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The wide net cast by Congress to curb the recent slew of highly publicized business scandals could ensnare corporate lawyers in an ethical web. That is the consensus of several corporate attorneys who are concerned about the implications of the corporate reform bill, which was passed overwhelmingly by both houses of Congress last week. The bill, which was initially aimed at accounting abuses, significantly alters the corporate attorney’s client relationship. It requires, for the first time, that counsel inform senior officers of corporate misdeeds. And, if action is not taken at the management level, it requires counsel to bring their concerns up the corporate ladder. Additionally, the bill orders the Securities and Exchange Commission to establish “minimum standards of professional conduct” for attorneys practicing before the SEC in any manner, while providing little guidance on what those standards should seek to achieve. To that extent, it establishes federal regulation of the practice of law and would affect any lawyer handling securities work with a publicly traded company, corporate lawyers said. “The bill was initially directed at accountants, but it has gone much further and there are serious issues for both accountants and attorneys, as well as senior executives of public companies,” said Gerald S. Backman, a partner at Weil Gotshal & Manges and chairman of the New York State Bar Association’s Securities Regulation Committee. “It will have a broad impact.” Although the lengthy bill contains only two sections directly related to lawyers, the thrust of those provisions is powerful. One provision deals with rules of professional responsibility. It requires the SEC to adopt rules within six months setting forth minimum standards and gives the commission broad leeway in fulfilling that mandate. The other provision requires an attorney to report material evidence of a securities law violation, or a breach of fiduciary duty, to the chief legal counsel or chief executive officer. If those officials neglect to respond appropriately — and it remains unclear just what that means — the attorney must go to the audit committee or the full board. What is also unclear is what the attorney is supposed to do if it turns out the audit committee or board are complicit in the wrongdoing or refuse to take remedial action. Presumably, some observers said, the attorney is off the hook once he or she reports to the board, even if the underlying problem is not addressed. But others are not sure the line will be that clearly drawn. “One of the major problems is there is no knowledge test,” Backman said. “There is no indication that the attorney has to be aware that there is a violation. It does create a potential issue for lawyers representing public companies. It could also create friction between the attorney and the CEO or the general counsel.” While some commentators have suggested the reporting requirement could turn attorneys into informants and essentially pressure them to violate the attorney-client privilege, Backman said he does not read the statute as a “whistleblower” rule or see a conflict with professional ethics. He noted that there is no requirement for disclosure outside the corporation, and that the law would require only lawyers to inform their clients of irregularities. The measure does, however, tread into an area that has traditionally been left to state bar groups and state regulatory agencies, and seemingly sets the stage for a separate corporate governance law that goes beyond traditional parameters generally limited to disclosure, Backman said. ETHICAL RESPONSIBILITY Louis Grumet, an attorney and executive director of the New York State Society of Certified Public Accountants in Manhattan, said the debate — not unlike that over multidisciplinary practice — highlights the contrasting missions of lawyers and accountants. “An accountant’s duty is to the public, not the client,” Grumet said. “The lawyer’s duty is to the client, and not the public.” The corporate reform bill, Grumet predicted, will have a profound impact on legal practice, and to some degree function appropriately as a sword of Damocles. “The principle of confidentiality frees the client and lawyer to have a very frank discussion over what’s legal,” Grumet said. “But it could be that lawyers have, in some cases, been a little lax in the advice they were giving if the client was strong in what he wanted to do. This gives the lawyer an incredible reason to strengthen his backbone and give very strong legal advice, because he’s required to do that if he wants to keep practicing before the SEC.” Thomas A. Reed, a contract attorney acting as corporate counsel for BT North America Inc. in Manhattan and chairman of the Corporate Counsel Section of the New York State Bar Association, views the legislation as an “important first step toward improving the responsiveness and responsibility of corporations for their actions.” He is uncomfortable, however, with the concept of the SEC promulgating national regulations for attorney conduct. “This empowers the SEC, which in this capacity is acting as a prosecutorial body, to impose ethical standards on attorneys which may conflict with existing ethical codes of conduct,” said Reed, stressing that he is not speaking for BT North America, the State Bar or the Corporate Counsel Section. “I think that is a concern because the ethical rules are now enforced by the courts and disciplinary committees of the courts, which are well positioned to strike a balance between the public responsibilities of the attorney and the responsibilities of the attorney to the client.” In 1998, the American Bar Association rejected a proposal by law Professor Richard Painter of the University of Illinois that would have added to the model rules a requirement that lawyers report corporate misdeeds to the board. The ABA lobbied against the reporting requirement in this bill. Legal ethics expert Stephen Gillers, vice dean of New York University School of Law, said that while the notion of national regulation of the practice of law raises concerns, it makes sense in this limited framework. “It is not coherent, in my view, for a lawyer’s responsibility to depend upon the state in which the lawyer practices,” Professor Gillers said. “It is also salutary to have another national presence in the discussion of the appropriate disclosure rules beyond the ABA. The ABA has essentially monopolized the debate. This will create a separate focal point, a separate place for discussion.” BETWEEN LAWYER AND CLIENT Gillers was among 40 law professors who signed a letter Painter wrote to SEC Chairman Harvey Pitt following the Enron Corp. implosion urging a lawyer reporting requirement. When the SEC declined to take action, Congress stepped in with what Gillers views as a tempered and reasonable response. “It is not a ‘whistleblower’ rule because it does not envision the lawyer going outside the client,” Gillers said. “The report goes to the highest authority within the company itself. Further, lawyers are supposed to tell their clients about important developments in their cases. When the securities law violation threatens the client, it seems to me incontrovertible that the lawyer, who was unable to secure correction elsewhere, should go to the board.” However, Gillers said the legislation marks the first significant effort by Congress to mandate federal regulation of lawyers. “To the extent that I am cautious about this statute, it is a caution born of concern that the door may swing too widely,” Gillers said. “I don’t want to see wholesale congressional regulation of lawyers. On the other hand, if it’s contained, as it is in this bill, I am comfortable. All in all, I think it is a good move.”

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