25 - SEC Adopts Final Ethical Rules for Lawyers 

February, 2003 - Darrel A Rice

On January 29, 2003, pursuant to the requirements of Section 307 of the Sarbanes-Oxley Act of 2002, the SEC issued a release adopting a new Rule 205 entitled “Standards of Professional Conduct for Attorneys Appearing and Practicing Before the Commission in the Representation of an Issuer” (the “Standards”). The Standards set forth minimum ethical standards of conduct for attorneys practicing before the SEC and, to the extent the Standards are inconsistent with state ethical laws, the Standards purport to pre-empt state law. As initially proposed, the Standards would have required a lawyer who became aware of a material violation of certain federal or state laws to resign from representation of the issuer under certain circumstances for “professional considerations,” and advise the SEC of such resignation. The SEC deferred action on this proposed “noisy withdrawal” rule, and extended the period during which interested persons could comment on the proposed rule. The SEC also proposed an alternative to the noisy withdrawal rule under which an attorney who becomes aware of a material violation that is not properly addressed by the issuer would be required to resign for professional considerations. Under this alternative rule, however, the issuer would be required to notify the SEC of the resignation, unless the issuer satisfied certain requirements to avoid notification. Summary of the Final Rule on “Up the Ladder” Reporting The Standards can be summarized as follows: If, in appearing and practicing before the SEC in the representation of an issuer, an attorney becomes aware of evidence of, a material violation by the issuer, the attorney must report the material violation “up the ladder” within the issuer, starting with the chief legal officer (or if there is no chief legal officer, the chief executive officer) and, if an appropriate response is not received, to the audit committee of the board of directors or another committee of the board composed solely of independent directors (or if no such committee exists, to the full board). Appearing and practicing before the SEC In response to comments, the SEC significantly reduced the number of attorneys who are “appearing and practicing” before the SEC and therefore subject to the rule. As revised, appearing and practicing before the SEC includes: transacting business with the SEC, including communications; representing an issuer in an administrative proceeding, or in connection with an SEC investigation, inquiry, information request or subpoena; providing advice regarding securities laws or rules applicable to any document the attorney has notice will be filed with the SEC; and advising an issuer as to whether information is required to be filed with the SEC. As adopted, the Standards do not cover a person who, although an attorney, does not enter into an attorney-client relationship with the issuer. The SEC stated that the determination of whether an attorney-client relationship exists will be a federal question and will turn on the “expectations and understandings between the attorney and the issuer.” The Standards do not extend to a “non-appearing foreign attorney,” defined as an attorney admitted outside the U.S. who does not hold himself out as practicing U.S. law. Such a lawyer may conduct activities that would constitute practicing before the SEC, so long as either such activities are incidental to and in the ordinary course of his practice in a foreign jurisdiction or the foreign lawyer is appearing and practicing with a licensed U.S. lawyer.


Link to article


WSG Member: Please login to add your comment.