackett, who has surveyed a large number of law departments, because board members already face many responsibilities under Sarbanes-Oxley. Worse, the existence of a compliance committee allows general counsel to push responsibility on to others and keeps them from deciding what problems to take to the board, she said. General counsel widely dislike the idea of compliance committees. Ms. Hackett summed up their opinions in a report she wrote for Association of Corporate Counsel members. Referring to chief legal officers, she wrote, “Many CLOs have suggested that they would never wish to endorse a governance option that not only emasculates their ability to influence such important decisions, but abdicates responsibility for the very duties they were retained and feel professionally obligated to fulfill.” “Lawyers have to be at the center of the resolution,” said Ms. Madrid. “It sends the wrong message to the board of directors that somehow in-house counsel need to be distanced” from business activities. Some counsel also say that it would be impractical. A legal compliance committee would have two choices in investigating a �307 allegation, Ms. Hackett said. One would be hiring an outside firm that is apt to have little knowledge about the company, keeping the general counsel out of the loop. The other, she said, would be asking the general counsel to lead an investigation, simply reverting to the familiar model, she explained. General Motors is one of the few exceptions. It authorized its audit committee to also serve as a legal compliance committee. “We had a very enthusiastic, active, and engaged audit committee,” said Ms. Larin, an in-house attorney directing GM’s �307 efforts. The group showed no reluctance to accept these additional responsibilities, she continued. The guidelines call for a qualified legal compliance committee to keep the general counsel and CEO informed of its actions, said Ms. Larin, and permit the committee to tap the general counsel’s office to conduct investigations. More corporations may create board compliance committees if private corporate governance watchdog groups make it a requirement, said Ms. Hackett. Patrick McGurn of Institutional Shareholder Services, one of the leading watchdogs, said he prefers a compliance committee for the same reason general counsel abhor it: It takes discretion from lawyers. But he said his organization has no formal recommendation on whether companies should use it. While �307 caused law departments to implement procedures and educate attorneys about their responsibilities, experts said, these procedures play only a modest role in corporate governance. “It’s a mistake to focus exclusively on structure,” said Rhett Brandon, a partner at Simpson Thacher & Bartlett. “The bottom line is the establishment of an ethical culture,” said Ms. Madrid. Section 307, she explained, is a “helpful framework to which to build an ethical culture.” A general counsel’s clout within an organization plays an immense role in establishing this culture, attorneys said. “A company must ensure that a general counsel is toe-to-toe with senior executives,” said Ms. Madrid. In knowing that their department head stands on equal footing with company leaders, junior attorneys will possess more confidence in standing up to top executives, she said. Companies can take several measures to boost a general counsel’s standing, beginning with the job title. If a general counsel is one of 50 vice presidents, said Charles Morgan, head of BellSouth’s law department, the job seems inconsequential to junior attorneys. General counsel should have regular access to senior executives and attend board meetings to participate actively in business decisions and join the “inner-circle” of upper management, he said. Those general counsel that work in separate buildings or worse yet, separate cities, from company leaders will be less effective, he added. Mr. Olson of Gibson Dunn agreed. “I have seen situations where . . . I thought the legal function needed to be enhanced . . . or where the general counsel needed to be a stronger participant” to make the law department more pro-active.

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.