"Not later than 180 days after the date of enactment of this Act, the Commission shall issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers, including a rule--
requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof); and
if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors."
http://www.sarbanesoxleysimplified.com/sarbox/compact/htmlact/sec307.html
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"Section 307 of the Sarbanes-Oxley Act of 2002 requires the Commission to prescribe minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers. The standards must include a rule requiring an attorney to report evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the issuer up-the-ladder within the company to the chief legal counsel or the chief executive officer of the company (or the equivalent thereof); and, if they do not respond appropriately to the evidence, requiring the attorney to report the evidence to the audit committee, another committee of independent directors, or the full board of directors. Proposed Part 205 responds to this directive and is intended to protect investors and increase their confidence in public companies by ensuring that attorneys who work for those companies respond appropriately to evidence of material misconduct. We are still considering the "noisy withdrawal" provisions of our original proposal under section 307; in a related proposing release we discuss this part of the original proposal and seek comment on additional alternatives."
205.2(d) provides:
(d) Breach of fiduciary duty refers to any breach of fiduciary or similar duty to the issuer recognized under an applicable federal or state statute or at common law, including but not limited to misfeasance, nonfeasance, abdication of duty, abuse of trust, and approval of unlawful transactions.
205.2(e) provides:
(e) Evidence of a material violation means credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing, or is about to occur.
Evidence of a material violation must first be credible evidence.45 An attorney is obligated to report when, based upon that credible evidence, "it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing, or is about to occur."
On the other hand, the rule's definition of "evidence of a material violation" makes clear that the initial duty to report up-the-ladder is not triggered only when the attorney "knows" that a material violation has occurred48 or when the attorney "conclude[s] there has been a violation, and no reasonable fact finder could conclude otherwise."49 That threshold for initial reporting within the issuer is too high. Under the Commission's rule, evidence of a material violation must be reported in all circumstances in which it would be unreasonable for a prudent and competent attorney not to conclude that it is "reasonably likely" that a material violation has occurred, is ongoing, or is about to occur. To be "reasonably likely" a material violation must be more than a mere possibility, but it need not be "more likely than not."50 If a material violation is reasonably likely, an attorney must report evidence of this violation. The term "reasonably likely" qualifies each of the three instances when a report must be made. Thus, a report is required when it is reasonably likely a violation has occurred, when it is reasonably likely a violation is ongoing or when reasonably likely a violation is about to occur.
205.2(i) provides:
(i) Material violation means a material violation of an applicable United States federal or state securities law, a material breach of fiduciary duty arising under United States federal or state law, or a similar material violation of any United States federal or state law.
205.2(k) provides:
(k) Qualified legal compliance committee means a committee of an issuer (which also may be an audit or other committee of the issuer) that:
(1) Consists of at least one member of the issuer's audit committee (or, if the issuer has no audit committee, one member from an equivalent committee of independent directors) and two or more members of the issuer's board of directors who are not employed, directly or indirectly, by the issuer and who are not, in the case of a registered investment company, "interested persons" as defined in section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19));
(2) Has adopted written procedures for the confidential receipt, retention, and consideration of any report of evidence of a material violation under §205.3;
(3) Has been duly established by the issuer's board of directors, with the authority and responsibility:
(i) To inform the issuer's chief legal officer and chief executive officer (or the equivalents thereof) of any report of evidence of a material violation (except in the circumstances described in §205.3(b)(4));
(ii) To determine whether an investigation is necessary regarding any report of evidence of a material violation by the issuer, its officers, directors, employees or agents and, if it determines an investigation is necessary or appropriate, to:
(A) Notify the audit committee or the full board of directors;
(B) Initiate an investigation, which may be conducted either by the chief legal officer (or the equivalent thereof) or by outside attorneys; and
(C) Retain such additional expert personnel as the committee deems necessary; and
(iii) At the conclusion of any such investigation, to:
(A) Recommend, by majority vote, that the issuer implement an appropriate response to evidence of a material violation; and
(B) Inform the chief legal officer and the chief executive officer (or the equivalents thereof) and the board of directors of the results of any such investigation under this section and the appropriate remedial measures to be adopted; and
(4) Has the authority and responsibility, acting by majority vote, to take all other appropriate action, including the authority to notify the Commission in the event that the issuer fails in any material respect to implement an appropriate response that the qualified legal compliance committee has recommended the issuer to take.
205.2(l) provides:
(l) Reasonable or reasonably denotes, with respect to the actions of an attorney, conduct that would not be unreasonable for a prudent and competent attorney.
The definition of "reasonable" or "reasonably" is based on Rule 1.0(h) of the ABA's Model Rules of Professional Conduct, modified to emphasize that a range of conduct may be reasonable.
205.2(m) provides:
(m) Reasonably believes means that an attorney believes the matter in question and that the circumstances are such that the belief is not unreasonable.
205.2(n) provides:
(n) Report means to make known to directly, either in person, by telephone, by e-mail, electronically, or in writing.
205.3(b) provides:
(b) Duty to report evidence of a material violation. (1) If an attorney, appearing and practicing before the Commission in the representation of an issuer, becomes aware of evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer, the attorney shall report such evidence to the issuer's chief legal officer (or the equivalent thereof) or to both the issuer's chief legal officer and its chief executive officer (or the equivalents thereof) forthwith. By communicating such information to the issuer's officers or directors, an attorney does not reveal client confidences or secrets or privileged or otherwise protected information related to the attorney's representation of an issuer.
205.3(b)(2) provides:
(2) The chief legal officer (or the equivalent thereof) shall cause such inquiry into the evidence of a material violation as he or she reasonably believes is appropriate to determine whether the material violation described in the report has occurred, is ongoing, or is about to occur. If the chief legal officer (or the equivalent thereof) determines no material violation has occurred, is ongoing, or is about to occur, he or she shall notify the reporting attorney and advise the reporting attorney of the basis for such determination. Unless the chief legal officer (or the equivalent thereof) reasonably believes that no material violation has occurred, is ongoing, or is about to occur, he or she shall take all reasonable steps to cause the issuer to adopt an appropriate response, and shall advise the reporting attorney thereof. In lieu of causing an inquiry under this paragraph (b), a chief legal officer (or the equivalent thereof) may refer a report of evidence of a material violation to a qualified legal compliance committee under paragraph (c)(2) of this section if the issuer has duly established a qualified legal compliance committee prior to the report of evidence of a material violation.
205.3(b)(3) provides:
(3) Unless an attorney who has made a report under paragraph (b)(1) of this section reasonably believes that the chief legal officer or the chief executive officer of the issuer (or the equivalent thereof) has provided an appropriate response within a reasonable time, the attorney shall report the evidence of a material violation to:
(i) The audit committee of the issuer's board of directors;
(ii) Another committee of the issuer's board of directors consisting solely of directors who are not employed, directly or indirectly, by the issuer and are not, in the case of a registered investment company, "interested persons" as defined in section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)) (if the issuer's board of directors has no audit committee); or
(iii) The issuer's board of directors (if the issuer's board of directors has no committee consisting solely of directors who are not employed, directly or indirectly, by the issuer and are not, in the case of a registered investment company, "interested persons" as defined in section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19))).
205.3(b)(4) provides:
(4) If an attorney reasonably believes that it would be futile to report evidence of a material violation to the issuer's chief legal officer and chief executive officer (or the equivalents thereof) under paragraph (b)(1) of this section, the attorney may report such evidence as provided under paragraph (b)(3) of this section.
205.3(b)(5) provides:
(5) An attorney retained or directed by an issuer to investigate evidence of a material violation reported under paragraph (b)(1), (b)(3), or (b)(4) of this section shall be deemed to be appearing and practicing before the Commission. Directing or retaining an attorney to investigate reported evidence of a material violation does not relieve an officer or director of the issuer to whom such evidence has been reported under paragraph (b)(1), (b)(3), or (b)(4) of this section from a duty to respond to the reporting attorney.
205.3(b)(6) and (b)(7) provide:
(6) An attorney shall not have any obligation to report evidence of a material violation under this paragraph (b) if:
(i) The attorney was retained or directed by the issuer's chief legal officer (or the equivalent thereof) to investigate such evidence of a material violation and:
(A) The attorney reports the results of such investigation to the chief legal officer (or the equivalent thereof); and
(B) Except where the attorney and the chief legal officer (or the equivalent thereof) each reasonably believes that no material violation has occurred, is ongoing, or is about to occur, the chief legal officer (or the equivalent thereof) reports the results of the investigation to the issuer's board of directors, a committee thereof to whom a report could be made pursuant to paragraph (b)(3) of this section, or a qualified legal compliance committee; or
(ii) The attorney was retained or directed by the chief legal officer (or the equivalent thereof) to assert, consistent with his or her professional obligations, a colorable defense on behalf of the issuer (or the issuer's officer, director, employee, or agent, as the case may be) in any investigation or judicial or administrative proceeding relating to such evidence of a material violation, and the chief legal officer (or the equivalent thereof) provides reasonable and timely reports on the progress and outcome of such proceeding to the issuer's board of directors, a committee thereof to whom a report could be made pursuant to paragraph (b)(3) of this section, or a qualified legal compliance committee.
(7) An attorney shall not have any obligation to report evidence of a material violation under this paragraph (b) if such attorney was retained or directed by a qualified legal compliance committee:
(i) To investigate such evidence of a material violation; or
(ii) To assert, consistent with his or her professional obligations, a colorable defense on behalf of the issuer (or the issuer's officer, director, employee, or agent, as the case may be) in any investigation or judicial or administrative proceeding relating to such evidence of a material violation.
205.3(b)(8) and (b)(9) provide:
(8) An attorney who receives what he or she reasonably believes is an appropriate and timely response to a report he or she has made pursuant to paragraph (b)(1), (b)(3), or (b)(4) of this section need do nothing more under this section with respect to his or her report.
(9) An attorney who does not reasonably believe that the issuer has made an appropriate response within a reasonable time to the report or reports made pursuant to paragraph (b)(1), (b)(3), or (b)(4) of this section shall explain his or her reasons therefor to the chief legal officer (or the equivalent thereof), the chief executive officer (or the equivalent thereof), and directors to whom the attorney reported the evidence of a material violation pursuant to paragraph (b)(1), (b)(3), or (b)(4) of this section.
Section 205.5 Responsibilities of a Subordinate Attorney
(a) An attorney who appears and practices before the Commission in the representation of an issuer on a matter under the supervision or direction of another attorney (other than under the direct supervision or direction of the issuer's chief legal officer (or the equivalent thereof)) is a subordinate attorney.
(b) A subordinate attorney shall comply with this part notwithstanding that the subordinate attorney acted at the direction of or under the supervision of another person.
(c) A subordinate attorney complies with §205.3 if the subordinate attorney reports to his or her supervising attorney under §205.3(b) evidence of a material violation of which the subordinate attorney has become aware in appearing and practicing before the Commission.
(d) A subordinate attorney may take the steps permitted or required by §205.3(b) or (c) if the subordinate attorney reasonably believes that a supervisory attorney to whom he or she has reported evidence of a material violation under §205.3(b) has failed to comply with §205.3."
http://www.sec.gov/rules/final/33-8185.htm#P22_1978
section 307 did more than require the SEC to issue standards
for lawyers; it specified that one of those rules require lawyers to “report evidence of a material
violation of the securities laws or a breach of fiduciary duty or similar violation by the company
or any of its agents to the chief legal officer or the chief executive officer of the company (or the
equivalent thereof).” If the chief legal officer or chief executive officer fails to provide an
“appropriate response” to the evidence, the rule was to require the lawyer to “report the evidence
to the audit committee, another independent committee, or the full board of directors.” This
requirement is typically referred to as “up-the-ladder” reporting, or simply “reporting up,” a
phrase we will use here.
The final rules implementing section 307 of Sarbanes-Oxley are set forth in new Part 205
of the Commission’s rules. The rules require attorneys “appearing and practicing” before the 23
SEC in the representation of issuers to report evidence of a material violation of law or breach of
fiduciary duty by the issuer or its agent up the corporate ladder to the chief legal counsel or to
both the chief legal counsel and the chief executive officer. If the chief legal counsel or chief
executive officer fails to provide an “appropriate response” to the evidence, the attorney must
report the evidence to the audit committee, another independent committee, or the full board of
directors.
1. Which Lawyers Are “Appearing and Practicing” Before the SEC Under Part 205?
The first interpretive question lawyers face under the SEC rules is whether the rules apply
to them. Congress cast a potentially wide net in §307 by requiring the SEC rules to apply to all
“attorneys appearing and practicing before the Commission in any way in the representation of
issuers.” In accordance with this directive, the SEC promulgated §205.2(a)(1), which defines 25
“appearing and practicing before the Commission” to include:
• transacting any business with the SEC, including communications in any form;
• representing an issuer in SEC administrative proceedings or in connection with
any SEC investigation, inquiry, information request or subpoena;
• providing advice with respect to the federal securities laws or SEC rules
thereunder regarding any document that the attorney has notice will be filed with
the SEC; and
• advising an issuer as to whether information or a statement, opinion or other
writing is required to be filed with or submitted to the SEC.
The argument that lawyers should have no responsibility for client illegality, short of
signing documents, is an embarrassment to the legal profession. The law rejects this hamstrung
vision of lawyer ethics. At a minimum, it is malpractice for a lawyer, whether negligently,
recklessly, or intentionally, to sit by silently or passively when a reasonable lawyer would not, to
advise that legally required documents need not be filed, or to counsel that information thatshould be disclosed need not be. In SEC v. National Student Marketing, the court said that, in
29 30
some circumstances, such conduct is more than malpractice; it amounts to aiding and abetting
securities fraud. Finally, and most recently, In re Enron Corp. Securities, Derivative & ERISA
Litigation held that lawyers can be primary violators of the securities laws even if they do not
sign the relevant documents.
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http://www.bu.edu/law/faculty/scholarship/workingpapers/documents/Koniak-et-al-Sarbanes-Oxley-04-20.pdf
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