Corporate Lawyers Get Reporting Code

Corporate lawyers will have to follow a new code of conduct starting this week, a change that has left many attorneys fearful of its effect and the possibility of stricter measures by market regulators.

The new code, mandated by the Sarbanes-Oxley corporate reform law passed last year, requires a lawyer who finds wrongdoing in a company to alert top management. If no adequate response results, the lawyer then must alert a sequence of directors’ committees, leading potentially to the full board.

“This is a watershed event for attorneys,” said Bart Schwartz, general counsel of MONY Group Inc., a insurance and financial services company in New York.

“Corporate attorneys will have a trickier but much more important role to play,” he said.

The “reporting up” rule has been criticized by some legal academics as overly complex and difficult to apply. Other lawyers have said it usefully codifies a practice that many conscientious attorneys already were following.

More controversial is a possible expansion of the code the Securities and Exchange Commission is considering. When it wrote the rules that Congress ordered for reporting up, the commission postponed a decision on a proposal to require lawyers also to “report out” possible wrongdoing.

This proposal would require a corporate lawyer who has reported up without satisfaction to resign from the company and notify the SEC without explaining the reasons for the resignation.

Lawyers fiercely opposed the idea, contending that it would violate attorney-client privilege. The SEC responded with a possible alternative that would require the company, not the attorney, to notify the SEC of the attorney’s resignation.

About 90% of corporate lawyers worry that their clients, or fellow executives, may clam up on them if the SEC expands the new code, according to a survey by the International Bar Assn.

At a meeting this month in San Francisco, the American Bar Assn.’s House of Delegates was scheduled to consider the matter, with the SEC expected to be watching the deliberations closely.