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The Securities and Exchange Commission has proposed stringent new rules requiring securities lawyers to disclose evidence of wrongdoing at companies they counsel. The proposed regulations would implement provisions of the Sarbanes-Oxley Act, passed earlier this summer. Congress ordered the agency to draft rules requiring lawyers “to report evidence of a material violation of securities law” to the company’s general counsel and then, if the general counsel does not “appropriately respond,” to report the evidence to the company’s audit committee or board of directors. The SEC will take public comments on the proposed rules for the month following publication in the Federal Register. The final version is due in January 2003. Many attorneys, unhappy with the novel prospect of being regulated by a federal agency, viewed the Sarbanes-Oxley provisions on lawyer disclosure with dismay. The American Bar Association tried, without success, to derail the legislation by offering its own set of disclosure rules that would be implemented at the state level. But the rules, as proposed, go well beyond the legislation itself, seizing upon numerous opportunities to expand lawyers’ disclosure duties. The SEC stated in a press release Wednesday that it was adopting an “expansive view” of who is subject to the rules, including both in-house and outside counsel, and even foreign lawyers in some instances. It also said it was incorporating “several additional provisions” culled from legal commentators and the ABA into its proposal. “The hope was that the SEC would proceed very cautiously,” said C. Evan Stewart, a partner at the New York office of Winston & Strawn, “but this draft proposal envisions far more than a toe in the water.” One proposal, for instance, would require a lawyer not only to inform the board of directors of evidence of misconduct, but also to quit and disaffirm documents submitted to the SEC. Such a “noisy withdrawal” rule, which has repeatedly been rejected by the ABA, has the potential to put lawyers in the difficult position of tattling on their clients. It could also conflict with the attorney-client privilege, which requires lawyers to maintain their client’s confidentiality, experts said. Another proposal would expand a lawyer’s disclosure obligations to encompass not just those instances in which he “knows” wrongdoing has occurred, but also when he “reasonably believes” it has or is about to occur. “It’s quite a dangerous standard,” Stewart said. “It’s one that’s going to capture a lot of people, especially in hindsight.” The SEC’s proposal suggests that a lawyer may protect himself in circumstances involving a violation of the securities law by documenting every step he takes in handling the problem and his accompanying duty to disclose. But this may also pose problems, said Richard Kosnik, a partner in the New York office of Jones Day Reavis & Pogue and a former SEC associate director. “We may end up with situations in which attorneys are being overly cautious and disclosing everything they think might be covered,” he said. “From a practical perspective, general counsel are going to find themselves going through reams of documents on every mundane matter,” he added. CLIENT RELATIONSHIPS The proposed rules could also hurt lawyers’ relationships with their clients, experts said. If lawyers are explicitly obligated to disclose what clients tell them, clients may simply choose not to talk to them, Stewart said. “Getting clients to trust you as a lawyer is one of the most difficult things to do, particularly in the financial services industry,” he said. “Once a client knows that you have explicit duties or face personal sanctions if you don’t disclose, human nature and personal and professional experience just tell me that he or she will be less inclined to talk to you.” The rules come at a difficult time for the SEC, and lawyers did not seem surprised that the agency was taking such an aggressive stance. The SEC’s chairman, Harvey L. Pitt, who resigned under pressure Tuesday night, is in no position to push for more lenient regulations of securities lawyers or anyone else, experts said. Pitt resigned while there are several investigations pending over his failure to inform the agency’s four other commissioners that William Webster, the lawyer selected to head a new board overseeing accountants, was on the audit committee of a company that is being accused of accounting fraud. Nonetheless, experts anticipate that the bar will resist the rules as proposed. “You can assume these rules will create controversy,” said Edwin David Robertson, a partner at Cadwalader Wickersham & Taft. “Expect considerable comment from the bar to the extent these rules conflict with the state rules that already exist.” “Whenever there is inconsistent regulation of lawyers, they are put at risk,” he said.
Sarbanes-Oxley Act of 2002: What Lawyers Need to Know

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