News
Corporate
Jul. 30, 2002
Balancing Act
Forum Column - By Lawrence J. Fox - While lawyers have watched their 401(k) accounts sink to levels that will keep all of us working until age 75, the U.S. Senate has launched a full-scale attack on our profession. The only fact more troubling than the unanimous vote is the silence of the lawyers of America as it raced its way toward passage.
Forum Column
By Lawrence J. Fox
While lawyers have watched their 401(k) accounts sink to levels that will keep all of us working until age 75, the U.S. Senate has launched a full-scale attack on our profession. The only fact more troubling than the unanimous vote is the silence of the lawyers of America as it raced its way toward passage.
To what do I refer? SB2673, the Public Company Accounting Reform and Investor Protection Act of 2002, is the remarkable proposal that brought Republicans and Democrats together in a transparent attempt to escape blame for Enron and its progeny by pandering to a restive public. It includes a provision captioned, "Rules of Professional Responsibility for Lawyers."
This section of the bill would require the Securities and Exchange Commission to adopt rules for lawyers who practice before that agency, rules that would mandate that those lawyers report "evidence of a material violation of the securities laws or breach of fiduciary duty or similar violation by a company or agent thereof" to the chief legal officer or chief executive officer of the company and, if those individuals don't "appropriately respond," report the evidence to the audit committee of the board.
This proposal is the brainchild of professor Richard Painter of the University of Illinois College of Law who enlisted a number of his academic colleagues to endorse this idea in a letter to Chairman Harvey Pitt of the Securities and Exchange Commission.
Next, Sen. John Edwards, D-N.C., a former trial, not corporate, lawyer embraced the idea as a way of responding to those who alleged that the lawyers are responsible for the scandals along with the accountants.
At first blush, the proposal might seem benign. Lawyers are generally opposed to violations of the securities laws, breaches of fiduciary duty and similar violations, so why should we not applaud this legislation? Because it is a frontal attack on terribly important principles of the American Bar Association and both bad ethics and bad public policy.
The very idea of the Senate enacting or directing others to enact rules of professional responsibility for lawyers should be enough to cause collective professional indigestion. A fundamental tenet is that our rules shall be promulgated by the states. Lawyers often have correctly resisted efforts by the federal government to usurp the state highest courts' traditional role of regulating lawyers.
Not too long ago, the Conference of Chief Justices, under the then-able leadership of Chief Justice Norman Veasey of Delaware, upheld this precept when it successfully had struck down attempts by the Justice Department under Attorney General Janet Reno that sought to apply federal ethics standards to lawyers employed by the federal government.
Whether lawyers are regulated at the state level or the national level, the ABA has long defended the principle that regulation of lawyers should come from the courts because the courts uniquely are in a position to maintain the independence of the profession. Indeed, both the haste and unanimity with which this misguided legislation was adopted demonstrates better than anything why lawyer regulation should not be left to the frenzy of the moment.
Second, there has been no demonstration that any provision like this is needed. From the highly publicized financial debacles that are the catalyst for this legislative response, there has not been a single suggestion that any lawyer knew something, failed to report it within the enterprise and disaster followed.
At the present time, in fact, it appears that our present Rules of Professional Conduct, in all respects, were quite adequate to the task of providing lawyers with the framework for dealing with the multiple issues generated by Enron, WorldCom and others. The fact that there have been allegations that lawyers violated our rules, even if those allegations turn out to be true, is no reason to change them.
Third, at its midyear meeting in February, the ABA renewed its commitment to present Rule 1.13. That rule provides an elegant and appropriate framework for a lawyer's professional responsibility when the lawyer is representing an organization.
It requires that the lawyer shall proceed as reasonably necessary in the best interest of the organization when the lawyer knows that an organizational agent is acting or refusing to act in a way that is likely to result in "substantial injury to the organization." While that rule does not mandate what the lawyer should do in those circumstances, a decision properly left to the discretion of the lawyer, it does make clear that the lawyer has an obligation to act.
This bill, which suggests that a lawyer could lose his or her license to practice law because he or she either failed to uncover a securities law violation or a breach of fiduciary duty, or reported to the wrong individual or failed to go far enough in reporting up the corporate ladder, improperly micromanages lawyer's professional responsibilities and the proper role lawyers should play regarding their corporate clients.
This is especially true because the proponents of this change were unable to demonstrate that Rule 1.13 was not insufficient in regard to the recently publicized highly publicized scandals.
Fourth, the rule masquerades as a regulation of professional responsibility but in fact has nothing to do with ethics. Rather, it is designed to change those corporate lawyers who appear before the SEC into surveillance operatives and junior regulators. If we had truth-in-naming legislation, this provision would be captioned the Lawyer Unlimited Liability Act of 2002.
While it purports only to require reporting within the client organization, its effect is quite different. When, with the benefit of hindsight, it turns out that there were securities law violations or breaches of fiduciary duties by the client, the SEC lawyers for the company will be held responsible for failing to report to the required individuals or board committees. At that time, creditors, shareholders and regulators will try to extract damages or disciplinary relief for the lawyer's breach of this new obligation.
Given this potential exposure, those retained to represent the company before the SEC not only will undertake the tasks for which they were retained but also, a matter of self-preservation, will assume a new regulatory role. This undoubtedly will cause them to err on the side of reporting far too much which could disrupt the client organization.
As so many others have done in the context of Enron, this legislation completely confuses the responsibilities of lawyers with the responsibilities of their clients. Moreover, it changes the role of the lawyers into one that far more resembles the role accountants and government regulators should play. The result is legislation that lawyers should oppose vehemently.
Though it may be too late, it is our job to explain to the members of the House of Representatives the bad public aspects of the bill. To galvanize us into action, the ABA should adopt an appropriate resolution reaffirming our existing policy and should go on record in opposition to this new idea of lawyer liability masquerading as a rule of ethics.
State or local bar association should draft an appropriate response as soon as possible so that appropriate House of Delegates action can occur when the ABA meets in August in Washington, D.C.
Lawrence J. Fox is a partner with Drinker Biddle & Reath in Philadelphia.
By Lawrence J. Fox
While lawyers have watched their 401(k) accounts sink to levels that will keep all of us working until age 75, the U.S. Senate has launched a full-scale attack on our profession. The only fact more troubling than the unanimous vote is the silence of the lawyers of America as it raced its way toward passage.
To what do I refer? SB2673, the Public Company Accounting Reform and Investor Protection Act of 2002, is the remarkable proposal that brought Republicans and Democrats together in a transparent attempt to escape blame for Enron and its progeny by pandering to a restive public. It includes a provision captioned, "Rules of Professional Responsibility for Lawyers."
This section of the bill would require the Securities and Exchange Commission to adopt rules for lawyers who practice before that agency, rules that would mandate that those lawyers report "evidence of a material violation of the securities laws or breach of fiduciary duty or similar violation by a company or agent thereof" to the chief legal officer or chief executive officer of the company and, if those individuals don't "appropriately respond," report the evidence to the audit committee of the board.
This proposal is the brainchild of professor Richard Painter of the University of Illinois College of Law who enlisted a number of his academic colleagues to endorse this idea in a letter to Chairman Harvey Pitt of the Securities and Exchange Commission.
Next, Sen. John Edwards, D-N.C., a former trial, not corporate, lawyer embraced the idea as a way of responding to those who alleged that the lawyers are responsible for the scandals along with the accountants.
At first blush, the proposal might seem benign. Lawyers are generally opposed to violations of the securities laws, breaches of fiduciary duty and similar violations, so why should we not applaud this legislation? Because it is a frontal attack on terribly important principles of the American Bar Association and both bad ethics and bad public policy.
The very idea of the Senate enacting or directing others to enact rules of professional responsibility for lawyers should be enough to cause collective professional indigestion. A fundamental tenet is that our rules shall be promulgated by the states. Lawyers often have correctly resisted efforts by the federal government to usurp the state highest courts' traditional role of regulating lawyers.
Not too long ago, the Conference of Chief Justices, under the then-able leadership of Chief Justice Norman Veasey of Delaware, upheld this precept when it successfully had struck down attempts by the Justice Department under Attorney General Janet Reno that sought to apply federal ethics standards to lawyers employed by the federal government.
Whether lawyers are regulated at the state level or the national level, the ABA has long defended the principle that regulation of lawyers should come from the courts because the courts uniquely are in a position to maintain the independence of the profession. Indeed, both the haste and unanimity with which this misguided legislation was adopted demonstrates better than anything why lawyer regulation should not be left to the frenzy of the moment.
Second, there has been no demonstration that any provision like this is needed. From the highly publicized financial debacles that are the catalyst for this legislative response, there has not been a single suggestion that any lawyer knew something, failed to report it within the enterprise and disaster followed.
At the present time, in fact, it appears that our present Rules of Professional Conduct, in all respects, were quite adequate to the task of providing lawyers with the framework for dealing with the multiple issues generated by Enron, WorldCom and others. The fact that there have been allegations that lawyers violated our rules, even if those allegations turn out to be true, is no reason to change them.
Third, at its midyear meeting in February, the ABA renewed its commitment to present Rule 1.13. That rule provides an elegant and appropriate framework for a lawyer's professional responsibility when the lawyer is representing an organization.
It requires that the lawyer shall proceed as reasonably necessary in the best interest of the organization when the lawyer knows that an organizational agent is acting or refusing to act in a way that is likely to result in "substantial injury to the organization." While that rule does not mandate what the lawyer should do in those circumstances, a decision properly left to the discretion of the lawyer, it does make clear that the lawyer has an obligation to act.
This bill, which suggests that a lawyer could lose his or her license to practice law because he or she either failed to uncover a securities law violation or a breach of fiduciary duty, or reported to the wrong individual or failed to go far enough in reporting up the corporate ladder, improperly micromanages lawyer's professional responsibilities and the proper role lawyers should play regarding their corporate clients.
This is especially true because the proponents of this change were unable to demonstrate that Rule 1.13 was not insufficient in regard to the recently publicized highly publicized scandals.
Fourth, the rule masquerades as a regulation of professional responsibility but in fact has nothing to do with ethics. Rather, it is designed to change those corporate lawyers who appear before the SEC into surveillance operatives and junior regulators. If we had truth-in-naming legislation, this provision would be captioned the Lawyer Unlimited Liability Act of 2002.
While it purports only to require reporting within the client organization, its effect is quite different. When, with the benefit of hindsight, it turns out that there were securities law violations or breaches of fiduciary duties by the client, the SEC lawyers for the company will be held responsible for failing to report to the required individuals or board committees. At that time, creditors, shareholders and regulators will try to extract damages or disciplinary relief for the lawyer's breach of this new obligation.
Given this potential exposure, those retained to represent the company before the SEC not only will undertake the tasks for which they were retained but also, a matter of self-preservation, will assume a new regulatory role. This undoubtedly will cause them to err on the side of reporting far too much which could disrupt the client organization.
As so many others have done in the context of Enron, this legislation completely confuses the responsibilities of lawyers with the responsibilities of their clients. Moreover, it changes the role of the lawyers into one that far more resembles the role accountants and government regulators should play. The result is legislation that lawyers should oppose vehemently.
Though it may be too late, it is our job to explain to the members of the House of Representatives the bad public aspects of the bill. To galvanize us into action, the ABA should adopt an appropriate resolution reaffirming our existing policy and should go on record in opposition to this new idea of lawyer liability masquerading as a rule of ethics.
State or local bar association should draft an appropriate response as soon as possible so that appropriate House of Delegates action can occur when the ABA meets in August in Washington, D.C.
Lawrence J. Fox is a partner with Drinker Biddle & Reath in Philadelphia.
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