Must Client Confidences Be Sacrificed to Achieve Economic Security?
by Teresa Schmid
(County Bar Update, May 2003, Vol. 23, No. 5)

Must Client Confidences Be Sacrificed to Achieve Economic Security?

By Teresa Schmid, Esq., member, LACBA Professional Responsibility & Ethics Committee. Schmid is the director of LACBA’s Professional Services Department. The opinions expressed are her own.

Since the terrorist attack of September 11, 2001, Americans have countenanced some erosion of their constitutional rights in the interests of personal and national security. We’ve experienced this erosion across a broad spectrum of activity in our daily lives — ranging from the inconvenience of heightened airport security to the impact of increased Immigration and Naturalization Service scrutiny of friends, neighbors, co-workers and ourselves to the yet-unknown scope of the Homeland Security intelligence network. While these developments may be distressing, they have the advantage of being within the public discourse, subjects of active debate between the legal community and the institutions that formulate public policy. The debate itself is a regenerative activity that is the sustaining strength of a democratic society. Whatever the result, there will be an element of social and political choice reflected in the outcome.

We don’t tend to think of economic emergencies as impacting individual rights in the same way. Generally, government responses to such emergencies are framed as heightened regulation of business to protect the public. The Sarbanes-Oxley Act of 2002 and, to a greater extent, the rulemaking activity of the Securities and Exchange Commission under the act are a case in point. Given the nature of the emergency presented by Enron and its progeny, changes in the business regulatory environment were necessary and inevitable. But embedded in the resultant regulation is a challenge to the attorney-client relationship. What is now in play — The question of whether attorneys should be permitted, or even required, to disclose client confidences if necessary to prevent economic harm to others.

On July 16, 2002, exactly two weeks before the Sarbanes-Oxley Act was signed into law, the American Bar Association released the preliminary report of its Task Force on Corporate Responsibility. In this report (generally called the “Cheek Report” after Task Force Chair John H. Cheek III) the task force revisited certain revisions to Model Rule 1.6 that were proposed by the ABA Commission on Evaluation of the Rules of Professional Conduct (“Ethics 2000”) and rejected by the House of Delegates in February 2002. Model Rule 1.6 requires preservation of client confidences — the functional equivalent of California Business & Professions Code §6068(e). The proposed revisions would have permitted disclosure to prevent or rectify the consequences of a crime or fraud in which the client had used the lawyer’s services and that resulted in substantial injury to the financial interests or property of another. California’s representatives to the House of Delegates were instrumental in defeating the revisions, which were in sharp contrast to California’s exacting standards for protection of client confidences and secrets.

Five months later, the Cheek Report recommended that the House of Delegates reconsider and approve the “financial harm” exception. In addition, the Cheek Report recommended that disclosure be mandatory, rather than permissive, when necessary to prevent client conduct known to the attorney to involve a crime when the client has used the attorney’s services to further the conduct.

For California attorneys, the issue might have rested there since they are not subject to the ABA’s Model Rules but instead to California’s own Rules of Professional Conduct and Business & Professions Code. However, California attorneys who are subject to the Sarbanes-Oxley Act by reason of “appearing and practicing” before the SEC (17 CFR Part 205.2(a)(1)) may be caught unawares. The SEC originally proposed a “noisy withdrawal” rule by which attorneys who became aware of evidence of a material violation would have to report “up the ladder” within the organization, withdraw if there is no timely response or remedial action, and file a statement with the SEC that such withdrawal was due to “professional considerations.” Although the SEC later proposed alternative language to delete the “noisy withdrawal” provision, two features of the final SEC rule remain at odds with California’s protection of client confidences. The “noisy withdrawal” remains a permissive action under the alternative language of §205.3(f). In addition, the final version of the rule (which was released on January 29, 2003, and included all but the “noisy withdrawal” provision, whose public comment was extended until April 7, 2003) purports to preempt the rules of all other jurisdictions that conflict with its terms. Under §205.6(c), an attorney who complies in good faith with the provisions of Part 205 “shall not be subject to discipline or otherwise liable under inconsistent standards imposed by any state or other United States jurisdiction where the attorney is admitted or practices.”

Federal preemption of states’ rules of professional conduct arrived as a relatively quiet note amid the noise surrounding “noisy withdrawal.” Part 205 introduced into federal regulations a tacit “financial harm” exception to an attorney’s duty to protect client confidences. Implicit in the regulatory scheme is the assumption that the attorney-client relationship, like individual rights in the wake of September 11, should be sacrificed as needed to achieve national economic security. Did this change receive the public debate it deserved? It may be an idea whose time has come. But for California attorneys, whose protection of client confidences is the most stringent in the country, the journey to this brave new world may be a painful one.

The Los Angeles County Bar Association has introduced the Corporate Governance/Sarbanes-Oxley Information Center and Listservice to inform its members about the act and its continuing impact on L.A. lawyers and their clients. Listservice participants will receive early notice of news and commentary in this rapidly changing field and, in addition, will have a forum in which to ask questions and share information with other participants. Interested parties can join the listservice by visiting the Corporate Responsibility/Sarbanes-Oxley Information Center at http://www.lacba.org/ShowPage.cfm?PageID=2663

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