The corporate gatekeeper in ethical perspective.

AuthorHines, Christopher T.
PositionAbstract into II. Categories of Conflicts Rules D. Ethical Rules, p. 77-107

Abstract

The fallout from the financial crisis continues to inform the development of corporate and securities law, and the new regulatory landscape for economic activity within the United States is beginning to take form. This evolutionary process, however, has been anything but stable or certain. As might be expected, in concert with such momentous change in law and policy, recriminations for and associated investigations of past activity continue to affect competent regulators as well as market participants. Nevertheless, while many of the underlying causes of the financial crisis are now better understood by both policy makers and scholars, the question remains--given where we were, where do we go from here? While a definitive answer to such a question remains elusive, an additional perspective on the ethical issues of relevance to corporate and securities law may be helpful in considering the possible alternatives. In particular, the ethical rules of corporate gatekeepers in conflicts of interest scenarios are worthy of further consideration and discussion.

This article presents the argument that cases involving conflicts of interest in the corporate and securities law space may be viewed as primarily calling into question the ethical rules of the corporate gatekeeper. In support of such an argument, this article sets forth a framework for conflicts of interest scenarios that takes into account four categories of legal rules--activity rules, disclosure rules, liability rules and ethical rules. In adopting such a framework, this article will elaborate on an ethical perspective will be elaborated to address the ongoing development of corporate and securities law. Further, this article proposes further analysis in relation to disclosure rules on conflicts of interest policies for Compensation Committees as mandated by Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

This article is the second in a series that explores the intersection of corporate law and legal ethics. (1) Specifically, the present discussion concerns the foundations in doctrine and theory that may apply to issues of conflicts of interest within the ambit of corporate and securities law. Accordingly, the subject matter for discussion includes both rules of the professions--or first-order ethical rules--and rules as may be prescribed by the competent authority--that is, second-order ethical rules.

Table of Contents I. INTRODUCTION II. CATEGORIES OF CONFLICTS RULES A. Activity Rules B. Liability Rules 1. Central Bank v. First Interstate Bank of Denver 2. Stoneridge Investment Partners v. Scientific-Atlanta C. Disclosure Rules 1. Code of Ethics for Senior Financial Officers 2. Compensation Committee Independence Standards D. Ethical Rules 1. First-Order Ethical Rules a. Model Code of Professional Responsibility b. Model Rules of Professional Conduct 2. Second-Order Ethical Rules a. Attorney Conduct Rules III. THE PRIMACY OF ETHICAL RULES OF THE CORPORATE GATEKEEPER A. Ethical Rules and the Corporate Gatekeeper 1. Comparison of the Categories of Conflict Rules 2. The Corporate Gatekeeper in Ethical Perspective IV. CONCLUSION I. INTRODUCTION

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.

--Warren Buffett (2)

"Reputation is a fleeting thing." (3) In the world of high finance, a master of the universe today can quickly become tomorrow's cautionary tale. (4) It is, therefore, unsurprising to find that in the aftermath of the financial crisis (5) the professional reputations of numerous market actors and policy makers have experienced this very reversal of fortune. (6) In many cases one may credibly argue that such criticisms may be unfounded or excessive, (7) nevertheless, the fact remains that financial disaster has its consequences. (8) One of these consequences is that the reputation of those persons in positions of economic influence and authority will, by necessity, suffer. (9)

The fallout from the financial crisis continues to inform the development of corporate and securities law, and the new regulatory landscape for economic activity within the United States is beginning to take form. (10) This evolutionary process, however, has been anything but stable or certain. (11) As might be expected, in concert with such momentous change in law and policy, recriminations for and associated investigations of past activity continue to affect competent regulators as well as market participants. (12) Nevertheless, while many of the underlying causes of the financial crisis are now better understood by both policy makers and scholars, the question remains--given where we were, where do we go from here?

While a definitive answer to such a question remains elusive, an additional perspective on the ethical issues related to corporate and securities law may be helpful in considering the possible alternative answers to the question posed. (13) In particular, the ethical rules of corporate gatekeepers (14) in conflicts of interest scenarios are worthy of further consideration and discussion. (15) This Article presents the argument that cases involving conflicts of interest in the corporate and securities law space may be viewed as primarily calling into question the ethical rules of the corporate gatekeeper. (16)

In support of such an argument, Part II of this Article sets forth a framework for conflicts of interest scenarios that takes into account four categories of legal rules--activity rules, disclosure rules, liability rules and ethical rules. Specifically, the discussion of each of the categories of legal rules will proceed as follows: (i) for activity rules, the restrictions on services offered by auditors pursuant to section 201 of the Sarbanes-Oxley Act; (17) (ii) for liability rules, the ongoing debate concerning whether secondary liability under section 10(b) of the Exchange Act (18) should be available to federal securities class action plaintiffs in light of the Court's decisions in Central Bank of Denver v. First Interstate Bank of Denver (19) and Stoneridge Investment Partners, LLC v. Scientific Atlanta, Inc.; (20) (iii) for disclosure rules, proxy disclosure rules in relation to codes of ethics for senior financial officers (21) and compensation committee independence standards; (22) and (iv) for ethical rules, the relevant rules concerning conflicts of interest as provided in the Model Code of Professional Responsibility, (23) the Model Rules of Professional Conduct (24) and the Attorney Conduct Rules. (25) In adopting such a framework, an ethical perspective will be elaborated to address matters within the ongoing development of corporate and securities law. (26)

Part III of this Article will discuss in greater detail the primacy of ethical rules of the corporate gatekeeper by first comparing the categories of conflicts rules as initially described in Part II. In making such a comparison, I will argue for an ethical perspective in instances where the corporate gatekeeper is an actor. (27) Further, I will suggest that such an ethical perspective may also engage with recent scholarly discourse regarding the theoretical approaches taken in each of the Model Code of Professional Responsibility and the Model Rules of Professional Conduct. (28) As a means of further substantiating this line of reasoning, I propose further analysis in relation to disclosure rules on conflicts of interest policies for Compensation Committees as mandated by Dodd Frank, (29) and provides some concluding thoughts on the manner in which an ethical perspective as to the corporate gatekeeper may be more broadly considered as part of the ongoing development of corporate and securities law. (30)

  1. CATEGORIES OF CONFLICTS RULES

    The categorization of legal rules is a method of inquiry that facilitates further discussion of matters...

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