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The securities bar may be aghast at the Securities and Exchange Commission’s proposed rules for lawyer conduct, but leading law professors applaud the agency’s decisive stance, saying that lawyers invited the regulations by not acting on their own. The American Bar Association refused to adopt tougher ethics codes last spring despite the recommendation of its own committee that it do so. After that, and in light of a series of corporate financial scandals and calls for sweeping reforms of corporate governance laws, leading academics stepped in to agitate in favor of the SEC writing its own lawyer rules. “The ABA’s stubbornness and unwillingness to compromise and the ABA’s general disregard to what was going on in the marketplace is responsible for this,” said Stephen Bainbridge, a corporate law professor at the UCLA School of Law. Bainbridge is one of 40 academics who signed a letter to the SEC earlier this year calling upon the agency to assert its authority over securities lawyers. Academics have taken an active role in suggesting how securities regulators should adopt a single, uniform code to replace the disparate state systems, which one professor called inefficient and rife with conflicts. Penned by Richard Painter, a professor at University of Illinois College of Law, the letter wound its way to Sen. John Edwards, D-N.C. Edwards used the recommendations as he drafted an amendment to last summer’s sweeping corporate governance law — the Sarbanes-Oxley Act — to force the SEC to draft standards of conduct for securities lawyers. Bainbridge said the SEC’s tough new guidelines shouldn’t come as a shock to lawyers who are now chafing under the prospect of reporting to company boards or the SEC possible securities laws violations. “That chicken has come home to roost,” Bainbridge said. “There has been a sort of incestuous relationship between management and their lawyers for a long time,” Bainbridge said. “There have been an awful lot of us trying to get the ABA to pay attention to this issue and candidly speaking, the ABA has sort of slapped us every time, calling us mere academics.” Such sentiment isn’t new to the securities bar or to ABA President A.P. Carlton Jr., who bristled at criticism of his organization and says that academics should stay out of the debate over rules for lawyer conduct. “I don’t like academics sitting there speculating on what the ABA has or hasn’t done,” Carlton said. “We’re the lawyers, and we’re the people who have been involved in the issue.” In the meantime, Carlton said the ABA is reconsidering its stance on its own committee’s recommendations. Those recommendations were the result of a two-year study of the ABA’s model rules. Currently under scrutiny is whether the ABA should expand its narrow criteria that allow a lawyer to divulge client confidences, possibly to include the threat of financial fraud, he said. But at the end of the day, Carlton said, the model rules aren’t binding and some 40 states already utilize broader criteria than the ABA on when the attorney-client privilege may be waived. “All the ABA does is adopt a model code and the states either adopt it or not,” Carlton said. Carlton declined to comment on any specifics of the SEC’s proposed rules, saying the ABA would issue a formal comment before the SEC’s deadline of Dec. 18. But a broader issue of concern to the ABA, Carlton said, is how much authority the Sarbanes-Oxley Act grants to the SEC and whether it supersedes the states. “The practice has been for the SEC to utilize whatever remedies it has, if they’re appropriate, and then refer that matter out to the licensing authority,” Carlton said. “For 200 years, it has been the state supreme court’s.” The resistance to the SEC’s taking a more aggressive role in governing securities lawyers is a mistake, say some law professors. “The securities bar is very foolish to oppose this,” said William Simon, a professor of professional responsibility at Stanford Law School. “It doesn’t make sense to have 51 state processes in what is basically a unified, federal securities system.” Simon said the regulation is in a lawyer’s best interest. The rules, he said, clarify the lawyer’s responsibility when it comes to corporations because too often, lawyers identify with management. “If lawyers are going to be important figures in corporate compliance,” Simon said, “these regulations — by giving lawyers responsibility — mean they have a lot of power as well.”
Sarbanes-Oxley Act of 2002: What Lawyers Need to Know

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