SEC Proposes Rule for Corporate Counsel
Corporate lawyers would be forced to report evidence of misconduct to top executives and company boards under a rule proposed Wednesday by the Securities and Exchange Commission.
A public comment period will be opened on the proposal. A rule is required under a new federal accounting law and would be the first national standard of its kind.
The proposed rule would require that company attorneys report wrongdoing first to the chief executive or chief legal counsel. If the executive’s response is inadequate, the lawyers would have to report their concerns to the board of directors, its audit committee, or another independent board group.
The proposed rule is “historic and it is revolutionary,” said SEC Commissioner Roel Campos as the panel voted unanimously to submit it for comment.
“The changes are an important and necessary development in the American legal and business jurisprudence,” Campos said.
Lawyers who violate the requirement could be barred from practicing before the SEC.
“It’s a very serious sanction,” said Karl Groskaufmanis, a partner at Fried, Frank, Harris, Shriver & Jacobson in Washington. “If you have the kind of practice that requires you to be before the SEC, then it’s not just a slap on the wrist. It has potential for significantly impairing your ability to earn a living.”
The draft rule results from an amendment added by Sen. John Edwards (D-N.C.) to accounting-overhaul legislation signed July 30 by President Bush.
The law sought to restore confidence in financial markets shaken by accounting scandals at Enron Corp., WorldCom Inc., Xerox Corp. and other firms.
The new law follows allegations that Enron’s main law firm, Houston-based Vinson & Elkins, should have demanded greater public disclosure about off-the-books partnerships that hid $1 billion in Enron losses.
The proposed rule would require the SEC to issue standards of professional conduct for lawyers who represent public companies before the SEC. A new rule must be finalized by Jan. 26.
An attorney would have to report evidence of “material” violations of the securities laws. The SEC defines a material violation as one that a reasonable investor would want to know about.
“The whole notion is, if you are the lawyer to the corporation, your loyalty is to the corporation, not to the individuals who may have hired you,” said SEC Chairman Harvey L. Pitt, in what could be one of his final votes. Pitt on Tuesday submitted his resignation.
The American Bar Assn. said it had no comment until the SEC releases the full rule package.