SEC Adopts Attorney Conduct Rule Under Sarbanes-Oxley Act


Washington, D.C., January 23, 2003 -- The Securities and Exchange Commission today adopted final rules to implement Section 307 of the Sarbanes-Oxley Act by setting "standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers." In addition, the Commission approved an extension of the comment period on the "noisy withdrawal" provisions of the original proposed rule and publication for comment of an alternative proposal.

On Nov. 6, 2002, the Commission voted to propose the standards of professional conduct in a new Part 205 of 17 CFR. That proposal defined who is appearing and practicing before the Commission in the representation of an issuer. Attorneys were required to report evidence of a material violation "up-the-ladder" within an issuer. In addition, under certain circumstances, these provisions permitted or required attorneys to effect a so-called "noisy withdrawal" -- that is, to withdraw from representing an issuer and notify the Commission that they have withdrawn for professional reasons.

The rules adopted by the Commission today will

  • require an attorney to report evidence of a material violation, determined according to an objective standard, "up-the-ladder" within the issuer to the chief legal counsel or the chief executive officer of the company or the equivalent;
  • require an attorney, if the chief legal counsel or the chief executive officer of the company does not respond appropriately to the evidence, to report the evidence to the audit committee, another committee of independent directors, or the full board of directors;
  • clarify that the rules cover attorneys providing legal services to an issuer who have an attorney-client relationship with the issuer, and who have notice that documents they are preparing or assisting in preparing will be filed with or submitted to the Commission;
  • provide that foreign attorneys who are not admitted in the United States, and who do not advise clients regarding U.S. law, would not be covered by the rule, while foreign attorneys who provide legal advice regarding U.S. law would be covered to the extent they are appearing and practicing before the Commission, unless they provide such advice in consultation with U.S. counsel;
  • allow an issuer to establish a "qualified legal compliance committee" (QLCC) as an alternative procedure for reporting evidence of a material violation. Such a QLCC would consist of at least one member of the issuer's audit committee, or an equivalent committee of independent directors, and two or more independent board members, and would have the responsibility, among other things, to recommend that an issuer implement an appropriate response to evidence of a material violation. One way in which an attorney could satisfy the rule's reporting obligation is by reporting evidence of a material violation to a QLCC;
  • allow an attorney, without the consent of an issuer client, to reveal confidential information related to his or her representation to the extent the attorney reasonably believes necessary (1) to prevent the issuer from committing a material violation likely to cause substantial financial injury to the financial interests or property of the issuer or investors; (2) to prevent the issuer from committing an illegal act; or (3) to rectify the consequences of a material violation or illegal act in which the attorney's services have been used;
  • state that the rules govern in the event the rules conflict with state law, but will not preempt the ability of a state to impose more rigorous obligations on attorneys that are not inconsistent with the rules; and
  • affirmatively state that the rules do not create a private cause of action and that authority to enforce compliance with the rules is vested exclusively with the Commission.

In addition, the final rules modify the definition of the term "evidence of a material violation," which defines the trigger for an attorney's obligation to report up-the-ladder within an issuer. The revised definition confirms that the Commission intends an objective, rather than a subjective, triggering standard, involving credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing or is about to occur.

The Commission voted to extend for 60 days the comment period on the "noisy withdrawal" and related provisions originally included in proposed Part 205. Given the significance and complexity of the issues involved, including the implications of a reporting out requirement on the relationship between issuers and their counsel, the Commission decided to continue to seek comment and give thoughtful consideration to these issues.

The Commission also voted to propose an alternative to "noisy withdrawal" that would require attorney withdrawal, but would require an issuer, rather than an attorney, to publicly disclose the attorney's withdrawal or written notice that the attorney did not receive an appropriate response to a report of a material violation. Specifically, an issuer that has received notice of an attorney's withdrawal would be required to report the notice and the circumstances related thereto on form 8-K, 20-F or 40-F, as applicable, within two days of receiving the attorney's notice. Accordingly, the proposal includes proposed amendments to forms 8-K, 20-F, and 40-F to require issuers to report an attorney's written notice under the proposed rule. The proposing release also will seek comment on whether there are circumstances in which an issuer should be permitted not to disclose an attorney's written notice.

The proposed rules also would permit an attorney, if an issuer has not complied with the disclosure requirement, to inform the Commission that the attorney has withdrawn from representing the issuer or provided the issuer with notice that the attorney has not received an appropriate response to a report of a material violation.

The final rules will become effective 180 days after publication in the Federal Register to provide issuers, attorneys, and law firms sufficient time to put in place procedures to comply with their requirements, and to allow the Commission the opportunity to consider the adoption of the proposed noisy withdrawal provision or the alternative disclosure procedure proposed today.

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The full text of detailed releases concerning each of these items will be posted to the SEC Web site as soon as possible.


Last modified: 1/23/2003