Reporting requirements for lawyers under Sarbanes-Oxley: Has Congress really changed anything?

Georgetown Journal of Legal Ethics, The, Summer 2003 by Robertson, Darlene M, Tortora, Anthony A

INTRODUCTION***

Hoping to restore investor confidence eroded by the recent trend of corporate scandals and accounting frauds that have permeated Wall Street, President George W. Bush recently signed into law the Sarbanes-Oxley Act of 2002 ("Act").1 This bill, inter alia, authorizes the Securities and Exchange Commission ("Commission") to promulgate rules setting forth minimum standards of professional conduct for corporate attorneys representing publicly held corporations.2 Although President Bush has stated that the Sarbanes-Oxley Act contains "the most far-reaching reforms of American business practices since the time of Franklin Delano Roosevelt,"3 it is far from clear whether the Act actually authorizes the Commission to increase the responsibilities, duties, and potential liability of corporate attorneys.

Supporters of heightened responsibility for securities lawyers argue that rules that subject corporate attorneys to a higher standard of ethical conduct and hold them more accountable for the misdeeds of their corporate clients are necessary to reverse the recent trend of corporate scandals and to revitalize investor confidence.4 Moreover, advocates of heightened standards argue that the traditional latitude given to lawyers to regulate their own conduct when representing large publicly traded companies has proven to be largely unsuccessful and, as a result, a bill ordering the Commission to promulgate a uniform set of standards is long overdue.5 Alternatively, critics of heightened standards for attorneys argue that imposing additional requirements, responsibilities, and duties on corporate attorneys would have a detrimental impact on the attorney-client relationship and would reduce the effectiveness of corporate counsel, thus undermining the purpose for the legislation.6 Additionally, critics argue that the Act's provision regarding attorneys evidences a retreat from the Commission's twenty-year policy against regulating the professional conduct of lawyers and that, in the interests of efficiency, such regulation is better left to the states and local bar associations.7 Legal commentator Arthur D. Burger notes that "these required disclosures, while to some degree not dramatically different from what is already required of corporate lawyers under American Bar Association ("ABA") Rule 1.13, have created controversy and uncertainty among legal commentators about their ultimate consequences."8 Although it is unclear how the Act and the Commission's rule passed pursuant to it will affect attorneys appearing and practicing before the Commission, the Act has cast a spotlight on corporate lawyers and on the standards that govern their professional conduct.

Part I of this note will discuss section 307 of the Sarbanes-Oxley Act of 2002. Part II discusses whether the mandatory reporting requirements imposed by Section 307 will affect the sanctity of the attorney-client relationship. Part III evaluates whether an attorney's ethical duties have really changed by comparing the prescribed mandates of Section 307 with the disclosure requirements imposed by the Model Rules of Professional Conduct ("Model Rules") and the Restatement of the Law, Third, The Law Governing Lawyers ("Restatement").9 Additionally, Part III explores whether Congress will be effective in reducing corporate fraud and restoring investor confidence in the securities markets by explicitly setting forth ethical obligations for attorneys appearing and practicing before the Commission.

I. SARBANES-OXLEY, SECTION 307

Section 307 of the Sarbanes-Oxley Act requires the Commission to issue rules setting forth minimum standards of professional conduct for attorneys appearing and practicing before it. The Commission was specifically instructed to promulgate 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, to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof); [and] if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.10

A cursory reading of this section indicates that Congress has required the Commission to impose heightened requirements on lawyers practicing before it. Supporters of this proposition argue that prior to the Act, "federal securities law did not require a lawyer to report corporate wrongdoing to anybody or to do anything about corporate fraud"11 and the Model Rules give attorneys substantial latitude since Rule 1.13 only requires that "the lawyer shall proceed as is reasonably necessary in the best interest of the organization."12 Accordingly, commentators argue that Section 307's mandatory reporting requirements significantly increase the ethical responsibilities and duties of corporate attorneys.13 Upon further analysis, however, it appears that the language of Section 307 does not give the Commission the authority to impose any obligations on lawyers beyond those which have long been required of them by courts, the Model Rules, and the Restatement. In addition to the language of Section 307, the legislative history supports the conclusion that Congress did not authorize the Commission to impose any new obligations on attorneys.14 In particular, in discussing Section 307 Senator Enzi stated that it "basically instructs the SEC to start doing exactly what they were doing 20 years ago, to start enforcing this up-the-ladder principle."15 The drafters intended only to remind lawyers of their existing duties and ensure that the Commission and the ABA are appropriately enforcing those duties.16