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The Securities and Exchange Commission has tabled a controversial proposal that would have required a lawyer to withdraw from representing a company that fails to fix securities violations and to notify the agency of the matter. The move to limit the so-called “noisy withdrawal” proposal came Thursday at an open hearing in which the SEC’s commissioners voted on a package of new rules called for by the Sarbanes-Oxley Act corporate reform law. Although the agency has yet to release the actual text of the final rules, at the meeting SEC staff members orally described changes to the original proposals made in November. The final rules will become effective 180 days after they are published in the Federal Register. The rules adopted Thursday were narrower in several respects than as first proposed. Experts attributed the shift to a barrage of lobbying from the American Bar Association, law firms and others, who argued that the rules went far beyond what was required by law. The bar was especially unhappy with the noisy withdrawal proposal, which they said threatened to turn lawyers into policemen. In its stead, the commissioners said they would propose a new rule on the subject, which will be released for a 60-day comment period before it is taken up for a vote. The new proposal would still require a lawyer to withdraw under certain circumstances, but the client company, not the lawyer, would then be required to notify the SEC of that withdrawal. This procedure would alleviate potential conflicts with some state bar rules, as well as ethics rules in some foreign jurisdictions, which forbid lawyers from disclosing confidential client information — even evidence of fraud. But it could still prevent clients from confiding in their lawyers, experts said. “Just changing the person who calls up the SEC doesn’t change the fact that that information is still being disclosed,” said C. Evan Stewart, a securities law partner at the New York office of Winston & Strawn. Stewart said he expected the new proposal will be criticized just as much as the former proposal for that reason. “Getting the client to come to his or her lawyer, do the right thing, none of these things go away under the proposal as described by the agency.” In a statement, ABA President Alfred P. Carlton offered tempered praise for the agency Thursday, saying he was “encouraged” by its actions and “look[ed] forward to continuing our constructive dialogue with the Commission.” In another important concession, the SEC narrowed its definition of who is subject to the rule to exclude some foreign lawyers and people who are licensed but not practicing law. Originally, the SEC had proposed a much more “expansive view” that, according to critics, would have swept myriad unsuspecting lawyers into its ambit. The agency also did away with a proposal allowing lawyers to protect themselves in circumstances involving a securities law violation by documenting every step they take in handling the problem. But Stewart said that as a practical matter, documentation will continue to be an issue. Lawyers may opt to paper their steps anyway, “to protect their own posteriors,” he said. STANDARD OF KNOWING Another point of contention also was narrowed: a proposal that would expand lawyers’ disclosure obligations to encompass not just instances in which they “know” of corporate wrongdoing, but also when they “reasonably believe” it has occurred or is about to. Although the agency retained the “reasonable belief” standard, it modified it somewhat by requiring the evidence to be “credible.” Stewart said that although the changes show the agency is being responsive to input from the bar, the rules were still “a work in progress.” “They are still pushing well beyond what is required by the law,” he said.
Sarbanes-Oxley Act of 2002: What Lawyers Need to Know

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