SEC Proposes Rules Prescribing Standards of Professional Conduct for Attorneys Pursuant to the Sarbanes-Oxley Act
November 26, 2002
On November 21, 2002, following the dictates of
Section 307 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange
Commission (SEC) issued proposed rules prescribing standards of professional
conduct for lawyers who represent issuers before the SEC. The proposed rules
would govern in-house and outside counsel, as well as lawyers (including
foreign-licensed lawyers) who do not typically interact with the SEC but work on
matters that may be incorporated into reports filed with the SEC.
“Up The Ladder” Reporting
The proposed rules require a lawyer who
“becomes aware of evidence of a material violation by the issuer” to take steps
to report that evidence to representatives of the company. Initially, the
reporting lawyer is required to notify the company’s chief legal officer (CLO)
or the chief legal officer and chief executive officer (CEO). If the initial
report does not yield an adequate and timely response, the reporting lawyer
must take the evidence further up the corporate ladder, to the audit committee
or to a committee comprised entirely of independent members of the company’s
board of directors.
Noisy Withdrawal
In the event that the reporting lawyer
reasonably believes that the company and its officers are not responding to the
evidence of a material violation in the manner required by the rules, the
lawyer must take steps to withdraw from representing the company before the
SEC and to notify the SEC of the withdrawal for “professional considerations.”
In addition, the lawyer is obligated to disaffirm any submission to the SEC
that the lawyer has prepared or has assisted in preparing that he or she
“reasonably believes is or may be materially false or misleading.” For lawyers employed by the company, withdrawal from the representation is not
required, but they are required to disaffirm with the SEC any potentially false
or misleading submissions.
Qualified Legal Compliance Committee
For companies concerned about the reporting and “noisy withdrawal”
procedures, the proposed rules suggest an alternative means for reporting and
taking action on potential violations. Issuers may create a qualified legal
compliance committee (QLCC) for the purpose of investigating reports of material
violations. The QLCC would be authorized to direct the issuer to take action to
avoid or correct the reported violation. The reporting lawyer, however, would
not be subject to the rule’s “noisy withdrawal” requirements.
Sanctions for Violations
Violations of the standards of professional
conduct prescribed by the proposed rules would be subject to prosecution by the
SEC "in the same manner as a violation of the Securities Exchange Act of 1934.”
Thus, someone who violates the SEC’s professional conduct standards could be
subject to all the remedies and sanctions available under the Exchange Act,
including injunctions, cease and desist orders, and officer and director bars
for lawyers who are officers and directors.
Other sections of the proposed rules address:
how lawyers should document their efforts to report violations; when lawyers
may disclose client confidences to the SEC without violating lawyer-client
privilege; and what obligations apply to supervisory versus subordinate lawyers.
The proposed rules, along with the SEC's
introduction and comments, are available at the SEC Web site (www.sec.gov).
Interested persons are invited to submit comments to the proposed regulations,
which must be received at the SEC on or before December 18, 2002. The SEC is
expected to adopt final rules by late January 2003.
Holland & Knight will be tracking this and
other developments in the implementation of the Act. For further information,
please contact Michael Jamieson, Christopher Myers, Jennifer Short, or Steve Sonberg at 1-888-688-8500.