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Corporate lawyers breathed a collective sigh of relief last week when the Securities and Exchange Commission voted to adopt a relatively narrow slate of new rules governing attorneys who advise public companies. But their relief may prove short-lived. At the Thursday vote on the new rules, outgoing SEC Chairman Harvey Pitt and three other commissioners signaled their intention to broaden the rules in the near future to include some variation on the now-infamous “noisy withdrawal” requirement. In the meantime, some corporate law firms, including Wilmer, Cutler & Pickering and Foley & Lardner, are already hustling to set up internal compliance programs. As originally proposed, the noisy withdrawal requirement would effectively compel an attorney under certain circumstances to alert the SEC to a corporate client’s misconduct. The controversial provision drew fierce opposition from the corporate bar, where it was denounced as an intrusion into the confidential relationship between attorneys and clients. The provision was carved out of the rules that the SEC approved last week. But the commission has not abandoned it. The SEC has instead offered it up for another 60 days of public comment. The SEC also added a new proposal, which includes several alternative forms of the noisy withdrawal provision. A few former SEC officials now say they strongly suspect the commission will ultimately impose some form of regulation on lawyers that achieves the same result as noisy withdrawal. “I think it’s something that’s definitely going to happen,” says Paul Huey-Burns, a D.C. litigation partner at Morgan, Lewis & Bockius and former assistant director of the SEC’s Enforcement Division. “The clouds are on the horizon.” Pitt and the other commissioners acceded at last week’s vote to the chorus of corporate bar requests for more time to weigh the subject. But at least four of the commissioners spoke out at the meeting in favor of a “reporting out” regime. Commissioner Harvey Goldschmid was the most forceful proponent. “For me, the absolute emphasis on client confidentiality found among so many” lawyers who opposed noisy withdrawal “is incomprehensibly out of balance,” Goldschmid said during last week’s vote. “It is contrary to duties we place on accountants and directors,” Goldschmid continued. “How can an absolute emphasis on confidentiality be reconciled with the commission’s traditional mandate to protect investors in the public interest?” CORPORATE LADDER As they await possible additional rules, partners at corporate law firms around the country are clutching their foreheads, puzzling over whether to adopt new internal procedures aimed at compliance with the SEC’s regulations. At the heart of the rules the SEC adopted last week is a so-called up-the-ladder reporting requirement. In essence, the new rules aim to prevent lawyers from turning a blind eye to a corporate client’s misconduct, by requiring lawyers to alert senior management at a client company, and ultimately the company’s board, to evidence of securities law violations. A few firms are already forming internal compliance committees to tackle the practical issues posed by the new rules. At Wilmer Cutler, corporate partner Thomas White says he and others at the firm have been working on forming an internal committee to field questions from individual lawyers about whether the up-the-ladder reporting requirement has been triggered in a given case. Former SEC officials say firms are right to take notice. “I would urge any firm to have a consultative process in place,” says Baker Botts D.C. securities partner James Doty, a former SEC general counsel. “The assumption here is that the person with the direct obligation to report these things will be right. But sometimes they’re wrong.” Even if alarmed associates are in some cases dissuaded by more-seasoned partners, Doty says, he’s worried that companies will be swamped with alerts from outside counsel about potential securities violations. “I think the bias at law firms is going to be to over-report, because firms are going to want to protect themselves.” David Becker, another former SEC general counsel who now practices in the D.C. office of Cleary, Gottlieb, Steen & Hamilton, suggests that law firms’ risk-averse instinct to report more, not less, than such rules clearly require could blunt the new SEC regulations. “It’s possible that you could end up with a situation in which [up-the-ladder] reports became a routinized communication,” Becker says. At least one large firm, Foley & Lardner, is considering building a full-fledged in-house compliance department modeled on those found inside brokerage houses and other securities firms. “I think you now have to go out and affirmatively look for compliance, not just wait for people to come to you with questions,” says Foley & Lardner’s D.C. managing partner, Richard Weiss, who is involved in the firm’s compliance effort. He predicts that the firm will hire additional professionals to staff the new department. “It will add expense to the firm,” he says. “But this is a big deal. It challenges some of the concepts we’ve lived with our entire professional lives.” Already there is talk within the securities bar of developing something along the lines of a model compliance program for law firms, in an effort to standardize firms’ internal practices in connection with the new SEC regulations. A senior securities lawyer at a firm with a prominent SEC practice says he’s working on such a program, which, if widely adopted, could evolve into a de facto standard of care for corporate lawyers. Firms that adhere to such a standard might be in a better position to defend themselves against claims that they negligently failed to take evidence of wrongdoing up the ladder at a public company. “What you don’t want is lots of firms making lots of different policies,” says a securities partner at another leading SEC firm. “Then it becomes difficult to have any certainty about your own.” Partners at a few law firms privately say that they see little need to change their internal practices. The reason, they say, is that the SEC’s new rules, at least as passed last week, really don’t change their ethical responsibilities. In fact, these lawyers suggest, the SEC’s new rules simply codify existing duties under the ethics rules of many states. STATES REGULATE ETHICS Ethical canons in most U.S. jurisdictions do exhort lawyers who learn of very serious malfeasance at a corporate client to take that information up the company’s chain of command. But legal ethics experts and some securities lawyers are quick to note that the state bar rules on this subject are rarely enforced against corporate law firms. And, of course, the SEC’s new rule turns what might otherwise look like a violation of a state bar’s ethics provision into a possible violation of federal securities laws. That means SEC enforcement, not a disciplinary hearing of the local bar. SEC General Counsel Giovanni Prezioso, who has overseen the new lawyer rules, bristles at the suggestion that they do little more than mirror state bar codes. “Congress considered it important to legislatively impose specific up-the-ladder requirements, subject to SEC sanctions,” says Prezioso, a former securities lawyer at Cleary Gottlieb. “The rules adopted by the SEC do exactly that, and take other steps consistent with Congress’ mandate.” John Villa, a legal malpractice expert and partner at Williams & Connolly, agrees that the SEC’s rules appear to differ in important ways from the state bar provisions. In broadest terms, he says, the SEC rules may be read to impose a much greater duty on corporate lawyers to “sit in judgment” of clients’ operational business decisions. WHO’S THE RAT? While the SEC has postponed a vote on its “noisy withdrawal” rule, it has also proposed an alternative that several observers suggested was likely to win the commission’s eventual approval. Under this new proposal, an attorney could still be required to withdraw under certain circumstances, but the client-company, not the attorney, would then be required to notify the SEC of that withdrawal. Legal ethics experts say this procedure might alleviate potential conflicts with some state bar rules, as well as with ethics rules in some foreign jurisdictions, which strictly forbid an attorney from disclosing confidential client information — even evidence of fraud. But several lawyers say they see little practical difference between a rule that requires a lawyer to alert the SEC to his or her withdrawal and a rule that requires a company to alert the SEC to a lawyer’s withdrawal. Under either scenario, securities lawyers point out, the client will likely view the lawyer as a turncoat. And faced with either version of the rule, companies that uncover evidence of potential fraud or looting may opt to avoid, rather than seek, legal advice. “We’re all concerned that some clients might not be as free with outside counsel,” says Robert Wise, the head of the securities litigation practice at Davis Polk & Wardwell in New York. “I think the chilling effect [on attorney-client communication] will be the same” under either version of the withdrawal rule, agrees Morgan Lewis’ Huey-Burns. Law firms uniformly discount the possibility that a withdrawal rule might also result in the loss of valuable clients. But this concern is hardly far-fetched. “I want to be a fly on the wall in the boardroom of a big law firm when they’re discussing whether or not they’re going to withdraw from a major client,” says the general counsel of a Fortune 100 corporation. “If you think that’s going to help their marketing in getting hired for another major project, well, that’s very problematic.” The American Bar Association, which mounted a vigorous campaign to narrow the SEC’s new rules and to eliminate the proposed noisy withdrawal requirement, shows no sign of backing down now. “It is my belief that we will continue with our original position,” says Piper Rudnick of counsel M. Peter Moser, who chairs the ABA’s task force on the new rules. “I don’t see any reason to change it.”

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