New laws and regs tighten requirements for corporate counsel
IN April, the American Bar Association (ABA) Task Force on Corporate Responsibility issued its final report urging changes in corporate governance policies to “create a new culture of corporate responsibility stressing constructive skepticism and active independent oversight of corporate executives.”
The report represents the “latest word” in corporate governance reform and the role and ethical responsibilities of corporate counsel in the post-Enron age, said Alfred P. Carlton Jr., ABA president, at the time of the report’s release.
The proposals were presented-and adopted-in the form of policy recommendations to the ABA House of Delegates in August at its convention.
The task force’s recommended corporate governance policies are designed to enhance the role of corporate lawyers in the system of checks and balances needed to ensure corporate compliance with law. The report also makes recommendations for amendments to the ABA Model Rules of Professional Conduct to sharpen existing duties of the corporate lawyer to the corporate client and to act in the best interests of that client when faced with illegal conduct by executive officers.
“This report goes beyond tinkering with the mechanisms of managing our nation’s businesses,” said Carlton. “It addresses a culture too often motivated by incentives for senior executive officers to manipulate or misreport information and for those, sometimes including lawyers, who are charged with advising or overseeing management to lapse into inaction, inattention, indifference or conflicting loyalties.”
“While lawyers need to thoroughly understand the objectives and business goals of the executive officers of their corporate clients in order to advise them effectively, they still must retain a professional detachment that allows them to promote legal compliance of the corporate entity,” said James H. Cheek, III. “Our recommendations aim to enhance lawyers’ ability to bring that independent professional judgment to bear.”
Specifically addressing lawyers’ responsibilities, the report urged routine opportunities for chief legal officers to communicate in executive sessions with corporate boards and for outside counsel to communicate with chief legal officers, to facilitate an internal flow of information about wrongdoing by the corporation or its executive officers.
Additionally, it urged amending the ABA Model Rules of Professional Conduct to:
* Conform the Model Rules to the ethical rules of a majority of the states by permitting lawyers to reveal information to prevent criminal or fraudulent conduct that is reasonably certain to result in substantial injury to the financial interests of others when the lawyers’ services are being used to further the fraud or crime.
* Refine and clarify when corporate lawyers must disclose up the ladder of authority within a corporate client, and when corporate lawyers may disclose, externally, conduct by the corporation or its executive officers, which a reasonable lawyer would conclude violates law or fiduciary duty and will result in substantial corporate injury.
* Add a requirement that lawyers who either are discharged because they report violations internally or withdraw from serving a corporation because it refuses to adequately address violations assure that the board is informed of the discharge or withdrawal.
While the task force reiterates recommendations from its preliminary report issued in July 2002 to foster independent oversight of corporate management by directors and other participants in the governance of public companies, it also recognized that “direct operational control of American public corporations is, and must remain, primarily in the hands of their senior executive officers.”
Citing recent “spectacular failures of corporate responsibility,” the task force reaffirmed the core conclusion from its preliminary report: “The exercise by independent participants of active and informed stewardship of the best interests of the corporation has in too many instances fallen short.”
The final report says events of the last two years “compellingly call for significant reforms and ‘consciousness raising’ in our system of corporate governance.” The task force recommendations are intended “to enhance the ability of corporate counsel and directors to discharge their corporate governance responsibilities more effectively.”
Continuing its commitment to provide sessions on timely topics, PLUS will offer a panel titled “The Changing Paradigm: New Hazards of Representing Corporations Post Enron, Sarbanes-Oxley and New SEC Rules and Regulations” at next month’s convention. The panel will be chaired by Susan Lawshe, assistant vice president, Chubb Executive Risk, and panelists will include: Anthony Davis, partner, Hinshaw & Culbertson; and Jim Rhyner, senior vice president, Avreco.
“We will be looking at issues such as how lawyers can best serve their clients, how counsel can comply with reporting requirements, how they can maintain independence and properly assess the risks of taking on a new corporate client,” says Lawshe. “In addition, we will be discussing how attorneys can find adequate insurance solutions for their corporate and securities practices.”
Lawshe says that, without a doubt, new SEC rules prompted by Sarbanes-Oxley have significantly expanded the responsibilities of both in-house and outside counsels under corporate governance. “There are new obligations of investigation that are being imposed,” she says.
For example, according to Lawshe, there is what is known as a “noisy withdrawal” rule. Basically, that means that if an in-house counsel discovers that there is something amiss occurring within the organization, that counsel must make a full report to those along the chain of command right up to the board of directors. If the corporation doesn’t take steps to correct the situation, the counsel would have to withdraw from the organization and report his or her findings to the proper authorities. At this stage, the counsel would become a defacto “whistleblower.” The issue becomes more complex with an outside counsel, who is not employed by the firm, but who may be held to the same level of obligation.
“The new rules are not final as yet, but when they are, depending on how they are worded, it could result in several years of litigation. For example, there is a big potential for conflict of interest lawsuits because the SEC rules might conflict with ABA and local chapter attorney-client confidentiality privileges,” says Lawshe. (Even though the ABA task force has allowed that attorneys, under certain circumstance, may not be held to the confidentiality rule, at press time the recommendation had not yet been voted on by the ABA or local chapters.)
The panel will also examine insurance implications of new SEC rules. Right now, insurers are considering law firms with intensive securities practices as extremely volatile risks. There are too many questions that are being left unanswered, Lawshe says. There will almost certainly be insurer demands that law firms retain a much greater portion of their exposures to loss, she says.
Copyright Rough Notes Co., Inc. Oct 2003
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