The QLCC: a chance to get things right; boards should assess the safeguard features of having a qualified legal compliance committee.

• Author: Ferrara, Ralph C.
• Position: Legal Brief

This is the second in a series of articles examining the Sarbanes-Oxley Act's impact on boards. In the previous article [Fall 2002], we described how the Act has increased the responsibilities of board audit committees. In this article, we discuss rules recently proposed by the SEC to report suspected misconduct.

FOR DECADES, the Securities and Exchange Commission has admonished attorneys representing public companies to report any suspected corporate wrongdoings. However, it was not until the signing of Sarbanes-Oxley that Congress granted the Commission express authority to impose such reporting obligations on attorneys. Recently, the SEC has proposed rules to implement this authority.

The proposed rules impose an up-the-ladder reporting obligation on attorneys who become aware of information that would lead an attorney "reasonably to believe" that a material violation by the company or by any company officer, director, employee, or agent has occurred, is occurring, or is about to occur. When the reporting obligation is triggered, the attorney must report this information to the issuer's chief legal officer or to both the CLO and CEO. If a reporting attorney does not receive an appropriate response within a reasonable time, he is required to report evidence of the material violation up the ladder to the company's audit committee or full board of directors.

The proposed rules go beyond the mandate of Sarbanes-Oxley by creating an additional reporting obligation for outside counsel when climbing the ladder fails to produce a satisfactory result. Under the proposed rules, under certain circumstances attorneys would be obligated to signal their concerns externally to a higher authority: the SEC. Specifically, where outside counsel believes that the material violation is occurring or is about to occur that is likely to result in substantial injury to the financial interest or property of the company or its shareholders and that the company's directors have not responded "appropriately" to evidence of that material violation, the attorney is required to do three things: (1) withdraw from rep resenting the company "forthwith"; (2) within one business day of the withdrawal, notify the SEC of the withdrawal and state that it was based on "professional considerations"; and (3) promptly disaffirm to the SEC any submission that the attorney prepared or helped to prepare th at the attorney reasonably believes is or may be materially misleading.

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