Attorney-Whistleblowing and Conflicting Regulatory Regimes

In my latest article, Conflicted Counselors: Retaliation Protections for Attorney-Whistleblowers in an Inconsistent Regulatory Regime, I examine the ever-evolving issue of attorney-whistleblowing, the reporting requirements under the Sarbanes-Oxley Act (“SOX”) of attorneys representing issuer-clients, the potential for conflict of these requirements with the rules of professional conduct in various states, and the lack of retaliation protections for attorneys subject to these rules. Although attorney-whistleblowing undoubtedly invokes concerns about ethics and client relationships, SOX requires attorneys who “appear and practice” before the Securities and Exchange Commission to internally blow the whistle on their clients by reporting evidence of material violations of the law “up-the-ladder” when they represent issuers. If an attorney fails to adhere to these requirements, he/she will be subject to SEC-imposed civil penalties and disciplinary action. The SOX rules also allow an attorney to make a permissive disclosure to the SEC, revealing confidential information without the issuer-client’s consent, in certain instances, including when the attorney reasonably believes necessary to prevent substantial financial injury to the issuer.

This article addresses the current weaknesses in laws protecting attorney-whistleblowers from retaliation, who are mandated by statute to act as internal whistleblowers. Despite such reporting duties, retaliation protections for attorney-whistleblowers have been weak, as state laws protecting whistleblowers from retaliation present a patchwork of insufficient protections. Federal protections have been no more favorable, as the success rate for whistleblowers under SOX has been surprisingly low due to various administrative hurdles in seeking relief under the statute. Congress enacted the whistleblower program of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010 in an effort to improve upon protections for whistleblowers, which made available the right to bring a retaliation claim in federal court (not available under SOX), a longer statute of limitations, and double back pay as a remedy. These robust protections of Dodd-Frank have, however, been limited due to courts’ interpretations of the way in which the statute defines a “whistleblower”—as one who reports directly to the SEC, rather than internally or up-the-ladder. Specifically, the Fifth Circuit’s decision in Asadi v. G.E. Energy, 720 F.3d 620 (5th Cir. 2013), limits the protections of whistleblowers by holding that only those who report externally to the SEC are protected under the statute, thereby excluding whistleblowers who have reported internally or up-the-ladder within their organizations from retaliation protections. As might be expected, if attorneys permissively disclose information about client wrongdoing to the SEC, they risk serious disciplinary action for breaching the duty of confidentiality if admitted in a jurisdiction that does not allow such disclosures.

In this article, I undergo an in-depth study of the exceptions to the duty of confidentiality among the 50 states and other ethical rules that may allow for disclosures on par with what is permitted under SOX. I find that the ethical rules in eighteen states and in Washington, D.C., which I call the “Non-Adopting States,” do not allow the same types of permissive disclosures as those allowed under SOX. Further, there are numerous nuances among the states as to whether attorneys may permissively disclose through exceptions to the duty of confidentiality or under each state’s equivalent of the American Bar Association’s Model Rule 1.13, which governs the actions of attorneys when they represent organizations as clients. Thus, as it stands, attorneys are subject to a maze of conflicting regulatory regimes when they represent issuer-clients if they are admitted to the bar in one of the Non-Adopting States.

No court has yet determined the crucial question of whether the SOX rules preempt conflicting state ethical rules. After conducting an analysis focused on both statutory and administrative preemption questions, as well as the legislative history of the rules in question, I conclude that the SOX rules would indeed preempt conflicting state law, thereby protecting lawyers from disciplinary sanctions if they permissively disclose under SOX but are admitted in a jurisdiction with a conflicting rule, as well as ensuring that they are protected from retaliation as whistleblowers. Undoubtedly such a result is likely to be met with resistance by the Non-Adopting States. In an effort to address such concerns, I suggest amendments and clarifications to the SOX rules to qualify the “reasonable belief” reporting trigger that permits attorneys to reveal information to the SEC. I also explore the feasibility of a state-based solution to the problem in the event that preemption were not to prevail through the adoption of a modified version of Model Rule 1.13 that recognizes the unique nature of representation of attorneys appearing and practicing before the SEC.

Finally, I conclude by considering the role of today’s corporate attorney in the context of larger new governance regulatory regimes that turn away from top-down, government-imposed regulation and look towards self-regulation, collaboration, and early fraud-detection. I argue that attorneys representing issuer-clients in the modern regulatory landscape are well-positioned to enforce the goals of new governance models given their unique reporting requirements under SOX and can enhance modern-day corporate governance and compliance efforts that seek to proactively detect, address, and remediate instances of wrongdoing before escalating to higher and more egregious levels.

A full copy of this article is available on SSRN by clicking here.