Last month, the SEC published for comment Proposed Rules under Section 307 of the Sarbanes-Oxley Act setting new standards of professional conduct for attorneys. The SEC will issue Final Rules by January 26, 2003
- Company Counsel represent the Company and not individual executives or directors.
- Company Counsel are expected to be honest in their dealings with the SEC and investors, and should insist on the same from others who speak for the Company.
- Company Counsel are gatekeepers, distinguishing potential wrongdoing within the organization from false alarms. There is nothing novel about Company Counsel investigating potential issues and recommending remedial action where warranted.
- Company Counsel most effectively serve the Company by communicating with management, the Board and each other, reaching consensus where possible, and elevating unresolved issues where necessary.
- Section 307 and the Proposed Rules impose new reporting obligations and procedures on Company Counsel. For some Company Counsel, these may formalize existing practices.
- Corporate governance and compliance issues may consume greater time. Company Counsel may find themselves addressing more issues (and non-issues), and documenting their responses. It is possible that more issues will be elevated to the Board or Board committees.
- The Proposed Rules purport to allow issuers to disclose attorney-client privileged communications and attorney work product to the SEC without waiving those privileges and protections.
- Under some circumstances, outside Counsel may be required to effect a "noisy withdrawal" from their representation of a public company client (telling the SEC they are doing so for "professional considerations"), and both in-house and outside Counsel may be obligated to "disaffirm" the issuer's filings.
- Company Counsel may be sanctioned for violating the Proposed Rules, although it is unclear whether the SEC will prosecute attorneys with any greater frequency than it has under the existing laws.
(i) communicate or transact any business with the SEC, including by representing any party in connection with an SEC administrative proceeding, investigation, inquiry or information request;(ii) prepare any report, statement, opinion or other material that the attorney has reason to believe will be filed with or otherwise provided to the SEC, even if the attorney only prepares a portion of a document that is filed or submitted to the SEC by someone else; and(iii) advise any party with respect to its obligation to file or provide the SEC with material, regardless of whether the party ultimately does so.
(i) withdraw immediately from the representation of the issuer;(ii) provide written notice to the SEC that the withdrawal was based on "professional considerations" within one business day of withdrawing; and(iii) promptly "disaffirm" any submission to the SEC that the attorney has prepared or assisted in preparing that the attorney reasonably believes is or may be materially false or misleading.
(i) prevent the commission of an "illegal act" that the attorney reasonably believes likely will result in either "substantial injury" to the issuer or investors, or the perpetration of fraud on the SEC;(ii) rectify past illegal conduct by the issuer that was aided by the disclosing attorney's services; and(iii) defend himself or herself against charges of attorney misconduct by using the documentation of his or her response to reports of wrongdoing, for example, to rebut charges that he or she was not reasonable in believing that an issuer appropriately responded to a report of a violation.
- Define the Problem. Compliance with Section 307 and the Final Rules will require Counsel to gather key information because without the facts it is impossible to evaluate whether "evidence" of material violations, as opposed to an insignificant error, exists.
- Communicate. Section 307 and the Proposed Rules are largely about communication - among counsel, management and the Board. As in the past, the best response to a client problem is one reached by consensus, based on a common understanding of the facts and shared concern for the Company.
- Keep a File. The Proposed Rules require Company Counsel to document their responses to potential situations. This may be easier said than done; corporate crises often emerge quickly, which sometimes makes it difficult to document the string of conversations and documents upon which decisions are made. At a minimum, Company Counsel should segregate contemporaneous notes, email etc., which can be organized later. Company Counsel also should evaluate the Company's document preservation policies whenever new issues arise.
- Protect The Privilege. Remember that the Company is the client, and not its management. Personnel may need to be reminded that their communications with counsel are not privileged with respect to others in the Company, that they have an obligation to preserve the privilege, and that the Company has the right to waive the privilege.
- Think Outside The 307 Box. Section 307 and the Proposed Rules do not supplant the other obligations of the Company and its Counsel. Information of wrongdoing, regardless of whether it constitutes "evidence" of a "material violation" for Section 307 purposes, may require investor disclosure or trigger other reporting federal, state, or contractual obligations.
- Plan Ahead. Counsel cannot anticipate corporate crises, much less "material violations" that trigger Section 307 obligations. For now, we recommend that you simply understand the proposals, and advise subordinates (for whom the CLO is responsible) and management of their provisions. The Board similarly should be advised as to the SEC's definition of their responsibilities. The Company may also wish to consider whether it would designate a QLCC, if the Final Rules were to retain that alternative.
- Seek Guidance. Section 307 and the Proposed Rules are new. Predictably, questions will arise as to how a "reasonable" attorney would interpret "information," whether a violation is "material," whether a proposed response is "appropriate," and whether everyone has acted in timely manner. We encourage you not to exercise judgment on these issues in isolation.