SEC Acknowledges Ethical Obligations May Preclude Voluntary Reporting Out By Attorneys

In 2003, the Securities and Exchange Commission adopted rules that purportedly immunized attorneys who, subject to specific conditions, reveal confidential information to the SEC.  17 C.F.R. § 205.3(d)(2)  Technically, the rule permits, but does not require such disclosure without the consent of the “issuer” (who may or may not be the attorney’s client).

The SEC’s adoption of this rule caused widespread consternation in several state bars – especially in California.  Section 6068(e) of the California Business and Professions Code requires attorneys “To maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.”

There is only one statutory exception to this obligation – an attorney may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual.  The statute is reinforced by the California Rules of Professional Conduct, which prohibit attorneys from revealing information protected by Section 6068(e) without the informed consent of the client.  Rule 3-600.

In March 2004, the the Corporations Committee and the Committee on Professional Responsibility and Conduct of the California State Bar (COPRAC) jointly issued a summary Ethics Alert to all members of the California Bar, highlighting the major issues presented by the new SEC rules and the impact they have on California attorneys. Ethics Alert: The New SEC Attorney Conduct Rules v. California’s Duty of Confidentiality (2004).  Subsequently, the Corporations Committee published a law review article which discussed in depth the conflict.  Conflicting Currents: The Obligation to Maintain Inviolate Client Confidences and the New SEC Attorney Conduct Rules, 32 Pepp. L. Rev. 89 (2005).  The authors were James F. Fotenos, Steven K. Hazen, James R. Walther, Nancy H. Wojtas and I.

The SEC made it clear that it believed its rule “shall prevail over any conflicting or inconsistent laws of a state or other United States jurisdiction in which an attorney is admitted or practices.”  Implementation of Standards of Prof’l Conduct for Attorneys, [2002-2003 Transfer Binder] Fed. Sec. L. Rep. (CCH) 86,823, at 87,071 (Feb. 5, 2003).   Thus, I was pleasantly surprised to see the following statement in an amicus curiae brief filed yesterday by the SEC:

These attorneys are not required to make reports to the Commission and, indeed, may often be precluded from doing so as a result of their ethical obligations to their clients.

While I may be reading too much into this one sentence, it was heartening to see some acknowledgment that attorneys have ethical obligations to their clients.

The SEC filed the brief in Liu Meng-Lin v. Siemens AG, in support of its position that whistleblowers are entitled to protection from retaliation regardless of whether they report wrongdoing to their employer or the SEC.


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