SEC Approves Rule for Lawyers

Times Staff Writer

The Securities and Exchange Commission, racing to complete the final reforms mandated by Congress in the wake of last year's corporate failures, approved a rule Thursday requiring corporate lawyers who discover wrongdoing at a company to inform the firm's senior officers.

The SEC also said it would soon consider a more far-reaching plan to ensure that the SEC learns of corporate misdeeds uncovered by lawyers, but stopped short of requiring lawyers to report such findings themselves.

The SEC also voted Thursday to require mutual funds to disclose to investors how the funds voted in shareholder elections, a proposal that had been fiercely contested by the mutual fund industry as a costly burden.

"Let the sun shine in on these proxy votes," said SEC Commissioner Roel Campos, a Democrat and one of four members on the five-member commission who supported the measure.

The actions directed at corporate lawyers, coming just a day after the SEC imposed new rules to bolster the independence of auditors, embodied the struggle of federal regulators to come up with a code of behavior for attorneys. The decisions seemed certain to increase concerns within the legal profession about the SEC's efforts.

"We think that it still fundamentally alters the attorney-client relationship and would expect concerns to still be raised," said Alison Ressler, an attorney with Sullivan & Cromwell in Los Angeles.

But Harvey L. Pitt, the SEC's outgoing chairman, said the push for rules affecting lawyers should be seen as a "signal to the legal profession" that the public has doubts about the effectiveness of its self-regulation.

Thursday's decisions capped a flurry of SEC actions in the last two weeks, most of which were mandated by the Sarbanes-Oxley reform legislation passed by Congress last summer.

Under the Sarbanes-Oxley Act, securities lawyers will be required to report evidence of financial misconduct to top executives, a provision that the SEC unanimously embraced Thursday. But the tougher SEC proposal that would require lawyers to tell the government about misconduct triggered strong resistance from lawyers, many of whom saw it as a breach of attorney-client privilege.

Lawyers said such issues already were regulated by their own bar associations and that such a requirement could chill communication between lawyers and their corporate clients.

SEC staffers said Thursday that they are preparing a new proposal that would require attorneys who suspect corporate misconduct to stop providing legal services to that client if the wrongdoing isn't addressed. In such cases, the law firm would be required to notify the SEC of the withdrawal and the circumstances surrounding it. SEC officials said they would allow an additional 60 days of public com- ment on the proposal.

Lawyers expressed relief that the SEC didn't endorse the proposal that they report misconduct directly to the government, but they also were wary of the new plan.

"I think the SEC acted in a fair manner," said Lance J. Kimmel, an attorney with Foley & Lardner in Los Angeles, whose clients include Hawthorne-based OSI Systems Inc., which makes security systems.

But the proposed alternative still raises questions about attorney-client confidentiality, even though the responsibility of disclosing the lawyer's withdrawal would fall to the client.

"The end result may very well still be that confidences are revealed and that disclosures of those confidences are forced by the lawyer's action," said Stephen Glover, an attorney with Gibson, Dunn & Crutcher in Washington.

The rule requiring mutual funds to disclose to investors how they voted in shareholder elections was strongly opposed.

Times staff writer Josh Friedman contributed to this report.

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