X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
On Jan. 30, 2003, the Securities and Exchange Commission published final rules to fulfill the mandate of the Sarbanes-Oxley Act of 2002, the law that President Bush signed last summer in response to the catastrophic collapses at Enron, WorldCom, Adelphia, and others. Most of the Sarbanes-Oxley Act deals with reforms in corporate governance and accounting practices, but � 307 commands the SEC to issue minimum standards of professional conduct for attorneys appearing and practicing in any manner before the SEC in the representation of issuers. Last November, the SEC circulated proposed Standards of Professional Conduct for Attorneys for public comment. The Jan. 30 release contains the final rules, which will take effect in late July or August of this year. Do these new SEC rules apply to you? If you work on securities law matters, they probably do. ‘APPEARING AND PRACTICING’ The new rules impose duties on any lawyer who is “appearing and practicing before the Commission” in the representation of issuers. That phrase is defined in 17 C.F.R. � 205.2(a) to mean any attorney who is: (i) Transacting any business with the Commission, including communications in any form; (ii) Representing an issuer in a Commission administrative proceeding or in connection with any Commission investigation, inquiry, information request, or subpoena; (iii) Providing advice in respect of the United States securities laws or the Commission’s rules or regulations thereunder regarding any document that the attorney has notice will be filed with or submitted to, or incorporated into any document that will be filed with or submitted to, the Commission, including the provision of such advice in the context of preparing, or participating in the preparation of, any such document; or (iv) Advising an issuer as to whether information or a statement, opinion, or other writing is required under the United States securities laws or the Commission’s rules or regulations thereunder to be filed with or submitted to, or incorporated into any document that will be filed with or submitted to, the Commission; … This definition is broad. Even if you are a junior associate, you may well be communicating with the SEC in some manner, or serving as second chair at an SEC administrative hearing, or respond to an SEC inquiry, investigation, or subpoena, or advise an issuer about federal securities laws, rules, or regulations regarding documents that need to be filed with the SEC, or advise an issuer about the preparation of such documents. All of those activities fall within the definition of “appearing and practicing” before the SEC. The final definition represents a compromise. The definition is broad enough to include attorneys who advise an issuer that the federal securities laws do not require the issuer to incorporate a particular document into a filing, registration statement or other submission to the SEC, but the definition does not cover an attorney who lacks notice that a document he or she is preparing or assisting in preparing will be submitted to the SEC. Thus, the SEC has explained that under the final definition: “[A]n attorney’s preparation of a document (such as a contract) which he or she never intended or had notice would be submitted to the Commission, or incorporated into a document submitted to the Commission, but which subsequently is submitted to the Commission as an exhibit to or in connection with a filing, does not constitute ‘appearing and practicing’ before the Commission.” What about lawyers who are employed by issuers, either as in-house counsel or in non-legal jobs? The definition of “appearing and practicing before the Commission” expressly excludes any attorney who is not providing legal services to an issuer. Thus, in its Jan. 30 release the SEC said: “Attorneys need not serve in the legal department of an issuer to be covered by the final rule, but they must be providing legal services to an issuer within the context of an attorney-client relationship.” If you fit within the broad definition of attorneys who are appearing and practicing before the SEC, and you become aware of “evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer,” then under 17 C.F.R. � 205.3(b) you “shall report such evidence to the issuer’s chief legal officer” (the “CLO,” who is typically the company’s General Counsel) — or to both the CLO and CEO — “forthwith.” Do not stop at “Go” or at any lower-ranking lawyer or officer in the company. Go directly to the CLO. After reporting to the CLO, you must follow up on your report. Specifically, unless the CLO “reasonably believes that no material violation has occurred, is ongoing, or is about to occur,” then the CLO must take “all reasonable steps to cause the issuer to adopt an appropriate response,” and shall advise you (the reporting attorney) about those steps. When you receive the CLO’s report, you must evaluate it — and unless you “reasonably believe” that the CLO or CEO has provided “an appropriate response within a reasonable time,” you must report the evidence of a material violation up the ladder to (a) the issuer’s audit committee, or (b) some other Board committee composed of independent directors, or (c) the issuer’s full Board. If you still do not reasonably believe that the issuer has made an appropriate response within a reasonable time, then you must explain your reasons to the people to whom you have reported. If you don’t fulfill these duties, then under 17 C.F.R. � 205.6 (entitled “Sanctions and discipline”), you will be subject to “the civil penalties and remedies for a violation of the federal securities laws,” and you will be “subject to the disciplinary authority of the Commission,” which may result in your being “censured, or being temporarily or permanently denied the privilege of appearing or practicing before the Commission.” That is no way to advance your career as a securities lawyer. And you might be subject to professional discipline by the state as well. (That is not double jeopardy.) You may be thinking, “Hey, I’m way down on the totem pole. I’m not the one who is going to ring up the General Counsel the minute I come across a suspicious document and say, ‘OK, Mr. CLO, I’ve just discovered some evidence of a material violation of the federal securities laws and I demand that the company make an appropriate response within a reasonable time or I’m going over your head to the audit committee!’ No, sir, that’s not going to be my job. Some grey-haired corner office partner is going to make that call. Not me!” But if you are reviewing documents, interviewing witnesses, or preparing witnesses to testify at an administrative hearing, or if you are meeting with someone in the issuer’s accounting department to get numbers for a Form 10-K — the kinds of things associates often do — then you are as likely as anyone to come across evidence of a material violation of the securities laws. Some of those violations just do not trickle up to high-level partners. As the SEC itself said in its Jan. 30th release, “because subordinate attorneys frequently perform a significant amount of work on behalf of issuers, we believe that subordinate attorneys are at least as likely (indeed, potentially more likely) to learn about evidence of material violations as supervisory attorneys.” Can you fulfill your duty under the new SEC rules by passing on the evidence to a supervisory attorney — either that grey-haired partner or someone else above you? Yes, you can. Under � 205.5 of the new rules (entitled “Responsibilities of a subordinate attorney”): (c) A subordinate attorney complies with � 205.3 if the subordinate attorney reports to his or her supervising attorney under � 205.3(b) evidence of a material violation of which the subordinate attorney has become aware in appearing and practicing before the Commission. You may therefore satisfy your duties under the rules either by reporting evidence of a material violation directly to the CLO or to your “supervising attorney.” (A “supervising attorney” is “a senior attorney who actually directs or supervises the actions of a subordinate attorney appearing and practicing before the Commission.” But “a senior attorney who supervises or directs a subordinate on other matters unrelated to the subordinate’s appearing and practicing before the Commission would not be a supervisory attorney … . “) What if you notify your supervisory attorney but he or she fails or refuses to notify the issuer’s CLO of the material evidence that you have discovered? The SEC is gentle with you here. If your supervising attorney doesn’t report the material evidence to the issuer’s CLO, then you “may” report to the CLO yourself, but you are not compelled to do so. And what if you get fired for reporting evidence of a material violation? Stay tuned — the SEC has issued proposed rules to protect attorneys who are discharged for reporting such evidence, and those proposals are still pending. Roy Simon is a professor of law and teaches ethics at Hofstra University School of Law.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

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 © 2020 ALM Media Properties, LLC. All Rights Reserved.