Remarks by Commissioner Lee at PLI’s Corporate Governance

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at PLI’s Corporate Governance – A Master Class 2022. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Send Lawyers, Guns and Money: (Over-) Zealous Representation by Corporate Lawyers [1]

Thank you Brian [Breheny] for the introduction and to the Practicing Law Institute for having me today. Before I begin, I want to take a moment to acknowledge the on-going humanitarian disaster in Ukraine. My thoughts are with the people of Ukraine, who have demonstrated impossible bravery, and with those of you who may have friends or relatives affected by this crisis.

It’s a privilege to address my fellow members of the bar. This privilege is very meaningful to me personally in part because of my unexpected path into the legal profession and my deep regard for the ideals of public service that our profession represents.

I do not come from a family of lawyers; in fact my parents did not even attend college. I never laid eyes on an actual lawyer during my childhood. What I knew about them came from TV shows, which means I assumed their jobs were to cleverly question witnesses at trial until they confessed to the crime for which another had been charged. Despite (or maybe because of) this misperception, I secretly dreamed of becoming a lawyer and was awed to the point of reverence by the profession. As I worked my way through college and eventually, in my late thirties, through law school, I began to better understand what lawyers do and what it means to be a member of a “profession”—how the calling stood apart from other businesses principally because advocating for fidelity to the law is, at its core, a form of public service. [2] Taking this to heart, I launched an initiative in law school that led to the adoption of a requirement for students to complete pro bono work as part of the curriculum.

I have lived the experience of law from the perspectives of an outsider with no idea of what lawyers do, a student, a client, a securities law practitioner, an enforcement lawyer (both civil and criminal), and now as a Commissioner helping to shape regulatory policy. My belief in the ideals of the profession—ideals that I know you all share—has only grown stronger with time.

I take great pride in being a member of the bar and this is the lens that I bring to the topic I want to address today. I want to talk about supporting securities lawyers, both in-house and outside counsel, in upholding the best traditions of the profession. Specifically, by fulfilling a mandate in the Sarbanes-Oxley Act designed to do just that. As we near the twentieth anniversary of its passage, we still have not fulfilled Congress’s mandate under Section 307 of Sarbanes-Oxley to adopt minimum standards of professional conduct for attorneys appearing and practicing before the Commission in the representation of issuers. [3]

A key element of Sarbanes-Oxley, passed in the wake of the massive financial failures of the Enron era, was to create structures of accountability for professionals—executives, accountants and auditors, and, under Section 307 of the Act, accountability for lawyers. In considering Section 307, Congress recognized that executives and accountants did not “work alone,” and that lawyers were “virtually always there looking over their shoulders.” [4] Congress was concerned, however, that counsel often acted in the interests of the executives who hired them rather than the company and its shareholders to whom their duty and responsibility is owed. [5]

Unfortunately, in response to this mandate, the SEC adopted only one standard: the so-called “up-the-ladder” rule, requiring lawyers to report certain potential violations up the chain of management inside a corporate client. [6] We did not adopt a broader set of rules as Congress directed, and quite significantly, even this single standard has not been enforced in the nearly 20 years since it was adopted. [7]

The policies behind this unfulfilled mandate—which are designed to support lawyers in their gatekeeping role—are as relevant and compelling today as they were 20 years ago, if not more so. Indeed the role of corporate lawyers as gatekeepers in the capital markets—distinct from the litigator’s role—has long been acknowledged by a broad and bipartisan group from William O. Douglas, [8] to A.A. Sommer [9] and Stanley Sporkin. [10] It also includes Independent, Republican, and Democratic Chairs of the SEC. [11]

And it wasn’t just during the Enron era that we saw lapses in the gatekeeping role. [12] We saw such lapses with stock option backdating and mutual fund market timing cases, [13] and to some extent in the 2008 financial crisis. [14] More recently, we have seen an entirely new, multi-trillion dollar industry [15] develop around cryptocurrency and digital assets that largely defies existing laws and regulations. [16] The role of lawyers in enabling this approach remains to be fully fleshed out, but the failure to comply with well-known principles of the securities laws has already been costly for many firms. The bottom line is this: when corporate lawyers give bad advice, the consequences befall not just their clients, but the investing public and capital markets more broadly—especially when it comes to disclosure advice. [17]

But we do not currently have sufficient standards in place upon which to assess this kind of advice. Standards for professional conduct could help both lawyers and regulators navigate this difficult terrain where bad legal advice can, in the words of a prior Commission, “inflict substantial damage on the Commission’s processes, and thus the investing public, and [] the level of trust and confidence in our capital markets.” [18] It’s time to revisit this unfulfilled mandate and consider whether the SEC should adopt (and enforce) a minimum set of standards for lawyers who practice before the Commission to better protect investors and markets.

I. “Can-do” Corporate Lawyering

The “bad advice” I refer to arises from a type of “can-do” approach to lawyering that is ill-suited to lawyers in a gatekeeping role. It is born from a desire to give management the answer that it wants. Or, as a Delaware court recently stated, it stems from a “contrived effort to generate the client’s desired result when real-world facts would not support it.” [19]

If you haven’t read this particular Delaware decision (Bandera Master Fund v. Boardwalk Pipeline) from late last year, I commend it to you as a study in the perils of modern corporate law practice. It involves sophisticated counsel who, as the court put it, engaged in “goal-directed reasoning” to provide an opinion designed to allow the client to exercise a lucrative call right. [20] However, the court concluded the opinion was based on artifice and sleight of hand. It thus ruled that the opinion was given in bad faith and awarded damages against the client of roughly $700 million. [21]

Unfortunately, this case does not appear to represent an isolated instance of poor judgment by a single lawyer or firm. Indeed, this same court wrote an expansive opinion in 2020 in which it found another preeminent firm had “committed fraud” by holding back important information during a competitive bidding process. [22] In yet another recent case, the court laid out chapter and verse how a large law firm took part in a covert plan to “undermine a merger” while concealing their work so as not to “advertis[e] that [the client] was breaching its obligations” to use best efforts to close the deal. [23]

Though these particular cases were not about disclosure under the securities laws, they are nevertheless emblematic of a dynamic—a kind of race to the bottom—that can occur when specialized professionals like securities lawyers compete for clients in high stakes matters and are pressured to provide the answers their clients seek. As one observer put it: “Can-do lawyering has run amok. Still you don’t want to be the lawyer that just says ‘no.’ You’ll never make it.” [24]

Of course, this type of conduct is far from the norm for securities law practitioners, but it is not as rare as we would like to think. In my 25 years as a securities lawyer, I have observed this kind of conduct on multiple occasions. It is not easy to strike the right balance between zealous representation in corporate law matters and thoughtful consideration of the potential impact to shareholders, investor protection, and the public interest. Most lawyers generally err on the side of caution. But examples like those I’ve noted erode public trust in the highly-skilled, principled attorneys in the financial regulatory space and in our markets more broadly.

II. The Impacts of Bad Advice Related to Corporate Disclosures [25]

A. Market Harm

When lawyers fail as gatekeepers, when they provide “goal-directed” reasoning to public companies on critical issues like materiality, there is a broader interest at stake. Investors and financial markets can be harmed through false or misleading disclosure.

And lawyers are frequently involved in disclosure decisions. While management is generally responsible for public company disclosures, they often rightly rely on counsel to review and draft the relevant filings and resolve many questions that arise in the process of crafting disclosures, including critical materiality determinations. [26]

In fact, the role of counsel in the disclosure process has, if anything, only increased in recent years as the Commission has shifted even further toward principles-based rules. [27] Specific disclosure items have been replaced with a more “principles-based” approach that focuses on management’s view of the materiality of the information. [28] Critically important, top-of-mind issues for investors such as climate risk and cybersecurity disclosures currently depend mostly upon materiality determinations. [29] Principles-based rules make disclosure decisions more management-centric, requiring officers to exercise greater judgment to determine whether disclosure is necessary. [30] Materiality determinations, which are mixed questions of law and fact, are thus particularly suited for review by counsel. [31]

However, when, as a New York City Bar Task Force found, lawyers “ben[d] to management pressures” [32] or engage in a “contrived effort to generate the client’s desired result,” [33] their advice can distort important market-moving information, interfere with price discovery, and lead to misallocations of capital. Indeed, misleading or false disclosure can have a profoundly negative impact on an investor’s decision-making process. It can directly impact their savings, investment goals, and overall financial well-being. Misleading or false disclosures also erode integrity and confidence in our financial markets and regulatory system.”

Some rightly point out that reputational harm can offer a powerful incentive for lawyers not to succumb to such pressure. [34] However, increased competitiveness in the profession contributes to the problem, and imprecise legal principles, like materiality, “invite interpretation in a self-serving fashion.” [35] Lawyers view themselves as problem-solvers for their clients, and failing to give management what it wants can actually be what causes reputational harm. [36]

B. Reduced Deterrence

Perversely, in addition to inflicting harm on investors and potentially exposing the company to costly litigation, contrived legal advice can actually insulate from liability those individuals within a company who are responsible for false or incomplete disclosure. This turns the role of gatekeeper on its head.

Also a lack of individual accountability greatly undermines the deterrent effect of a potential enforcement action or private litigation. [37] Individual accountability for corporate rule-breaking is a singularly effective deterrent, and also a matter of fundamental fairness that promotes public trust in financial markets.

The fact is, however, we are too often hamstrung in our ability to charge individuals, particularly with respect to disclosure violations by public companies. [38] I know, from over a decade of experience as an enforcement lawyer and from reviewing and voting on hundreds of cases as a Commissioner, this is not from a lack of diligence by the Commission’s Enforcement staff. In fact, I can say with confidence that in cases alleging disclosure violations by a public company, staff carefully investigates and considers whether individuals are responsible and should be charged.

So, what gets in the way of charging individuals? In some cases, the disclosure failure or misrepresentation truly is not attributable to a specific person or persons within a company, but rather more broadly to a failure by the company to employ sufficient processes and safeguards around disclosures. This is sometimes referred to as “corporate negligence.” [39] In other cases, considerations of equity may militate against charging a relatively low-level employee or one who was in some sense a victim of a corrupt corporate culture.

In still another category of cases, however, we know who within the company was responsible, but face significant risks in charging them due to the involvement of lawyers in the disclosure decision that forms the basis of the enforcement action. Of course, as I mentioned, it is prudent and beneficial for companies to seek the advice of counsel in making important disclosure decisions. However, if counsel merely contrives to support a pre-determined goal of management, such activity is merely rent-seeking masquerading as legal advice, while providing a shield against liability.

I have seen this scenario on a number of occasions—examples of lawyers providing advice that was, in my view, reckless, but that provided cover for other executives who weren’t charged. Because we generally lack standards by which to hold such lawyers accountable, the result is no individual accountability of any kind. [40]

III. Current Professional Standards are Inadequate

The existing framework for professional conduct is not adequate to the task—neither through states nor the SEC. [41] State bars don’t have the resources [42] and may lack the necessary expertise [43] needed to resolve issues around the legal advice provided to public companies. [44] State disciplinary actions can also lack financial disincentives in the form of monetary sanctions.

The SEC can and does bring actions against lawyers who directly commit violations of the federal securities laws or aid and abet in these violations. [45] Lawyers have been sanctioned where they allegedly misrepresented or concealed information in documents that they drafted, signed, and filed; [46] authored “sham” agreements; [47] or knowingly facilitated a fraud. [48] But these cases are generally premised on claims that the lawyer violated a substantive provision of the securities laws.

Setting aside substantive violations of the securities laws, the Commission’s own Rules of Practice are a potential source for lawyer discipline. Under Rule 102(e), the Commission can suspend or bar attorneys when their behavior falls below “generally recognized norms of professional conduct.” [49] Nonetheless, we have generally chosen instead to use Rule 102(e) only to impose follow-on bars after attorneys have been found to violate substantive provisions of the securities laws, as though such violations are the only way in which an attorney can violate generally recognized norms of conduct. [50]

More importantly, even if the Commission determined to switch course and consider these types of actions, there is a more fundamental hurdle: what are the “generally recognized norms of professional conduct” by which we would assess lawyers? We could look to state law standards but they are mostly drafted in a one-size-fits-all fashion, arguably more oriented toward litigators, and do not explicitly address norms for those representing public companies. [51] As you are all keenly aware, a lawyer at the largest firm representing the largest public issuers is engaged in a very different type of practice from a solo practitioner handling personal injury or estate law matters.[52] State law standards also focus mostly on the behavior of individual lawyers, assigning few responsibilities to the firm for quality assurance. [53] And while the standards include some useful concepts, they are often aspirational and difficult to enforce. [54]

As I mentioned, however, the Commission has the authority to address these concerns and was directed by Congress to do so. Section 307 mandated that the SEC “issue rules”—plural—adopting “minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers.” [55]

While these rules were to include a requirement that lawyers report evidence of certain legal violations up through their client’s chain of management, the mandate was broader than that. [56] To date, however, the Commission has adopted only the single “up-the-ladder” standard. And unfortunately, while an entirely new regime for oversight of the accounting profession has grown and evolved, and thousands of executives have certified SEC filings under Section 302, some having their salaries clawed back under Section 304, we have never brought a single case finding a violation of the up-the-ladder rule under Section 307, a glaring fact of which market observers are well aware. [57] Like a tree that falls in the forest with no one to hear, a rule that is not enforced may fairly be said to be no rule at all. Indeed this calls into question whether we have fulfilled even the narrowest expectations of Congress in adopting Section 307.

IV. Rules to Live By

The time is ripe to return to this unfinished business. Doing so will require careful thought, as well as assistance from the securities bar, experts on professional responsibility, and other interested parties and market participants. I will offer today some thoughts on where we might start, and I’d appreciate hearing from you all on these or other approaches.

We might offer greater detail regarding a lawyer’s obligation to a corporate client, including more specifically how their advice must reflect the interests of the corporation and its shareholders rather than the executives who hire them. [58] This distinction is not always an easy one to make in practice, but at a minimum, might require consideration of the impact of the advice on the corporation and its shareholders, including the impact should the disclosure decision ultimately prove incorrect. [59]

Advice on materiality may be deserving of its own treatment in the standards, treatment designed to ensure a sufficiently independent and rigorous analysis. In weighing the importance of information to a reasonable investor, courts have recognized that a materiality analysis is “inherently fact-specific” [60]and “delicate,” [61] and have declined to find information immaterial as a matter of law unless it is “so obviously unimportant . . . that reasonable minds could not differ,” [62] with doubts construed in favor of requiring disclosure. [63] Disclosure counsel should already be applying these concepts, but a standard could make them explicit.

Minimum standards might also address requirements of competence and expertise. As noted in Bandera Master Fund, a good faith opinion necessarily requires that the opinion-giver have competence in the relevant area of law. [64] Those rendering advice on disclosure issues may not always have adequate training. Disclosure lawyers, for example, may opine on materiality without sufficient focus or understanding of the views of “reasonable” investors. [65] They may focus instead on litigation risk associated with non-disclosure. The Commission could provide continuing education requirements that apply to securities lawyers advising public companies, much like the PCAOB has done for auditors. [66]

In addition to the adoption of standards applicable to lawyers practicing before the Commission, we could consider some degree of oversight at the firm level. [67] Audit firms for public companies are obligated to have a system of quality control at the firm level; [68] something similar might make sense for securities lawyers.

Other topics that could be addressed in a set of minimum standards could include the need for independence in rendering advice, [69] the obligation to investigate red flags and ensure an accurate factual predicate for legal opinions, [70] and the retention of sufficient contemporaneous records to support the reasonableness of any legal advice, including whether appropriate expertise was brought to bear. [71]

V. Conclusion

These are just a few ideas [72] regarding what standards might look like that I hope can serve as a starting point for conversation and collaboration. Having read through comments submitted in response to our proposed up-the-ladder rules in 2002, I appreciate the complexity of this task, as well as concerns of the American Bar Association and others regarding protection of the attorney-client privilege. [73] We must give that careful consideration, just as we must also weigh the costs of there being few, if any, consequences for contrived or tortured advice.

The attorney-client privilege is not an end in itself. It is a means to an end which is fidelity to law and society. I can hardly say it better than our former Enforcement Director, Linda Chatman Thomsen:

Underlying all evidentiary privileges—which [] are disfavored at law, for the simple reason that they interfere with fact-finding—is the idea that there is an offsetting benefit that justifies the cost to the truth-seeking process. That somehow—by protecting these relationships with [] lawyers—we, as a society, end up encouraging better conduct, not worse.

That is the goal of standards in this space—to support securities lawyers in giving clients their best advice while living up to the promise of public service that our profession embraces.

Endnotes

1Warren Zevon, Lawyers, Guns and Money (Asylum Records 1978).(go back)

2See John J. Parker, A Profession Not a Skilled Trade, 8 S.C. L. Rev. 179, 179 (1955) (“The practice of the law is a profession – not a business or a skilled trade. While the elements of gain and service are present in both, the difference between a business and a profession is essentially this: the chief end of a trade or business is personal gain; the chief end of a profession is public service. Of the three learned professions, says Ruskin, it pertains to the minister to teach, to the physician to heal and to the lawyer to give peace and order to society.”).(go back)

3See Sarbanes-Oxley Act of 2002 § 307, 15 U.S.C. § 7245 (“Sarbanes-Oxley Section 307”).(go back)

4See 148 Cong. Rec. S6551-52 (daily ed. July 10, 2002) (statement of Sen. Edwards) (“The truth is that executives and accountants do not work alone. Anybody who works in corporate America knows that wherever you see corporate executives and accountants working, lawyers are virtually always there looking over their shoulder. If executives and/or accountants are breaking the law, you can be sure that part of the problem is that the lawyers who are there and involved are not doing their jobs.”).(go back)

5See id. (“We have seen corporate lawyers sometimes forget who their client is. What happens is their day-to-day conduct is with the CEO or the chief financial officer because those are the individuals responsible for hiring them. So as a result, that is with whom they have a relationship. When they go to lunch with their client, the corporation, they are usually going to lunch with the CEO or the chief financial officer. When they get phone calls, they are usually returning calls to the CEO or the chief financial officer. The problem is that the CEO and the chief financial officer are not the client. Their responsibility and the client they have to advocate for–and which they have an ethical responsibility to advocate for–is, in fact, the corporation, not the CEO or the chief financial officer.”); 148 Cong. Rec. S6554-56 (daily ed. July 10, 2002) (statement of Sen. Enzi) (“It is important to understand the corporate attorney’s client is the whole corporation and its shareholders, and not just the CEOs or some of the executives, accountants, or auditors. As a result, their ultimate duty of representation is not to the people to whom they normally report but to the shareholders through the board of directors.”); 148 Cong. Rec. S6556 (daily ed. July 10, 2002) (statement of Sen. Corzine) (“The lawyer’s client is the corporation’s shareholders, not the manager.”).(go back)

6See Implementation of Standards of Professional Conduct for Attorneys, Securities Act Rel. No. 8185 (Sept. 26, 2003) (adopting final rules implementing the so-called “up-the-ladder” requirement pursuant to Section 307 of the Sarbanes-Oxley Act). For the purpose of clarity, the up-the-ladder provision is technically codified as several distinct rules in the Code of Federal Regulations. See 17 C.F.R. §§ 205.1-205.7. In substance, however, those rules are limited in scope to the up-the-ladder requirement, and I refer to them collectively throughout this speech as a single rule.(go back)

7This is not to say that lawyers haven’t made efforts to comply with this rule. Anecdotally, I am aware that some lawyers in fact have and do report up the ladder, sometimes spurring internal investigations.(go back)

8William O. Douglas, The Lawyer and The Federal Securities Act (Apr. 22, 1934) (“Service to the client has been the slogan of our profession. And it has been observed so religiously that service to the public interest has been sadly neglected.”).(go back)

9A.A. Sommer, Jr., The Emerging Responsibilities of the Securities Lawyer, Address to the Banking, Corporation & Business Law Section, N.Y. State Bar Ass’n (Jan. 24, 1974), in Larry D. Soderquist & Theresa Gabaldon, Securities Regulation 617-19 (4th ed. 1999) (“I would suggest that in securities matters (other than those where advocacy is clearly proper) the attorney will have to function in a manner more akin to that of auditor than to that of the attorney. This means several things. It means that he will have to exercise a measure of independence that is perhaps uncomfortable if he is also the close counselor of management in other matters, often including business decisions. It means he will have to be acutely cognizant of his responsibility to the public who engage in securities transactions that would never have come about were it not for his professional presence. It means that he will have to adopt the healthy skepticism toward the representation of management which a good auditor must adopt.

It means that he will have to do the same thing the auditor does when confronted with an intransigent client—resign.”).(go back)

10Interview of Stanley Sporkin, Former Director, Division of Enforcement, SEC at SEC Historical Society (Sept. 23, 2003) (“We developed the so-called access strategy which to my delight has become one of the underpinnings of Sarbanes-Oxley. Of course, they now call it the gatekeeper strategy. The access strategy was developed on the concept that for a [stock] promotion to be effective required the assistance or help of a professional. You had to have access to the marketplace, otherwise the promotion would fail. And access to the marketplace was obtained through a number of different professionals. You had to have a good lawyer, an accountant, a broker-dealer, maybe a banker. The theory was that we didn’t have the resources to police every crooked promoter. There were too many out there. But we could narrow down our looking to a very small group of professionals who provide access to the marketplace.”).(go back)

11See, e.g., Gary Gensler, Chair, SEC, Prepared Remarks at the Securities Enforcement Forum (Nov. 4, 2021) (stating that lawyers, among other professionals “play an important role in our capital markets. Market participants rely on you for advice and counsel on a daily basis. Within our securities laws, you are entrusted with certain responsibilities and take on certain obligations as well. Thus, you occupy positions of trust. Though you represent your clients, you also have an important role in upholding the law, which protects investors and our markets.”); Jay Clayton, Chairman, SEC, Statement on Cryptocurrencies and Initial Coin Offerings (Dec. 11, 2017) (discussing questions of the legal status of so-called “utility tokens” and stating: “On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities. I urge you to be guided by the principal motivation for our registration, offering process and disclosure requirements: investor protection and, in particular, the protection of our Main Street investors”); Jay Clayton, Chairman, SEC, Opening Remarks at the Securities Regulation Institute (Jan. 22, 2018) (“Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards.To be blunt, from what I have seen recently, particularly in the initial coin offering (‘ICO’) space, they can do better.Our securities laws—and 80 plus years of practice—assume that securities lawyers, accountants, underwriters, and dealers will act responsibly.It is expected that they will bring expertise, judgment, and a healthy dose of skepticism to their work.Said another way, even when the issue presented is narrow, market professionals are relied upon to bring knowledge of the broad legal framework, accounting rules, and the markets to bear.”); Jay Clayton; Harvey Pitt, Chairman, SEC, Remarks Before the Annual Meeting of the American Bar Association’s Business Law Session (Aug. 12, 2002) (“Although some lawyers believe the roles of outside auditors and corporate lawyers are vastly different, lawyers representing public companies have responsibilities quite similar to those of outside auditors. Outside auditors owe a duty to shareholders and the investing public—to assure that a company’s financial reports are reliable and truthfully prepared. Similarly, lawyers who represent corporations serve shareholders, not corporate management. Helping a company satisfy literal legal prescriptions, even if doing so is contrary to what those legal prescriptions were intended to accomplish, doesn’t satisfy a corporate lawyer’s duties.”). But see John C. Coffee Jr., The Attorney as Gatekeeper: An Agenda for the SEC, 103 Colum. L. Rev. 1293 (2003) (describing a debate amongst the bar over the appropriate role for securities attorneys and whether such attorneys owe a duty to the public or, instead, exclusively to their client).(go back)

12Even the Supreme Court has acknowledged—in a ruling applying a broad interpretation to the scope of Sarbanes-Oxley’s whistleblower protections—that Congress was largely animated in Sarbanes-Oxley by the ways in which professionals of all sorts, and especially accountants and lawyers, failed in their respective gatekeeping roles. See Lawson v. FMR LLC, 571 U.S. 429, 447-449 (2014) (identifying numerous instances in which Congress evinced an intent to address auditors’ and lawyers’ incentives to look the other way when confronted with fraud or other bad conduct, including: 1) citing a finding by a Department of Labor Administrative Review Board that “Congress plainly recognized that outside professional—accountants, law firms, contractors, agents, and the like—were complicit in, if not integral to, the shareholder fraud”; 2) stating that “the Senate Report demonstrates that Congress was as focused on Enron’s outside contractors in facilitating the fraud as it was on the actions of Enron’s own officers”; 3) describing as “clear from the legislative record . . . Congress’ understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract; and 4) noting Congress’ emphasis on the role of outside gatekeepers and the Senate Report’s conclusion that “Congress must reconsider the incentive system that has been set up that encourages accountants and lawyers who come across fraud in their to remain silent”).(go back)

13See John C. Coffee, Jr., The Political Economy of Dodd-Frank, Why Financial Reform Tends to be Frustrated and Systemic Risk Perpetuated, 97 Cornell L. Rev. 1019 (2012) (“Total silence on the enforcement front has followed the SEC’s aspirational Standards of Professional Conduct. Despite numerous instances in which lawyers were clearly aware of executive misconduct and both the stock-option backdating scandal and the mutual-fund market timing scandal followed the adoption of these standards and presented instances in which misconduct involving violations of the federal securities laws deeply implicated attorneys-the SEC appears to date never to have charged an attorney representing a public corporation with violating this rule.”). See also Linda Chatman Thomsen, Director, Division of Enforcement, SEC, Remarks Before the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute 2007 (May 4, 2007) (“A few too many recent examples come to mind. The conduct of several inside lawyers in the recent options backdating scandals should make us all pause. In recent months, the Commission has sued the former General Counsels of four publicly traded companies: Apple, McAfee, Monster Worldwide and Comverse Technology for allegedly backdating undisclosed in-the-money options to themselves and to others.Sadly, in each of the four cases we alleged that to further the respective scheme, the company’s inside counsel altered or fabricated company records to advance or conceal the fraud.”).(go back)

14William Douglas’ comments in 1934 make it clear that attorneys’ role in financial crises is not a new phenomenon. See Douglas, supra note 8 (“It is true that the high priests of the legal profession were active agents in making high finance a master rather than a servant of the public interest. They accomplished what their clients wanted accomplished and they did it efficiently, effectively and with dispatch. They were tools or agencies for the manufacture of synthetic securities and for the manipulation and appropriation of other people’s money . . . They never took seriously the true nature of their public trust. They failed to act as conditioners of their clients’ programs. They neglected their foremost function—to create and maintain financial practices which were respectable, honest, and conservative.”).(go back)

15See Yvonne Lau, Fortune.com, Cryptocurrencies hit market cap of $3 trillion for the first time as Bitcoin and Ether reach record highs (Nov. 9, 2021) (“On Tuesday, the cryptocurrency market soared to an all-time high, reaching a market cap of $3 trillion, as the world’s two largest cryptocurrencies surged to record highs . . . The global crypto market cap has grown fivefold since last November, when it stood at $578 billion.”). While the total market cap has like decreased in recent months due to significant price declines of certain cryptocurrencies, it remains the case that the market for cryptocurrencies well exceeds the trillion dollar mark.(go back)

16See Gary Gensler, Chair, SEC, Remarks Before the Aspen Security Forum (Aug. 3, 2021) (“I think former SEC Chairman Jay Clayton said it well when he testified in 2018: ‘To the extent that digital assets like [initial coin offerings, or ICOs] are securities — and I believe every ICO I have seen is a security — we have jurisdiction, and our federal securities laws apply.’ I find myself agreeing with Chairman Clayton. You see, generally, folks buying these tokens are anticipating profits, and there’s a small group of entrepreneurs and technologists standing up and nurturing the projects. I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight. This leaves prices open to manipulation. This leaves investors vulnerable. Over the years, the SEC has brought dozens of actions in this area,prioritizing token-related cases involving fraud or other significant harm to investors. We haven’t yet lost a case.”) (internal citations omitted).(go back)

17See Gurbir Grewal, Director, Division of Enforcement, SEC, Remarks at SEC Speaks 2021 (Oct. 13, 2021) (“When gatekeepers are living up to their obligations, they serve as the first lines of defense against misconduct. But when they don’t, investors, market integrity, and public trust all suffer. Encouraging your clients to play in the grey areas or walk right up to the line creates significant risk. It’s when companies start testing those lines that problems emerge and rules are broken. And even if that’s not the case, the public loses faith in institutions that appear to be trying to get away with as much as they can. That’s why gatekeepers will remain a significant focus for the Enforcement Division.”). See also Linda Chatman Thomsen, Director, Division of Enforcement, SEC, Remarks Before the 27th Annual Ray Garrett, Jr. Corporate and Securities Law Institute 2007 (May 4, 2007) (“But, and this is an important but, we cannot talk about the attorney-client privilege without talking about and embracing the reason for that protection. Underlying the privilege is the assumption that attorneys will advise and advance compliance with the law. Society expects lawyers to be more than hired guns, to do more than keep people happy. We expect that they can and will make uncomfortable decisions and that they can and will deliver unwanted advice and bad news. Underlying all evidentiary privileges—which let me remind you, are disfavored at law, for the simple reason that they interfere with fact-finding—is the idea that there is an offsetting benefit that justifies the cost to the truth-seeking process. That somehow—by protecting these relationships with priests, or doctors, or lawyers—we, as a society, end up encouraging better conduct, not worse.”).(go back)

18In re William R. Carter, Exchange Act Release No. 17597, 1981 WL 384414, at *3 (Feb. 28, 1981).(go back)

19Bandera Master Fund LP v. Boardwalk Pipeline Partners, C.A. No. 2018-0372-JTL, 2021 WL 5267734, at *71 (Del. Ch. Nov. 12, 2021) (“[T]he record as a whole depicts a contrived effort to generate the client’s desired result when the real-world facts would not support it.”).(go back)

20Id. at *2.(go back)

21Id. at *2-3.(go back)

22AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, C.A. No. 2020-0310-JTL, 2020 WL 7024929, at *17 (Del. Ch. Nov. 30, 2020).(go back)

23In re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114-JTL, 2020 WL 5106556, at *7 (Del. Ch. Aug. 31, 2020).(go back)

24Sujeet Indap, Delaware Judge Sends Warning to Zealous Lawyers, Financial Times, Dec. 13, 2021.(go back)

25This speech focuses broadly on counsel involved in the formulation and review of issuers’ public disclosure, including those who address the many legal questions that often arise in that context. As a general matter, I do not intend with these comments to address the conduct of attorneys serving as litigators or otherwise representing their client(s) in an advocacy role in an adversarial proceeding or other similar context, such as in an enforcement investigation. There are doubtless areas of concern with certain lawyer behavior in that context that warrant similar scrutiny, but those issues are outside of the scope of these remarks.(go back)

26See, e.g., Bank of America and Merrill Lynch: How did a Private Deal Turn into a Federal Bailout? Joint Hearing before the H. Comm. on Oversight and Gov’t Reform and the Subcommittee on Domestic Policy, 100th Cong. 73 (June 11, 2009). During the hearing, the following exchange occurred between Congressman Peter Welch and Kenneth Lewis, then-CEO of Bank of America:

Mr. WELCH. And do you think after the fact information is not of interest to investors?

Mr. LEWIS. What I do know is that when our lawyers tell us we have a disclosable event, we disclose it.

Mr. WELCH. If you have——

Chairman TOWNS. I must interrupt the gentleman.

Mr. WELCH. If I can ask just one final question. If there is an event that you consider so significant that it may allow you to invoke the material adverse consequence contract clause, do you not think that same event is of interest to shareholders and requires you, in your fiduciary duty, to disclose it?

Mr. LEWIS. I leave that decision to our security lawyers and our outside counsel.

Mr. WELCH. You are not CEO?

Mr. LEWIS. I am not a securities lawyer.

(go back)

27See, e.g., Modernization of Regulation S-K Items 101, 103, and 105, Securities Act Release 10668, at 9 (Aug. 8, 2019) (“We propose to revise Items 101(a) (description of the general development of the business), 101(c) (narrative description of the business), and 105 (risk factors) to emphasize a principles-based approach because the current disclosure requirements may not reflect what is material to every business.”). This emphasis on principles-based rules made its way into the Commission’s auditor independence rules as well. See Qualifications of Accountants, Securities Act Release No. 10876, at 8 (Oct. 16, 2020) (“The Commission proposed amending the definition of an affiliate of the audit client set forth in Rule 2-01(f)(4)(i) to include amaterialityqualifier with respect to operating companies, including portfolio companies, under common control.”).(go back)

28See, e.g., Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Securities Act Release No. 10890, at 6 (Nov. 19, 2020) (“We are adopting changes to Items 301, 302, and 303 of Regulation S-K that would reduce duplicative disclosure and focus onmaterialinformation.”); Modernization of Regulation S-K Items 101, 103, and 105, Securities Act Release No. 10825, at 6 (Aug. 26, 2020) (“Our disclosure requirements, while prescriptive in some respects, are rooted inmaterialityand facilitate an understanding of a registrant’s business, financial condition and prospects through the lens through which management and the board of directors manage and assess the performance of the registrant.”). See also Business and Financial Disclosure Required by Regulation S-K, Securities Act Release No. 10064, at 33 (Apr. 13, 2016) (“The concept of materiality has been described as ‘the cornerstone’ of the disclosure system established by the federal securities laws.”); Modernization of Property Disclosures for Mining Registrants, Securities Act Release No. 10570 (Oct. 31, 2018) (“We are adopting the proposed provision that a registrant must provide the disclosure specified in subpart 1300 of Regulation S-K if its mining operations arematerialto its business or financial condition.”).(go back)

29See Commission Guidance Regarding Disclosure Related to Climate Change, Securities Act Release No. 9106, at 12 (“Securities Act Rule 408 and Exchange Act Rule 12b-20 require a registrant to disclose, in addition to the information expressly required by Commission regulation, ‘such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.’”); Regulation S-K Item 101(c)(2), 17 C.F.R. § 229.101 (requiring issuers to disclose, “to the extent material to an understanding of” the issuer’s business, a description of the issuer’s human capital resources).(go back)

30See, e.g., Business and Financial Disclosure Required by Regulation S-K, supra note 28, at 35 (“Many of our rules require disclosure when information is material to investors.These rules rely on a registrant’s management to evaluate the significance of information in the context of the registrant’s overall business and financial circumstances and determine whether disclosure is necessary. The requirements are often referred to as ‘principles-based’ because they articulate a disclosure objective and look to management to exercise judgment in satisfying that objective.”); Modernization of Regulation S-K Items 101, 103, and 105, supra note 27, at 6-7 (“These disclosure requirements are often referred to as ‘principles-based’ because they articulate a disclosure concept rather than a specific line-item requirement. Principles-based rules rely on a registrant’s management to evaluate the significance of information in the context of the registrant’s overall business and financial circumstances and to determine whether disclosure is necessary.”).(go back)

31See Michel Rosenfeld, The Transformation of the Attorney-Client Privilege: In Search of an Ideological Reconciliation of Individualism, the Adversary System, and the Corporate Clients SEC Disclosure Obligations, 33 Hastings L. J. 495, 537 (“The securities attorney, as an expert, is often in a better position than his or her client to evaluate the materiality of information for disclosure purposes.”).(go back)

32Report of the New York City Bar Association Task Force on the Lawyer’s Role in Corporate Governance, 62 Bus. Law. 427, 457 (Feb. 2007) (“NYC Bar Task Force”) (“Nonetheless some of the recent scandals do suggest that occasionally lawyers have bent to management pressures, andfailed to ask the questions or take the actions that might have prevented or mitigated corporate misconduct.”).(go back)

33Bandera Master Fund, supra note 19, at *71 (“But here, the record as a whole depicts a contrived effort to generate the client’s desired result when the real-world facts would not support it.”). Another academic has summed up the dynamic this way: “the lawyer in the market-driven firm faces a simple[] imperative: do whatever the client wants.” Milton C. Regan, Jr., Corporate Norms and Contemporary Law Firm Practice, 70 Geo. Wash. L. Rev. 931, 941 (2002) (“As devotion to the client becomes the defining value of the legal profession, concerns about craft autonomy and preserving the integrity of the legal system may begin to fade. Rather than engage in the complex task of trying to accommodate multiple professional values, the lawyer in the market-driven firm faces a simpler imperative: Do whatever the client wants.”).(go back)

34See David J. Beck, The Legal Profession at the Crossroads: Who Will Write the Future Rules Governing the Conduct of Lawyers Representing Public Corporations?, 34 St. Mary’s L.J. 873, 906 (2003) (“[E]ven if no disciplinary sanctions are imposed by the SEC, the specter of alleged disciplinary action by the SEC carries its own costs in terms of the damage to the attorney’s reputation, regardless of the outcome.”).(go back)

35Donald C. Langevoort, Gatekeepers, Cultural Captives, or Knaves?: Corporate Lawyers Through Different Lenses, 88 Fordham L. Rev. 1683, 1692 (2020) (“The often subjective nature of the law also makes the slope more slippery. As with ethical precepts, vague legal principles invite interpretation in a self-serving fashion, without awareness of the biased construal.”). See also 60 Minutes: Anonymous, Inc. (CBS television broadcast Jan. 31, 2016) (showing a sting operation in which a number of lawyers displayed a willingness to aid an anonymous person with obtaining property such as New York real estate and yachts despite significant red flags that the funds were the proceeds of corruption or other wrongdoing).(go back)

36See Langevoort, supra note 35, at 1692 (“Lawyers covet being thought of as problem solvers for their clients, which puts pressure on them to live up to expectations as a matter of professional identity. Interviews with lawbreakers reveal how the first steps toward abject criminality in business settings were often by people who did a little too much not to let others down and then could not stop once committed to the course of action (a form of cognitive dissonance).”); NYC Bar Task Force, supra note 32, at 455 (“We also agree that there are pressures on lawyers to acquiesce in wrongful client conduct, reflecting in part the increased competitiveness of the profession. Outside lawyers are pressed to attract and retain clients. A law firm partner’s compensation—or even a small law firm’s survival—may depend on the business referred by the CEO of a major client. The mobility of clients insures a heightened sensitivity to client satisfaction.”); John C. Bogle, Founder and Former Chairman, Vanguard Group, Written Testimony for the PCAOB Public Hearing on the Concept Release on Auditor Independence and Audit Firm Resolution, excerpting from John C. Bogle, The Battle for the Soul of Capitalism (2005) (“At one meeting of the Independent Standard Board, I asked the members of the profession whether the biggest reputation risk that an attestation firm faced would be a reputation for being rigid, tough, disciplined, and unyielding in demanding compliance with both the spirit and the letter of GAAP. It’s unlikely that such a stand would be popular with their clients. But it goes further than that. As I have said about institutional money manager participation in corporate governance: There are only two types of clients we don’t want to offend—actual and potential.”).(go back)

37Opinion and Order,SECv. Bank of America Corp., Case No. 09-cv-6829, 2010 WL 624581, at *5 (S.D.N.Y. Feb. 22, 2010) (“Where management deceives its own shareholders, a fine most directly serves its deterrent purposes if it is assessed against the persons responsible for the deception.”).(go back)

38A brief review of just the past few years reveals that individual charges in disclosure cases are exceedingly rare, including in those cases brought against a number of well-known companies. That is not to suggest that individual charges are warranted in all, or even most, of these cases, but the extreme scarcity of individual charges relative to instances of significant disclosure failings warrants close scrutiny.(go back)

39See Mary Jo White, Chair, SEC, Three Key Pressure Points in the Current Enforcement Environment (May 19, 2014) (“Assessing whether a corporation acted negligently involves comparing a corporation’s conduct, as carried out through its employees, to the actions of a reasonable corporation in similar circumstances—without the need to impute a particular state of mind from an individual to the corporation, as is required for scienter-based violations.In practice, charging only corporations with negligence can be appropriate when an entity makes a material misstatement or omission in the offer or sale of securities and the evidence will not support holding any individual responsible. In those cases, holding the entity responsible for the misstatements is the right thing to do if the evidence demonstrates that the entity’s conduct fell below the standard of reasonable care—for example, because it failed to have appropriate policies or procedures, failed to properly train its employees, or failed to structure its operations so that people making disclosure decisions are provided with the necessary information to make those decisions on an informed basis.”).(go back)

40In fact, lawyer involvement in antifraud violations can operate as an obstacle to establishing individual liability even when we can’t fully explore their role. This is the result of what is sometimes referred to as a “presence of counsel” defense—i.e., counsel was involved in some way in the underlying decision. While invoking a “reliance on counsel” defense requires a waiver of privilege, defendants asserting “presence of counsel” typically seek to avoid such a waiver, thus shielding the substance of any communications with the lawyer. The idea is that an individual could not have intended to violate the securities laws when that individual understood that lawyers were aware of the issue but did not intervene. While the validity of such an argument is dubious, Judge Rakoff addressed the issue head on when, in the midst of a trial in which the defendant was not invoking a reliance on counsel defense, defense counsel nonetheless sought to elicit testimony about whether a flip book for the relevant transaction had been sent to lawyers for review. See S.E.C. v. Stoker, No. 11-CV-07388 (S.D.N.Y.). Judge Rakoff held that evidence that the defendant “believed that counsel had attested to the legal appropriateness of [] documents [was] just another way of saying reliance on counsel” without carrying the burden of such a defense. Id. Judge Rakoff stated that he was “troubled” by the questions and instructed defense counsel to no longer focus on counsel with their questions or to even mention the words “counsel” or “lawyer.” Id. Nevertheless, the dubious “presence of counsel” defense remains an obstacle to establishing individual liability because some courts have shown a willingness to allow a defendant to introduce evidence that they relied on the advice of counsel without formally asserting the defense. See, e.g., SEC v. Snyder, 292 Fed.Appx. 391, 406 (5th Cir. 2008) (“[R]eliance on the advice of counsel need not be a formal defense; it is simply evidence of good faith, a relevant consideration in evaluating a defendant’s scienter.”) (quoting Howard v. SEC, 376 F.3d 1136, 1147 (D.C. Cir. 2004)); See also SEC v. Sethi Petroleum, LLC, 2017 U.S. Dist. LEXIS 124429, 2017 WL 3386047, *4 (E.D. Tex. Aug. 7, 2017) (“Reliance on counsel is not a formal defense, but rather it is simply a means of demonstrating good faith and represents possible evidence of an absence of any intent to defraud”) (citations and quotations omitted). Thus, lawyers can potentially shield individuals from liability merely by being present during discussions related to disclosure.(go back)

41See Langevoort, supra note 35, at 1693 (“Even when [corporate lawyer] conduct crosses the line into actual illegality, enforcement resources and incentives are such that only a small fraction of wrongdoing is detected and dealt with via sanction. In that sense . . . the absence of negative feedback adds ice to the slope by allowing ethical and legal risk-takers to claim greater status and rewards.”).(go back)

42See Quintin Johnstone, An Overview of the Legal Profession in the United States, How that Profession Recently has been Changing, and its Future Prospects, 26 Quinnipiac L. Rev. 737, 759 (“A major problem, however, in enforcement oflawyerdisciplinary and unauthorized-practice laws isinadequatestate funding of the enforcement process, with resulting inadequate enforcement staffing.”); Sung Hui Kim, Lawyer Exceptionalism in the Gatekeeping Wars, 63 SMU L. Rev. 73, 86 n.86 (2010) (“State bar disciplinary systems lack both the funding and the expertise to go after securities lawyers.”); Geoffrey C. Hazard, Jr. & Deborah L. Rhode, The Legal Profession: Responsibility and Regulation 484-87 (2d ed. 1988) (“Disciplinary action is practically nonexistent in many jurisdictions …. “).”(go back)

43See Susan P. Koniak, When the Hurlyburly’s Done: The Bar’s Struggle with the SEC, 103 Colum. L. Rev. 1236 (2003) (“[N]either I nor any of my colleagues in this area of law know of one single case in which a lawyer from a major law firm has been disciplined by state authorities for aiding a client’s securities fraud.Despite all the settlements after the savings and loan crisis, all the press coverage, and a number of court opinions describing egregious lawyer conduct, there has been not one case of state discipline. The state disciplinary systems lack the expertise in securities law, the staff, and the monetary resources to take on a major securities firm. They can’t do it and they don’t. Thus, when the bar says leave securities lawyers to the states, it means leave them unregulated.”).(go back)

44Jack A. Guttenberg, Practicing Law in the Twenty-First Century in a Twentieth (Nineteenth) Century Straightjacket: Something Has to Give, 2012 Mich. St. L. Rev. 415, 471 (2012) (“The profession does little to punish incompetence and very few lawyers are disciplined for incompetence.”).(go back)

45See, e.g., SEC Obtains Final Judgment Against Lawyer Who Assisted Fraud, Litig. Release No. 25065 (Apr. 6, 2021) (announcing the settlement of a case alleging that outside counsel “aided and abetted” securities violations by drafting “sham consulting agreements” and failing to disclose to the board of directors “the true purpose of the agreements”).(go back)

46See, e.g., In re David Lubin, Exchange Act Release No. 83897 (Aug. 21, 2018) (“David Lubin, alawyerlicensed in New York, fraudulently misrepresented and concealed material information regarding the ownership of shares of a publicly-traded company . . . By omitting material facts related to the status of the Form S-1 shares in the public filings he drafted, signed, and caused to be filed, Lubin purposefully hid the true beneficial ownership of the Form S-1 shares.”).(go back)

47See, e.g., SEC Obtains Final Judgment Against Lawyer Who Assisted Fraud, supra note 45 (“Specifically, the complaint alleged that Shkreli had investors enter into agreements with Retrophin that misleadingly stated that the payments were for consulting services, when in fact the payments were for the release of potential claims against Shkreli. This alleged misconduct was, according to the complaint, aided and abetted by Greebel, who was Retrophin’s outside counsel and served as corporate secretary. The complaint alleged that Greebel drafted sham consulting agreements and failed to disclose to Retrophin’s Board of Directors the true purpose of the agreements.”).(go back)

48See, e.g., In re Phillip R. Grogan, Exchange Act Release No. 84197 (Sept. 19, 2018) (“Grogan facilitated the transfer of investor funds through his IOLTA account to Young, when he knew or should have known that doing so would contribute to the violations by Young and YCM of the antifraud provisions of the federal securities laws. Grogan continued to transfer investor funds to Young, despite his awareness of mounting evidence that Young was not paying investors the promised returns and despite knowing that Young continued to use the fee agreement section over his objections.”).

[ref no=49]In re William R. Carter, supra note 18, at *28 (“[W]e perceive no unfairness whatsoever in holding those professionals who practice before us to generally recognized norms of professional conduct, whether or not such norms had previously been explicitly adopted or endorsed by the Commission. To do so upsets no justifiable expectations, since the professional is already subject to those norms.”).(go back)

50See Disciplinary Proceedings Involving Professionals Appearing or Practicing Before the Commission, Exchange Act Release No. 25893, 1988 WL 1000021, at *10 (July 7, 1988) (“[T]he Commission, as a matter of policy, generally refrains from using its administrative forum to conduct de novo determinations of the professional obligations of attorneys.Indeed, the Commission has generally utilized Rule 2(e) proceedings against attorneys only where the attorney’s conduct has already provided the basis for a judicial or administrative order finding a securities law violation in a non-Rule 2(e) proceeding.”). But see In re Scott G. Monson, Investment Company Act Release No. 28323 (June 30, 2008) (“[T]he Commission has established that it will pursue cases against lawyers who allegedly violate the securities laws with scienter, render misleading opinions used in public disclosures, or engage in conduct that would render a non-lawyer liable for the same activity under comparable circumstances.”); In re Ira Weiss, Exchange Act Release No. 52875 (Dec. 2, 2005) (finding that the conduct of bond counsel in issuing an unqualified opinion in a municipal securities offering “departed from the standard of reasonable prudence and was at least negligent,” and charging him with violations of Securities Act Sections 17(a)(2) and (3)). In re Steven Altman, Exchange Act Release No. 63306 (Nov. 1, 2010) (finding that Altman’s offer to help his client evade a subpoena or testify falsely violated certain provisions of the New York State Bar Association’s disciplinary rules and charging Altman attorney under Rule 102(e) for those violations). The Commission stated in Altman, “That the Commission generally has refrained from initiating this type of proceeding does not deprive it of its authority to do so.” Id.(go back)

51See Eli Wald, Resizing the Rule of Professional Conduct, 27 Geo. J. Legal Ethics 227, 228 (“[T]he Rules are explicitly meant to be a one-size-fits-all model for all lawyers, irrespective of context.”). Indeed, they have been described as having a “litigation bias.” Id. at 245 (“MostRulesformally address lawyers broadly and not specifically litigators. But a close reading of the Comments often reveals the litigation bias inherent in theRules.”); Milton C. Regan, Jr., Professional Responsibility and the Corporate Lawyer, 13 Geo. J. Legal Ethics 197, 201 (2000) (“A second disjunction between corporate practice and ethical rules is the fact that the latter traditionally have been formulated primarily with the litigator in mind. Yet transactional work, a staple of corporate practice, raises questions that do not always fit easily within this paradigm.”).(go back)

52See Guttenberg, supra note 44, at 460-61 (“The time has come to give up the ghost that all lawyers and all law practices are the same, and, concomitantly, that all clients are the same.Equating the multinational corporate client with the individual seeking a divorce or wanting to form a small business, and, therefore, devising rules that apply equally to lawyers representing those very different clients, does a grave disservice to both clients and lawyers alike.”).(go back)

53See Wald, supra note 51, at 245 (“In sum, because the majority of American lawyers are no longer solo practitioners, regulating nearly exclusively at the individual level makes little intuitive sense and is no longer self-explanatory. Whether to add firm-level regulation alongside individual-level regulation then becomes a policy question, the answer to which can benefit from contextual empirical analysis as to how firms’organization, structure, policies, procedures and culture shape, inform, and influence ethical decision making by individual lawyers.”).(go back)

54See Preliminary Report of the American Bar Association Task Force on Corporate Responsibility (2003) (“These broad and aspirational principles, while of profound importance, do not afford a sufficient guide to the corporate lawyer confronted with aberrant conduct by corporate officers and insiders.”); Model Rules of Prof’l Conduct r. 2.1: Advisor (Am. Bar Ass’n) (“In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.”).(go back)

55The provision is mandatory. See Sarbanes-Oxley Section 307, supra note 3 (“Not later than 180 days after the date of enactment of this Act, the Commission shall issue rules . . . setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers”) (emphasis added).(go back)

56See Coffee, supra note 11, at 1301-1302 (“Although the only specific reform mandated by section 307 was up-the-ladder reporting, the breadth of thephrase ‘minimumstandards of professional conduct’ sweeps far more broadly and easily could encompass other, potentially more extensive gatekeeping duties, at least to the extent that any such duty can be fairly characterized as a ‘minimumstandard of professional conduct.’”). See also Roger C. Cramton, George M. Cohen & Susan P. Koniak, Legal and Ethical Duties of Lawyers After Sarbanes-Oxley, 49 Vill. L. Rev. 725, 789-790 (“Section 307 refers to ‘minimumstandards of professional conduct,’ which means that the SEC was required to adopt not simply the two rules referred to, but a set of rules governing the conduct of lawyers who appear and practice before the SEC. Rules concerning disclosure are not unusual, either for ‘standards of professional conduct’ governing lawyers generally or forrules promulgated by the SEC under the securities laws, which of course are all about disclosure of various types. The use of the word ‘including’ reinforces the idea that the two rules mentioned in Section 307 were not the only ones Congress authorized the SEC to adopt.Moreover, there is no language in Section 307 that purports to limit in any way the type of ‘standards of professional conduct’ the SEC is authorized to adopt.”).(go back)

57See Marc I. Steinberg, Ethical and Practical Lawyering with Vanishing Gatekeeper Liability, 88 Fordham L. Rev. 1575, 1583-84 (April 2020) (“Perhaps most telling is that, since the adoption in 2003 of its standards of professional conduct,mandated by the Sarbanes-Oxley Act of 2002,the SEC has not instituted a single proceeding against an attorney based on an alleged violation of these standards.Hence, for several years, the SEC has refused to invoke statutory and regulatory mechanisms that clearly come within the ambit of its authority.”); Coffee, supra note 13, at 1044 (“Total silence on the enforcement front has followed the SEC’s aspirational Standards of Professional Conduct. Despite numerous instances in which lawyers were clearly aware of executive misconduct–and both the stock-option backdating scandal and the mutual-fund-market timing scandal followed the adoption of these standards and presented instances in which misconduct involving violations of the federal securities laws deeply implicated attorneys–the SEC appears to date never to have charged an attorney representing a public corporation with violating this rule.”).(go back)

58See Model Rules of Prof’l Conduct r. 1.13: Organization as Client (Am. Bar Ass’n) (“((a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.”). See also 17 C.F.R. § 205.3(a) (“Anattorneyappearing and practicingbefore the Commissionin the representation of an issuerowes his or her professional and ethical duties to theissueras an organization. That theattorneymay work with and advise theissuer’s officers, directors, oremployeesin the course of representing theissuerdoes not make such individuals theattorney’s clients.”).(go back)

59See, e.g., Allison Herren Lee, Commissioner, SEC, Living in a Material World: Myths and Misconceptions About Materiality (May 24, 2021) (discussing the erroneous decision by Bank of America and its counsel not to disclose information about losses incurred by Merrill Lynch in advance of its acquisition, leading to substantial damages and penalties assessed against Bank of America). See also Wald, supra note 51, at 245 (“[R]ules could caution against too quick a deference to clients in circumstances in which clients’ conduct is likely to impose a significant economic harm on third-parties and against boilerplates, and perhaps mandate disclosure in subsections 1.6(b)(2) and 1.6(b)(3) in appropriate circumstances . . . [Such] rules could also specify the relevant considerations a lawyer should contemplate in terms of making disclosure, and highlight the cardinal importance of building client relationships as necessary infrastructure for informing client decision making.”).(go back)

60See Basic Inc. v. Levinson, 485 U.S. 224, 236 (1988) (“Any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive.”). See also Litwin v. Blackstone Grp. L.P.,634 F.3d 706, 716–17 (2d Cir. 2011) (“Materiality is an inherently fact-specific finding that is satisfied when a plaintiff alleges a statement or omission that a reasonable investor would have considered significant in making investment decisions.”)(citations and internal quotation marks omitted).(go back)

61See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976) (“The determination [of materiality] requires delicate assessments of the inferences a ‘reasonable shareholder’ would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact.”).(go back)

62ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co.,553 F.3d 187, 197 (2d Cir. 2009) (citations and internal quotation marks omitted). See also Azrielli v. Cohen Law Offices, 21 F.3d 512, 518 (2d Cir. 1994) (“Afraudclaim may not properly be dismissed summarily on the ground that the alleged misstatements were not material unless they would have been so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.”); In re Craftmatic Securities Litigation, 890 F.2d 628, 641 (“Only when the disclosures or omissions are so clearly unimportant that reasonable minds could not differ should the ultimate issue of materiality be decided as a matter of law.”); Shapiro v. UJB Financial Corp.,964 F.2d 272, 281 n. 11 (3d Cir. 1992), (“Only if the alleged misrepresentations or omissions are so obviously unimportant to an investor that reasonable minds cannot differ on the question of materiality is it appropriate for the district court to rule that the allegations are in actionable as a matter of law.”); Ganino v. Citizens Utils. Co.,228 F.3d 154, 162 (2d Cir. 2000)(quotingGoldman v. Belden,754 F.2d 1059, 1067 (2d Cir. 1985)) (“We have held that . . . ‘a complaint may not properly be dismissed . . . on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.’”).(go back)

63See TSC Industries, 426 U.S. at 448 (“Doubts as to the critical nature of information misstated or omitted will be commonplace. And particularly in view of the prophylactic purpose of the Rule and the fact that the content of the proxy statement is within management’s control, it is appropriate that these doubts be resolved in favor of those the statute is designed to protect.”). See also Commission Guidance Regarding Disclosure Related to Climate Change, Securities Act Release No. 9106 (Feb. 2, 2010) (“In the articulation of the materiality standards, it was recognized that doubts as to materiality of information would be commonplace, but that, particularly in view of the prophylactic purpose of the securities laws and the fact that disclosure is within management’s control, it is appropriate that these doubts be resolved in favor of those the statute is designed to protect.”) (internal quotation marks omitted).(go back)

64See Bandera Master Fund, supra note 19, at *53 (“For example, an opinion giver plainly must have competence in the particular area of law. An opinion giver who knowingly lacks competence in the area of law and nevertheless proceeds is not acting in good faith.”) (internal citations omitted).(go back)

65For example, following the 2010 Commission Guidance Regarding Disclosure Related to Climate Change (see supra note 29), which emphasized the importance of materiality, research suggests that the quality of disclosure actually decreased. See Jim Coburn & Jackie Cook, Ceres, Cool Response: The SEC & Corporate Climate Change Reporting (2014) (“Results show that more companies are saying something about climate in their 10-K filings but, of those that are disclosing something, they are not reporting more useful information. In fact, their disclosures appear to be getting briefer and less specific.”). An overall reduction in the quality of climate disclosure can hardly be said to have been the goal of that guidance. See also Final Report of the Advisory Committee on Improvements to Financial Reporting (Aug. 1, 2008) (“We believe that too many materiality judgments are being made in practice without full consideration of how a reasonable investor would evaluate the error.”).(go back)

66See Pub. Co. Acct. Oversight Board, Quality Control Standards, Section 1000.08(d)—Continuing Professional Education of Audit Firm Personnel (requiring at least 20 hours of qualifying continuing professional education every year and at least 120 hours every three years).(go back)

67This is interrelated with the discussion above regarding reputational harm. A law firm may wish to avoid such harm if it knew of contrived or risky advice being provided by a member, but it usually does not. Instead, it is the relationship partner who knows, and that partner may face different incentives from the firm as a whole. A firm may gauge risk quite differently from an individual partner whose compensation may be disproportionately dependent on a specific client.(go back)

68See Pub. Co. Acct. Oversight Board, Quality Control Standards, Section 20.03 (requiring each firm to have a system of quality control, which is “broadly defined as a process to provide the firm with reasonable assurance that its personnel comply with applicable professional standards and the firm’s standards of quality”).(go back)

69See Coffee, supra note 11, at 1311-12 (“If some level of independence is necessary for an attorney to function as a gatekeeper (as A.A. Sommer, Jr. recognized over a quarter century ago), SEC rules of professional conduct could define these limits . . . Accordingly, the SEC should read section 307 to grant it authority to define the point at which the attorney is not sufficiently independent of the client to perform certain sensitive tasks.”).(go back)

70Id. at 1310 (“Few norms are less controversial among securities attorneys than that they should perform some due diligence in preparing prospectuses or other disclosure documents. Yet no SEC rule actually requires this.”). Professor Coffee has also suggested that it may be appropriate for attorneys to certify to the accuracy of a client’s disclosures in much the same way that an auditor must certify a client’s financials. See id. at 1312 (“Today, the auditor certifies the firm’s financial results, and under Sarbanes-Oxley, senior management certifies that the financial information in periodic reports filed with the SEC ‘fairly presents in all material respects’ the firm’s financial condition and results of operations . . .Alone, the attorney escapes and need not certify in any way as to the accuracy of the client’s disclosures. Yet, traditionally, the attorney is the field marshall of the disclosure process.”). He recognizes, however, that the differences in the type and scope of work performed by auditors and attorneys would require a careful calibration of the actual certification required of attorneys. Id.(go back)

71See, e.g., See Pub. Co. Acct. Oversight Board, Auditing Standard 1105: Audit Evidence (defining audit evidence and parameters for the collection of such evidence “obtain appropriate audit evidence that is sufficient to support the opinion expressed in the auditor’s report”).(go back)

72Congress could consider an alternative approach. Just as it created the PCAOB to replace industry oversight of auditing standards in the aftermath of Enron, Congress could consider creating a similar vehicle for the creation and oversight of standards for lawyers practicing before the Commission. A so-called “PCAOB for lawyers” could result in a regulator singularly focused on promoting the integrity of legal advice in the securities markets, where attorneys serve as gatekeepers and their advice can affect the investing public more broadly. Regulating securities lawyers who advise public companies would involve complex trade-offs that require a balancing of the interests of investors and the public against the need to protect the confidential relationship between client and counsel. A standalone entity may be in a position to better develop the necessary expertise to accomplish this mission. Moreover, such an organization could enhance compliance through a carefully crafted system of peer reviews, or even an inspections process. These ideas present thorny issues related to client confidentiality which could prove to be quite challenging. Still, they may be worthy of consideration as lessons learned during either peer reviews or inspections could in turn facilitate the development and ongoing maintenance of effective standards.

In any event, such an approach is, of course, entirely at the discretion of Congress. And there are any number of complex issues to resolve, including funding, oversight, and, most importantly, protecting the attorney-client privilege and open communication between clients and lawyers. However, to the extent lawyers play a similar gatekeeping function to auditors, the PCAOB model could be duplicated (and possibly improved upon) for the legal profession.(go back)

73The American Bar Association, among others, has argued that “subjecting lawyers to discipline by the SEC for negligence would have a chilling effect on the ability of lawyers to represent their client’s interests zealously and independently.” See Letter from Alfred P. Carlton, President, ABA to Harvey L. Pitt, Chairman, SEC (Dec. 18, 2002). I am, of course, cognizant of the complexity and sensitivity inherent in this area. Nevertheless, much as the Commission must weigh similar concerns in the context of Chief Compliance Officers, I am confident that, with the benefit of robust public engagement, the Commission is well-situated to craft rules designed to elevate—not disrupt—attorney conduct as it relates to the representation of issuers. And Congress has tasked us to do just that.(go back)

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