SEC Proposes Rules to Federalize Professional Conduct for Lawyers Practicing Before the SEC
"This [provision of the Sarbanes Oxley Act] is about making sure those lawyers. . . don’t violate the law and, in fact, more importantly, ensure that the law is being followed." -- Senator John Edwards, July 10, 2002 On November 21, 2002, the SEC proposed 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 law, the Standards pre-empt state law. Provisions of the Sarbanes Oxley Act Section 307 of the Sarbanes Oxley Act requires the SEC to “issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission.” In addition to other rules the SEC may adopt, Section 307 directs the SEC to adopt a rule “requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof,” up the ladder within the company, first to the chief legal officer or the chief executive officer and then to the board of directors or a committee of the board. Summary of the Standards 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 or any director, employee, or agent of 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 a satisfactory response is not received, to the board of directors or a committee of the board. If the board does not respond in a satisfactory manner, then, under certain circumstances, the attorney is required to effect a “noisy withdrawal” designed to alert the SEC of a problem. Appearing and practicing before the SEC Appearing and practicing before the SEC is broadly defined. It includes, communicating with the SEC; representing parties to and witnesses in an administrative proceeding, or in connection with an SEC investigation; preparing any document which the attorney has reason to believe will be filed with or incorporated into a filing or other submission to the SEC; and advising a person regarding the content of filings with or submissions to the SEC, or that such a filing or submission is not required. In its release proposing the Standards, the SEC indicated that it was broadly defining the lawyers that would be subject to the Standards. Becomes Aware of Evidence of An attorney has “evidence of a material violation” if the attorney has “information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur.” The SEC characterizes the standard as objective. An attorney had evidence of a material violation if the attorney has information that would lead a reasonable attorney to conclude there is a violation. A particular attorney’s personal belief that a violation has not occurred does not relieve the attorney from compliance with the rule if the belief is not reasonable. In its release proposing the Standards, the SEC notes that in determining whether or not an attorney becomes aware of evidence of a material violation the SEC will take into account the attorney’s training and experience. The same facts may cause a reasonable, experienced securities lawyer to become aware of a violation will not necessarily create awareness in an inexperienced lawyer.
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