After Sarbanes-Oxley: A Panel Discussion on Law and Legal Ethics in the Era of Corporate Scandal

Georgetown Journal of Legal Ethics, The, Fall 2003 by Gonson, Paul

I used to be able to repeat 10-b user employed manipulative and deceptive devices and contrivances in contravention of sec rules. The question held out not void for vagueness.

RICHARD HUMES

Okay, let's assume that you made the decision that you've observed conduct that requires you to report. You have three options. One, you can go to what is called a qualified legal compliance committee, QLCC for short, and the rule allows issuers to set up these committees which must be composed of independent directors, and they must have the authority to investigate violations and to direct the company to take remedial measures. I'm really compressing it but that's the gist of it. You can also report to your supervisory attorney.

PAUL GONSON

But the company doesn't have to have QLCC.

RICHARD HUMES

No there is no obligation. And I understand there is quite a debate in the legal community over whether it's prudent for a company to develop a QLCC. I think most of the view is it depends on what we do about reporting out. If you report to your supervisory attorney and that is also a term that is defined in the rule then that ends your obligations under the rule. It is then incumbent upon the QLCC or your supervisory attorney to inquire into the matter to determine whether a violation has taken place. The third option is to report to the general counsel or the Chief Legal Officer [CLO] of the company. And if you do that your obligations are very different.

If you report to the general counsel or the CLO, then that triggers a duty on the part of the general counsel to conduct an inquiry to determine whether in fact the violation you have cited occurred. And he or she must report that to the attorney as to whether a violation has occurred, and the attorney then has an obligation to determine whether the general counsel has provided an appropriate response. And under the rule there are four appropriate responses: (1) that no violation has taken place; (2) that a violation has taken place but the issuer has implemented appropriate remedial measure; (3) if the company has retained counsel to investigate the matter that the lawyer has reported to the company, and the company has implemented or is implementing the procedures recommended by the investigating attorney; and (4) if the matter is in litigation and a lawyer has been retained to represent the company, that lawyer can opine within the confines of his Rule 11 obligations that the company has a colorable defense. So if the reporting attorney gets an appropriate response back from the general counsel, then his or her obligations are met.

Assuming the reporting attorney does not get an appropriate response then he or she must report it to the audit committee, and the same process repeats itself. The audit committee would be obligated to conduct an inquiry to report back, and once again the lawyer would have to make a determination whether he received an appropriate response. Tf he doesn't receive an appropriate response, then he has to notify the full board of directors, the chief legal officer, and the chief executive officer that he made a report and did not receive an appropriate response after pursuing up the ladder within the issuer. At this point in time there is no obligation on the reporting attorney to report any further under the rule, including to the Commission. And that in summary how the rule would work.