The Qualified Legal Compliance Committee under Sarbanes-Oxley: Enlisting Independent Directors to Enhance Corporate Integrity
Volz, William H., Tazian, Vahe, Michigan Academician
The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) (1) imposes specific requirements on corporate attorneys that have broad implications on corporate governance and corporate organization. With the adoption of Sarbanes-Oxley, Congress and the SEC seek to limit corporate misconduct through two devices. First, they expand the accountability of corporate "gatekeepers," such as accountants, attorneys, and financial analysts. (2) Second, they vigorously promote specialized committees of independent directors within the corporate governance structure. (3)
This article will explore how one of these specialized committees proposed under SEC Rule 205, (4) the Qualified Legal Compliance Committee (QLCC), can serve as a valuable resource for management and corporate counsel when a reasonable belief exists that a material violation of the law may have occurred, is occurring or is about to occur. Part I provides a brief legislative history of the Act, particularly Section 307, and explores the SEC's rationale for involving corporate counsel in its investigation of corporate misconduct. Part II describes the SEC's requirements for establishing a QLCC, including its composition, its procedures, its authority, and its responsibilities. Part III analyzes the strengths and weaknesses of various structural and procedural options available to boards of directors that may be considering establishing a QLCC. Part IV explores the costs, the potential personal liability of directors, and other reasons that may explain a relatively slow rate of adoption of the QLCC by the corporate community. In Part V, the article offers a recommended structure and a set of procedures for the QLCC to ensure its effectiveness as a monitor of corporate behavior and as a valuable resource for management, in-house attorneys and the investment community.
1. PRELUDE TO SARBANES-OXLEY
Throughout its seventy-year history of enforcing federal securities laws, the SEC has assumed the role of the public's "statutory guardian" of honesty in the securities markets. (5) Many of the expanded statutory remedies created in Sarbanes-Oxley can be traced to enforcement proposals of the 1970s, an era known as the "golden age of SEC enforcement." (6) The SEC's vision for expanded regulation of corporate governance was outlined in a 1976 speech entitled, "Restoring Integrity to American Business." (7) In that speech, Stanley Sporkin, Director of the SEC's Enforcement Division, proposed that companies appoint a business practice officer responsible for implementing codes of ethical conduct. (8) Although a seemingly modest proposal in comparison to the regulations imposed by Sarbanes-Oxley, Sporkin, in fact, was looking to expand SEC powers beyond the limited statutory remedies then available to it. The SEC's historic power to seek injunctive relief against corporate violators of securities laws was seen by some commentators both as an inadequate remedy for the losses suffered by investors and as an ineffective deterrent to corporate violators. (9) Although courts have generally supported the SEC's petitions to force corporate management to disgorge ill-gotten gains, those charged with enforcement at the SEC have actively sought additional means to enforce the law. (10)
One strategy conceived by the SEC in the 1970s, when consent decrees were commonly used, was the "access theory" of securities law enforcement. (11) Because lawyers, accountants, and securities industry professionals often participate in, or have access to, management's decision-making process, the SEC reasoned that placing pressure on these key professionals would force a closer monitoring of corporate compliance. (12) This theory of enforcement sought to impose individual sanctions not only upon those professionals who were active participants in a violation, but also upon those who had merely acquiesced or who had failed to detect the illegal activity. …