Academic journal article The Review of Litigation

Regulation of Lawyer Conduct under Sarbanes-Oxley: Minimizing Law-Firm Liability by Encouraging Adoption of Qualified Legal Compliance Committees

Academic journal article The Review of Litigation

Regulation of Lawyer Conduct under Sarbanes-Oxley: Minimizing Law-Firm Liability by Encouraging Adoption of Qualified Legal Compliance Committees

Article excerpt


The Sarbanes-Oxley Act of 2002' represented Congress's rapid2 response to major corporate scandals such as the collapse of Enron Corporation, the bankruptcy of WorldCom, and the executive extravagance most typified by the actions of Tyco CEO Dennis Kozlowski.3 The financial scandals involving WorldCom, Qwest, Global Crossing, Tyco, and Enron cost shareholders 460 billion dollars,4 not to mention the many jobs lost and the costs to other firms who were suppliers to these companies.5 Many observers have called Sarbanes-Oxley the most significant legislation governing U.S. securities markets since the 1930s.6 President George W. Bush boasted that the Sarbanes-Oxley Act represented "the most farreaching reforms of American business practices since the time of Franklin Delano Roosevelt."7

Most of the provisions of Sarbanes-Oxley are aimed at the executives and accountants who are, for the most part, justifiably blamed for "all the Enron-WorldCom-Global Crossing chicanery" that the bill seeks to quash.8 These provisions require CEOs to personally certify the accuracy of corporate financial statements and other filings with the securities and Exchange Commission (sec),9 increase disclosures for off-balance sheet transactions such as those at the center of the Enron scandal,10 enhance penalties for whitecollar crime,11 and increase auditor independence.12 Most of these provisions are, if anything, good for attorneys in that the enormous amount of effort necessary for compliance and the inevitable litigation over non-compliance will create a substantial amount of additional work for corporate and securities lawyers.

Attorneys, however, did not emerge unaffected by the Act's litany of new regulations. Congress, under section 307 of the Act, directs the SEC to "issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers."13 The statute further directs that any regulation include rules "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."14 Further, "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)" the statute requires 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." 5 These specific rules16 have become known as the "up the ladder" reporting requirement that now applies to attorneys who practice before the SEC.17

First, this paper will briefly discuss the period prior to passage of the Sarbanes-Oxley Act and what, if anything, the legal profession might have done differently to prevent the sweeping nature of the regulation under the Act. Second, the paper will discuss in detail the SEC's implementation of section 307 through its rulemaking authority, the issues raised, and possible ramifications of the SEC rules, and other proposals such as compulsory "noisy withdrawal." Third, the Qualified Eegal Compliance Committee, an alternative reporting structure created by the SEC, will be described, evaluated, and recommended as the possible solution to all of the attorney-client issues created by the required up the ladder reporting requirement.


Prior to the passage of the Sarbanes-Oxley Act, the SEC had attempted to regulate attorneys who practice securities law through enforcement proceedings rather than through the rulemaking process.18 Such enforcement was primarily accomplished through use of the SEC's power to bar an attorney from appearing or practicing before the SEC if, after a hearing, it determined the attorney to "be lacking in character or integrity or to have engaged in unethical or improper professional conduct"19 or to have "willfully violated, or willfully aided and abetted the violation"20 of securities laws, whether or not any violation was proven in court. …

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