NCPA - National Center for Policy Analysis

SEC Wants Lawyers to Become Whistle Blowers

January 9, 2003

A majority of commissioners at the Securities and Exchange Commission favors adopting a regulation that would require lawyers to blow the whistle on client who misbehave. Lawyers fear adoption of the rule would change the nature of the entire attorney-client relationship.

  • Specifically, the rule would require a lawyer who believes he sees evidence of a client committing a "material" securities-law violation -- and is unable to get the company's board to stop it -- to quit and inform the SEC that he is quitting for "professional considerations."
  • The so-called "noisy withdrawal" requirement can be traced to a Congressional directive contained in last year's Sarbanes-Oxley Act -- which called for stricter rules to enforce corporate governance.
  • Congress called upon the SEC to adopt rules "setting forth minimum standards of professional conduct for attorneys" practicing before the commission -- and recommended that outside and company lawyers be required to report "evidence of a material violation" of securities laws "up the ladder" to senior executives or a company's board.
  • Lawyers complain the rule would make them into regulators and would constitute a dramatic breach of confidentiality.

One alternative under consideration is to require companies themselves to inform the SEC when an outside lawyer has quit.

Source: Mitchell Pacelle and Michael Schroeder, "New SEC Rule Could Turn Lawyers Into Whistle Blowers," Wall Street Journal, January 9, 2003.

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