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As the battle lines draw up again over the Securities and Exchange Commission’s proposed “noisy withdrawal” rule for lawyers, there’s been a shift in the positions of the contending forces. Most noticeably, the practicing bar has staked out fallback positions in the face of the commission’s seeming determination to press through with some kind of requirement for attorneys to report wrongdoings of clients. On Jan. 23, the commission made final an “up-the-ladder” reporting rule that requires both in-house and retained lawyers to report misconduct as far up the chain of command of public corporations as is necessary to put a stop to it. That rule was specifically mandated by Congress in the Sarbanes-Oxley Act and was relatively uncontroversial. On the same day, the commission postponed consideration of noisy withdrawal, which had provoked spirited opposition from securities law firms, state disciplinary authorities and professional organizations, such as the American Bar Association (ABA) and the American Corporate Counsel Association (ACCA). A group of 55 ethics and securities law professors, led by Roger C. Cramton of Cornell University, Susan P. Koniak of Boston University and George M. Cohen of the University of Virginia, were among the few who spoke in favor of the rule. It would require attorneys to withdraw from representation of corporations that are intransigent in their wrongdoing and to make a noise of it by notifying the commission. The commission gave until April 7 for additional comments on noisy withdrawal. At the same time, it solicited comments on an alternative “reporting out” proposal. Under the alternative, an attorney would still be required to withdraw in the face of entrenched misconduct, but the burden would be on the corporation to report his withdrawal to the commission. CHANGED LANDSCAPE In an interview, ABA President A.P. Carlton said the organization remains opposed to any proposal that would require an attorney to cease being an advocate for his client and instead become a policeman. From that perspective, he argued, the commission’s alternative proposal is no better than mandatory noisy withdrawal, since a lawyer’s withdrawal would compel his client to disclose corporate confidences. While acknowledging that up-the-ladder reporting might not be sufficient to deter misconduct at a company like Enron, where corruption is alleged to have permeated all levels of the hierarchy, Carlton maintained that Enron and other recent scandals should not set the pattern for the regulation of attorneys. “There’s been no proof in the Enron case that lawyers committed wrongdoing,” he said, adding that Arthur Andersen should have blown the whistle on the company’s practice of “serial limited engagements” — parceling out matters in spoonfuls so that blinkered attorneys could give the OK to dubious transactions. Though the ABA’s overall goal may remain the same, comparing its April 4 comment letter with its previous letter from last December reveals what appear to be tactical retreats. The new letter does not argue that the commission lacks congressional authority to issue a reporting-out rule or that state disciplinary bodies are adequately policing the conduct of securities lawyers, both of which figured prominently in its earlier letter. In addition, the new letter offers suggestions for how to improve mandatory reporting-out in the event the commission adopts it. It’s not hard to guess the reason for the change in tactics. At its Jan. 23 open meeting, the SEC dashed any hope that the postponement of noisy withdrawal spelled its doom. Several commissioners said that they believed the SEC had the authority to issue a reporting-out rule and that such a rule was probably necessary. Then-Chairman Harvey L. Pitt reiterated remarks he had made to an ABA gathering last year, to the effect that he had been disappointed with the states’ handling of disciplinary matters referred by the commission. Cramton said that those remarks, as well as the fact that the commission adopted many of the suggestions of the 55 professors with respect to the up-the-ladder rule, made him hopeful that reporting-out would come to pass. That success probably explains why, in their April 7 follow-up letter, 41 professors pledged their support for either noisy withdrawal or its alternative, suggesting only relatively minor changes. Cramton claimed that end-of-semester scheduling difficulties, and not a decrease in support, accounts for the decline in numbers, from 55 to 41 professors. Cramton added that he and his colleagues differ from Carlton and other practitioners in thinking that, outside of a trial, attorneys are supposed to be counselors who guide their clients and not mere advocates for whatever the client wants. He suspects that it is becoming harder for practitioners to fulfill that role as corporations increasingly shop around for compliant attorneys. Other practitioner groups have also changed their stance. In its December comment letter, ACCA did not even acknowledge that many states permit, and some even mandate, outside reporting by attorneys. While ACCA is still opposed to reporting-out, the organization’s new letter draws on that state experience to push the idea of permissive reporting. Like the ABA, ACCA even offers its own version of mandatory reporting-out, in case the SEC is so inclined. COMPLIANCE COMMITTEES A December letter by 77 law firms made no mention of qualified legal compliance committees, one of the key features of the commission’s proposed rules. An April 7 letter by the firms, now grown to 79, remedies that oversight, even if only to dismiss the committees as being inadequate to protect the attorney-client privilege. Under the SEC’s proposals, corporations that set up such committees, which must consist of at least three independent directors, relieve their attorneys of a significant burden. With up-the-ladder reporting, an attorney cannot rest until he sees the corporation take appropriate action, unless he reports the misconduct to a qualified committee. Similarly, an attorney need not make a noisy withdrawal if he reports to a committee and, under the alternative reporting-out proposal, a corporation with a committee need not notify the commission if an attorney withdraws. Though practitioners had little good to say about qualified committees in the first round of comments, they may be warming to the idea, if only out of necessity. Mike Liles Jr., a partner at Seattle’s Karr Tuttle Campbell, said that qualified committees were a topic of discussion at the ABA’s spring meeting of the business law section two weeks ago. He said that while the “turf reaction” of most in-house and corporate attorneys was to reject the idea, attorneys in the audience who serve on boards of directors were much more receptive. Liles speculates that malpractice insurers will push attorneys toward insisting that their clients adopt the qualified committees, because they offer a protection against liability even if the SEC’s rule stops at up-the-ladder reporting.

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