2007 Issue 1 - New York City Bar Association

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L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E cannot guarantee that her services will not be put to some improper purpose, but she can reduce this risk through appropriate inquiries when circumstances suggest some reason for concern. When in the course of the representation outside counsel becomes seriously concerned about the legality of the company’s actual or intended conduct, counsel should make reasonable inquiry of the company, regardless of whether the concern rises to the level of requiring a report under the SEC’s lawyer conduct rules (17 C.F.R. § 205) promulgated under Section 307 of the Sarbanes-Oxley Act (“SOX”), Public Law 107-204, 15 U.S.C. § 7245, or comparable state ethical rules. If such inquiries and subsequent counseling do not allay the concern, counsel should seriously consider withdrawing from the representation. In the rare situation when a company’s Board of Directors declines to consider or take action in response to counsel’s report of a threatened or ongoing clear and material violation of law by the company, counsel should seriously consider reporting such violation to the appropriate regulatory or governmental authorities (as permitted, under specified circumstances, by the SEC’s lawyer conduct rules, ABA Model Rules 1.6(b) and 1.13(c) and the ethics rules of most states). The case for reporting out will be especially compelling if a substantial reason exists to doubt the independence of the company’s directors. When a company asks a law firm or lawyer to succeed other counsel in connection with corporate advice or a transaction, and the circumstances suggest that the predecessor firm’s withdrawal or discharge may have involved an issue concerning the client’s conduct, before accepting the engagement successor counsel should request that the company permit it to discuss with prior counsel the reasons for its withdrawal or discharge. A refusal by the company so to permit should usually disincline successor counsel from accepting the engagement. iii) the role of law firms The responsibility of law firms as institutions has recently received increased attention in discussions of the ethical responsibilities of the profession. 14 The SEC’s lawyer conduct “reporting up” rules appear to have stimulated a heightened focus by firms on their responsibilities to provide ethical guidance to their attorneys in the rendition of legal ser- 14. See generally Elizabeth Chambliss & David E. Wilkins, A <strong>New</strong> Framework for Law Firm Discipline, 16 Geo. J. Legal Ethics 335 (2003); Symposium, How Should We Regulate Large Law Firms Is a Law Firm Disciplinary Rule the Answer, 16 Geo J. Legal Ethics 203, 210-12 (2002). T H E R E C O R D 174
L A W Y E R ’ S R O L E I N C O R P O R A T E G O V E R N A N C E vices. We offer several suggestions for law firms in this area (see Full Report at pp. 121-27). Every firm with significant public company representations should adopt written procedures for implementing the “up-the-ladder” obligations imposed by applicable ethical rules and the SEC’s lawyer conduct rules. Firm procedures should include, among other things: mechanisms within the firm to report possible violations; clear assurance that lawyers—especially junior attorneys—will be protected against any retaliatory action by reason of reporting up a perceived problem; education and training sessions; and the establishment of designated senior lawyers or committees to facilitate compliance. (One example of such procedures is set forth in Appendix F to the Full Report). Because a law firm’s culture has a significant impact on how ethics rules are interpreted and enforced within a firm, firms should also adopt for the guidance of their attorneys a statement of best practices in advising public companies. (One example of such a statement is set forth in Appendix G to the Full Report). Firms are encouraged to designate a partner (or other senior lawyer), committee or outside counsel as an ethics adviser available to consult with all firm attorneys and otherwise to advance the firm’s promotion of high ethical standards. The attorney-client privilege should be applied to protect consultations between lawyers and their law firm’s in-house ethics counsel (or specially retained outside counsel) on matters of professional conduct, including issues pertaining to clients. This protection will facilitate compliance with applicable rules and statutes, and enable the firm to enforce its ethical standards internally, thereby strengthening the lawyer’s role in corporate governance. We recommend that the courts review such privilege issues in light of this strong public interest. iv) the lawyer-auditor relationship and financial disclosures Almost all of the recent high-profile corporate scandals have involved financial frauds, typically focused on accounting manipulations. This lends urgency to the need to examine the role of lawyers with respect to client financial disclosures, including the manner in which lawyers and auditors work together, or fail to do so, as they render their respective services to a common client (see Full Report at pp. 127-35). The distinctly different roles of auditors and lawyers, the former independent of the client and owing direct duties to the investing public, and the latter confidential advisors owing their sole duties to their cli- 2 0 0 7 V O L. 6 2 , N O. 1 175
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2007 Issue 1 - New York City Bar Association

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