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'Up-the-Ladder' Responsibilities Clarified by Sarbanes-Oxley
As discussed on page 1 of this newsletter, the SEC recently issued 'Standards of Professional Conduct' for attorneys representing issuers before the SEC ' a new rule mandated by the Sarbanes-Oxley Act of 2002. See 15 U.S.C. ' 7201 et. seq. The Standards clarify an attorney's 'up-the-ladder' corporate reporting responsibilities imposed by the Act. 17 C.F.R. ' 205.
An attorney must advise his or her client's General Counsel or CEO whenever he or she receives 'credible evidence, based upon which it would be unreasonable, under the circumstances, for a prudent and competent attorney not to conclude that it is reasonably likely that a material violation has occurred, is ongoing or is about to occur.' 17 C.F.R. ' 205.2(e). A 'material violation' is defined broadly as a material violation of a federal or state securities law, a material breach of a fiduciary duty under federal or state law or a 'similar material violation of any United States, federal or state law.' 17 C.F.R. ' 205.2(i).
Although the stated purpose of the Rule is to 'ensure the law is being followed,' it reaches beyond that laudable goal by requiring attorneys to report past material violations, even when such violations have long since ceased, and to ensure the corporate client engages in 'appropriate' remedial and preventive measures with respect to those past violations. SEC Release Nos. 33-8150, 34-46868; SEC Release No. 33-8185 at p. 9, available at www.sec.gov. Any attorney who violates these Standards can be subject to an SEC civil suit, disciplinary proceedings or cease-and-desist orders. 17 C.F.R. ' 205.6
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