For Sarbanes-Oxley and Professional Responsibility Watchers...A Long, Hot Summer
LACBA Update, June/July 2003

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.

The May 2003 County Bar Update article “Must Client Confidences Be Sacrificed to Achieve Economic Security?” reviewed proposed changes in the rules of professional responsibility relating to preservation of client confidences. In the summer of 2003, changes in both the California Rules of Professional Conduct (CRPC) and the American Bar Association’s Model Rules of Professional Conduct are in the spotlight. Meanwhile, new rules for attorneys promulgated under Sec. 307 of the Sarbanes-Oxley Act take effect this summer on August 5, 2003. Also, rules for the adoption of corporate codes of ethics for senior financial officers under Sec. 406 of the act will take effect for fiscal years ending on or after July 15, 2003. In many companies, the adoption and enforcement of the latter will be tasked to corporate counsel.

On the California scene, AB 1101 would amend the language of Bus. & Prof. Code Sec. 6068(e), currently the nation’s most restrictive rule for the preservation of client confidences and secrets. The new language would create a limited exception, allowing a California attorney to disclose a client confidence or secret if “necessary to prevent the commission of a criminal act likely to result in the death of, or substantial bodily harm to, an individual.” Other states have similar exceptions, and many California attorneys will welcome it as a safe harbor. But to California’s professional responsibility community, it has the ring of the first breach in a long-defended beachhead.

After much public discussion, the ABA’s Presidential Task Force on Corporate Responsibility released its final report, dated March 31, 2003. ( To view the full text, go to the Task Force home page at http://www.abanet.org/buslaw/corporateresponsibility/home.html ) As reported in the May article, the Task Force’s Preliminary Report (the “Cheek Report”), released July 16, 2002, called for a change in Model Rule 1.6 to permit disclosure of client confidences 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. The final report, which is likely to be submitted for approval to the ABA House of Delegates at its annual meeting later this summer in August, retains that recommendation. The California delegation was instrumental in defeating a similar proposal in 2001. However, the Securities and Exchange Commission has raised the stakes since then.

The specter of losing the privilege of self-regulation has haunted lawyers since Enron filed for bankruptcy in December 2001. By appointing the Task Force in March 2002 and filing the Cheek Report two weeks before Sarbanes-Oxley was signed into law, the ABA signaled that lawyers were prepared to take the initiative to redefine their role in corporate governance. Meanwhile, the American Institute of Certified Public Accountants was forced to relinquish its self-regulatory role to the new Public Company Accounting Oversight Board.

On January 29, 2003, former SEC Chair Harvey Pitt delivered his last speech before handing the reins to incoming Chair William Donaldson, who was confirmed the following week. Although Pitt had submitted his resignation the previous November under a political cloud, the January speech was anything but a swan song. He cited the Cheek Report with approval, but pulled no punches for the legal profession:

In the past, the primary obligation for establishing standards for securities professionals was left to the professions. Sarbanes-Oxley reversed this presumption for accountants. The act didn’t go as far with respect to lawyers. Still, the act sends a clear signal that the legal profession must ensure that, in representing public companies, the highest professional and ethical standards prevail.

(For the full text of Pitt’s speech, go to http://www.sec.gov/news/speech/spch012903hlp.htm )

The message was not lost on the Task Force, which referred to Pitt’s speech in the final report, inferring that “further [SEC] rulemaking would be influenced by action taken by the ABA.” (ABA Report, page 9.) That will put increased pressure on the ABA to revise Rule 1.6, which would go a long way toward harmonizing the Model Rules with the SEC’s regulatory scheme but would broaden the gap between those and California’s more restrictive Sec. 6068(e).

Even if California’s delegation to the ABA again succeeds in defeating the liberalization of Model Rule 1.6, the central tension remains, which is the preemption of local rules of professional conduct by Sarbanes-Oxley Sec. 307. On April 22, 2003, the U.S. District Court ruled in Mayo v. Dean Witter Reynolds, C01-20336 (N.D. Cal. April 22, 2003) that the Securities Exchange Act and the Federal Arbitration Act preempt the new California disclosure requirements for arbitrators, so that the rules cannot be applied to securities groups. Like the California rules for arbitrators, Bus. & Prof. Code Sec. 6068(e) sets a higher ethical standard for practitioners in California. At least for California lawyers appearing and practicing before the SEC, that standard may be moot.