Chapter 22

• Jurisdiction: United States

Chapter 22 Regulation of Attorneys

The Role of Counsel

Lawyers play an essential role in delivering the rule of law to their clients.¹Not only do they counsel and advise their clients but they are often the most important, sometimes the only, way many clients learn what their obligations under the law actually are. Counsel help to ensure that their clients comply with the law, and they are also advocates for their clients. Sometimes those two roles conflict. The lawyer must resolve the conflicts "through the exercise of sensitive professional and moral judgment, guided by the basic principles underlying the Rules [of Professional Conduct]."²

Lawyers who "appear and practice before the SEC" have a special responsibility. As former SEC Chairman Manual F. Cohen put it, "I believe that the privilege of appearing and practicing before the Commission imposes on [lawyers] a corresponding obligation to assist in achieving the protection of investors and the public interest that the securities laws are designed to bring about."³

What does it mean "to appear and practice before the commission"? Actually, the definition, found in SEC Rule 205.2, is quite broad. It includes:

• transacting any business with the commission, including communications in any form;
• representing an issuer in a commission administrative proceeding or in connection with any commission investigation, inquiry, information request, or subpoena;
• providing advice in respect of the U.S. securities laws or the commission's rules or regulations thereunder regarding any document that the attorney has notice will be filed with or submitted to, or incorporated into any document that will be filed with or submitted to, the commission, including the provision of such advice in the context of preparing, or participating in the preparation of, any such document;
• advising an issuer as to whether information or a statement, opinion, or other writing is required under the U.S. securities laws or the commission's rules or regulations thereunder to be filed with or submitted to, or incorporated into any document that will be filed with or submitted to, the commission; and
• somewhat surprisingly, investigating evidence of a material violation reported under the up-the-ladder reporting requirements.

In recent years, there has been an increasing interest on the part of the SEC in regulating lawyers who "appear and practice" before it. In the well-known decision by the full SEC in In the Matter of Carter and Johnson, 475 SEC 471 (Feb. 28, 1981), the commission reversed a decision of an administrative law judge holding that two prominent Wall Street lawyers had violated the antifraud provisions of the securities laws as well as the standards of professional responsibility by assisting their client's management in concealing the company's true financial condition and in not informing the board of directors concerning the management's refusal to make adequate disclosures. The administrative law judge's decision was reversed because, according to the commission, "certain concepts of proper ethical and professional conduct were not sufficiently developed, at the time of the conduct here at issue, to permit a finding that either respondent breached applicable ethical or professional standards." But in a stern warning, the commission then stated that "we are today giving notice of an interpretation by the Commission of the term 'unethical or improper professional conduct' [as follows]: When a lawyer with significant responsibilities in the effectuation of a company's compliance with the disclosure requirements of the federal securities laws becomes aware that his client is engaged in a substantial and continuing failure to satisfy those disclosure requirements, his continued participation violates professional standards unless he takes prompt steps to end the client's non-compliance."

When a lawyer becomes aware of such activities, what steps should the lawyer take? For a thorough discussion of the obligations of a lawyer who is asked to render a formal legal opinion in connection with a securities transaction, see Darrell Rice and Marc Steinberg, "Legal Opinions in Securities Transactions," 16 J. Corp. L. 375 (1991). Consider also the following:

• Professor Mark Sargent, "Lawyers in the Perfect Storm," 43 Washburn L. J. (2003):

Lawyers' role as gatekeepers is complex and ambiguous, unlike the role of auditors who are required by law to be independent. Auditors are required to play a quasi-adversarial role vis-a-vis their auditing clients. Their job is to protect the investing public by casting a dispassionate disinterested eye on management's financial and accounting disclosures and placing their own reputation on the line by certifying the corporate financial statement. They function in essence as reputational intermediaries, drawing on their professional reputations to vouch for their auditing clients' financial disclosures. [But] lawyers are advocates. They have obligations to act on behalf of the corporate client that makes their role quite different from the quasi-adversarial role of an auditor. . . . (emphasis in original).

• Professors Deborah Rhode, of Stanford Law School, and Professor Paul Paton of the University of Alberta: "For lawyers, a place to start is with conditions that compromise independent professional judgment." Deborah Rhode & Paul Paton, "Lawyers, Ethics and Enron," 8 Stan. J.L. Bus & Fin. 9 (2002). Remember that under most states' professional responsibility codes, lawyers are ethically obligated to give "independent" and "candid" legal advice. See, e.g., New York State Code of Professional Conduct Rule 2.1 ("In representing a client, a lawyer shall exercise independent professional judgment and render candid advice.")

Lawyers are also advocates who are obligated to act on behalf of their corporate clients. Did the Enron lawyers betray the public interest by acting as advocates? Rhode & Paton: "Allegiance to management's short-term financial interests may compromise their obligation to the broader public as well as to the entity itself, which is, at least in theory, the lawyer's client." What is the lawyer's obligation to the "broader public"?

Lawyers are not only advocates; they are also gatekeepers. They can refuse to do the necessary legal work on a questionable transaction. Remember that NYS Rules of Professional Conduct 2.1 requires the lawyer to use "independent professional judgment and provide candid" legal advice.

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