X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Lawyers are up in arms about new rules being proposed by the Securities and Exchange Commission that they claim will force them to disclose client confidences. According to a draft of a 10-page letter obtained by the New York Law Journal, some 75 of the nation’s biggest law firms, including about 20 New York firms, will be “express[ing] their concern” with the SEC’s proposed rules. The effort is being spearheaded by Sullivan & Cromwell partner William J. Williams Jr., who said in an interview that the letter will be submitted today, the last day the agency is taking public comments on the planned rules. The rules will implement provisions of the Sarbanes-Oxley Act, the sweeping new securities legislation that was signed into law in August. Under Sarbanes-Oxley, the SEC is ordered to draft rules requiring lawyers “to report evidence of a material violation of securities law” to the company’s general counsel. If the general counsel does not “appropriately respond,” lawyers must report the evidence to the company’s audit committee or board of directors. The deadline for the final rules is Jan. 26. The act itself gave many lawyers heartburn when it was passed. Unhappy with the novel prospect of its members being regulated by a federal agency, the American Bar Association tried unsuccessfully to derail the lawyer disclosure provisions with its own set of proposed guidelines. But to the bar’s dismay, the SEC’s proposal, unveiled on Nov. 6, stretched the disclosure requirements well beyond what was contemplated by Congress. The SEC itself admitted in a press release that its proposal incorporated “several additional provisions” culled from legal commentators and the ABA. The agency also said it was adopting an “expansive view” of who is subject to the rule, including in-house and outside counsel, and even foreign lawyers in certain instances. “There is at least a hint that the decision makers within the SEC are bound and determined to take advantage of a windfall opportunity to make marionettes out of the lawyers,” said Edward H. Fleishman, a former SEC commissioner and senior counsel to the New York office of Linklaters, one of the signatories to the letter to the SEC. “The SEC is taking a statutory assignment that requires a scalpel and going after it with a meat cleaver,” said Fleishman, who submitted his own letter to the agency on Nov. 25, along with 29 other securities lawyers and professors. The proposal that lawyers find most upsetting is the so-called “noisy withdrawal” rule, which would require an attorney 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 standard, which has been repeatedly rejected by the ABA, could put lawyers in the awkward position of tattling on their clients. It could also conflict with the attorney-client privilege, which requires lawyers to maintain their client’s confidentiality, lawyers said. The SEC has suggested that lawyers may protect themselves in circumstances involving a violation of the securities law by documenting every step they take in handling the problem and the duty to disclose. The idea, however, provides cold comfort to attorneys. “By coupling noisy withdrawal with a requirement for contemporaneous documentation, you’re turning the lawyer into the SEC’s eyes and ears,” said Meredith Brown, co-chair of the corporate department at New York-based Debevoise & Plimpton, another signatory to today’s letter. Whenever a lawyer tells the SEC he is withdrawing for “professional considerations,” the first thing the agency is going to do is seek proof from the lawyer that he or she complied with the requirements to keep records and to withdraw promptly if there is not an appropriate response, Brown explained. Lawyers said that the proposed rule also poses the danger of violating the attorney-client privilege, which is waived whenever an attorney-client communication is disclosed to any one person. Although the SEC has made assurances that waiver would be limited to the agency itself, lawyers question whether it has the authority to say that. The commission itself admitted in a footnote to the proposed rules that “the federal case law on limited waiver is in a state of hopeless confusion.” Another proposal would expand a lawyer’s disclosure obligations to encompass not just those instances in which he “knows” of corporate wrongdoing, but also when he “reasonably believes” it has occurred or is about to. The standard “makes it dangerous not to be wrong,” said Gregory Markel, head of litigation at New York-based Cadwalader Wickersham & Taft. “To be safe, a lawyer may disclose or withdraw in situations where there’s nothing wrong,” he said. “It’s going to add a layer of cost and bureaucracy,” Markel added, “and create conditions for bad decisions.” “When people are nervous, they make bad decisions,” he said. All of the above endanger the relationship between attorneys and their clients, he said. “There’s likely to be a reluctance for people within a corporation to consult with their lawyers, because if they do, they open up a Pandora’s box that they can’t close.” The letter being filed today urges the SEC “not to go beyond what is absolutely required to be done before January 26,” leaving the rest for “more widespread and thoughtful comment.” In particular, the law firms recommend that the commission take no action on the “noisy withdrawal” rule. It also asks the agency to forego deciding whether the rules should cover foreign lawyers. The law firms also urge the agency to reconsider its admittedly broad view of certain defined terms, including “awareness of evidence of a material violation,” “attorney,” “appearance and practicing before the commission,” and “in the representation of an issuer.” The draft letter even strongly suggests that the SEC would be illegally overstepping its authority should it issue the rules as proposed. “We believe that the Commission requires more explicit authority from Congress before it attempts to preempt State court jurisdiction,” the letter states. Whether the SEC will back down remains to be seen. But some lawyers are not optimistic. “They may give the foreign lawyers some extra time but they aren’t going to give an iota of ground on anything that’s important,” said Linklater’s Fleishman, who had listened to an SEC roundtable on the lawyer disclosure rules held Tuesday. “I hope I’m wrong. Otherwise, there will be no securities lawyers that they can’t get if they want to,” he said. Jeff Blumenthal, a reporter with The Legal Intelligencer , an affiliate of the New York Law Journal and law.com, contributed to this report.

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]

 
 

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.