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Reporting Up and Out

The Sarbanes-Oxley Act


of 2002
Public Company Accounting
Reform and Corporate
Responsibility
15 U.S.C. 7245
17 CFR 205.1
Ch. 6 - Confidentiality - SOX reporting up and out

Q. 6-25 p. 616 Sarbanes Oxley Duties

L&C potentially faces:


(A) sanctions under the SarbanesOxley regulations.
(B)sanctions under Sarbanes Oxley
regulations and discipline under the
Rules.
(C)discipline under the RPCs but not
SOX.
(D)none of the above.
Ch. 6 - Confidentiality - SOX reporting up and out

Contra-indications

Dan is in-house assistant general


counsel at GSK
Amulex a GSK product is alleged
in a JAMA article to cause an increase
in heart attacks
An internal memo by GSK
researchers says the safety profile
of Amulex has been strongly
questioned. We lack the data
needed to rebut the critics
assertions.
Ch. 6 - Confidentiality - SOX reporting up and out

Contra-indications

Marketing circulates a memo to house


counsel in advance of the regular
monthly conference call with
investment analysts, saying "If
anyone should ask regarding the
recently filed Amulex product liability
cases, our response will be:
Counsel has looked at this case
and determined it is without
merit.
Ch. 6 - Confidentiality - SOX reporting up and out

Contra-indications

We stand by the safety of Amulex


and look forward to continued
growth in this vital market.
Responsible use of medicines is the
duty of every patient and
prescribing physician."
How should Dan respond to the
analyst?
Under what circumstance would he
be required to report up
Ch. 6 - Confidentiality - SOX reporting up and out

Lawyers as gatekeepers
a paradigm shift

Ch. 6 - Confidentiality - SOX reporting up and out

Who is the client?

Officers
Board of Directors
Employees
Shareholders
The organization itself
What is the duty owed if something
occurs or is about to occur that
breaks the law?
Ch. 6 - Confidentiality - SOX reporting up and out

Reporting Up in the Publicly Traded


Corporation

Shareholders
[QLCC - Qualified Legal Compliance
Committee - 17 CFR 205.2 (k)]
Board of Directors (audit committeecompensation committee-finance
committee)
CEO
CFO
Other officers
lower level employees
Ch. 6 - Confidentiality - SOX reporting up and out

15 U.S.C. 7245 Rules of professional


responsibility for attorneys

(1) requiring an attorney to report


evidence of a material violation of
securities law or breach of
fiduciary duty or similar violation
by the company or any agent thereof,
to
the chief legal counsel or
the chief executive officer of the
company
Ch. 6 - Confidentiality - SOX reporting up and out

15 U.S.C. 7245 Rules of professional


responsibility for attorneys

(2) if the counsel or officer does


not appropriately respond to the
evidence (adopting, as necessary,
appropriate remedial measures or
sanctions), requiring the attorney to
report the evidence to
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15 U.S.C. 7245 Rules of professional


responsibility for attorneys

the audit committee of the


board of directors of the issuer
or
to another committee of the
board of directors comprised
solely of directors not employed
directly or indirectly by the
issuer, or
to the board of directors.
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15 U.S.C. 7245 Rules of professional


responsibility for attorneys

The [Securities and Exchange]


Commission shall issue rules, in the
public interest and for the protection of
investors, setting forth minimum
standards of professional conduct
for attorneys appearing and
practicing before the Commission
in any way in the representation of
issuers
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Reporting Under SOX


Federal Preemption of
RPCs
Chapter II--Securities and
Exchange Commission
Part 205--Standards of
Professional Conduct for
Attorneys Appearing and
Practicing Before the Commission
in the Representation of an Issuer
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17 CFR 205.1 Purpose and


scope.

This part sets forth minimum


standards of professional
conduct for attorneys appearing
and practicing before the
Commission in the
representation of an issuer.
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17 CFR 205.1 Purpose and


scope.

These standards supplement


applicable standards of any
jurisdiction where an attorney is
admitted or practices and are
not intended to limit the ability
of any jurisdiction to impose
additional obligations on an
attorney not inconsistent with
the application of this part.
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17 CFR 205.1 Purpose and


scope [Preemption]

Where the standards of a state


or other United States
jurisdiction where an attorney is
admitted or practices conflict
with this part, this part shall
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Reporting UP - The SOX Triggering


Event
Evidence of a Material
Violation
17 CFR 205.3 Issuer as
client

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17 CFR 205.3 Issuer as client

(b) Duty to report evidence of a material


violation.

(1) If an attorney, appearing and practicing


before the Commission in the representation
of an issuer, becomes aware of evidence of a
material violation by the issuer or by any
officer, director, employee, or agent of the
issuer, the attorney shall report such evidence
to the issuer's chief legal officer... or to both
the issuer's chief legal officer and its CEO..
forthwith.
6 - Confidentiality - SOX Compare: M.R. 1.13Ch.
(b)
reporting up and out
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17 CFR 205.2 Definitions


(e) Evidence of a material violation
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.
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Appearing and Practicing before the


commission 17 CFR 205.2
(iii) Providing advice in respect of the United
States securities laws or the Commission's
rules or regulations thereunder regarding any
document that the attorney has notice will be
filed with or submitted to, or incorporated into
any document that will be filed with or
submitted to, the Commission, including the
provision of such advice in the context of
preparing, or participating in the preparation
of, any such document
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The Subordinate Attorneys Duty to Assess


Reasonableness of the Chief Legal Officers
Response

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17 CFR 205.3 (b) (3) reporting up

Unless an attorney who has


made a report under paragraph
(b)(1) reasonably believes that
the chief legal officer or the chief
executive officer of the issuer
has provided an appropriate
response within a reasonable
time, the [subordinate] attorney
shall report the evidence of a
material violation to:
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17 CFR 205.3 (b) (3) up, and up

(i) The audit committee of the


issuer's board of directors;
(ii) Another committee of the
issuer's [independent] board of
directors consisting solely of
directors who are not employed,
directly or indirectly, by the
issuer and are not..."interested
persons"...
(iii) The issuer's board of
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17 CFR 205.3 (b) (3) up, and up

(4) If an attorney reasonably


believes that it would be futile to
report evidence of a material
violation to the issuer's chief
legal officer and CEO... under
paragraph (b)(1) of this section,
the attorney may report such
evidence as provided under
paragraph (b)(3) of this section.
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17 CFR 205.2 Definitions Appropriate Response

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Appropriate response

(b) Appropriate response means


a response as a result of which
the attorney reasonably believes:

(1) That no material violation


has occurred, is ongoing, or is
about to occur;
(2) That the issuer has, as
necessary, adopted appropriate
remedial measures
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Appropriate response

- steps or sanctions to stop any


material violations that are
ongoing
- to prevent any material
violation that has yet to occur
- to remedy or otherwise
appropriately address any
material violation that has
already occurred
-to minimize the likelihood of its
recurrence; or
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Appropriate response Assigning


Counsel

(3) That the issuer, with the


consent of the issuer's board of
directors, a committee thereof to
whom a report could be made
pursuant to 205.3(b)(3), or a
qualified legal compliance
committee, has retained or
directed an attorney to review
the reported evidence of a
material violation and either
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Appropriate response Assigning


Counsel

(i) Has substantially


implemented any remedial
recommendations made by such
attorney after a reasonable
investigation and evaluation of
the reported evidence; or

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Appropriate response Assigning


Counsel

(ii) Has been advised that such


attorney may, consistent with his
or her professional obligations,
assert a colorable defense on
behalf of the issuer (or the issuer's
officer, director, employee, or agent,
as the case may be) in any
investigation or judicial or
administrative proceeding
relating to the reported evidence
of a material violation.
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Reporting Out
Reporting to the SEC

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17 CFR 205.3

(2) An attorney appearing and


practicing before the Commission in
the representation of an issuer may
reveal to the Commission, without
the issuer's consent, confidential
information related to the
representation to the extent the
attorney reasonably believes
necessary:
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17 CFR 205.3

(i) To prevent the issuer from


committing a material violation that
is likely to cause substantial injury to
the financial interest or property of
the issuer or investors

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17 CFR 205.3

(ii) To prevent the issuer, in a Commission


investigation or administrative proceeding from
committing perjury, proscribed in 18 U.S.C. 1621;
suborning perjury, proscribed in 18 U.S.C. 1622; or
committing any act proscribed in 18 U.S.C. 1001 that
is likely to perpetrate a fraud upon the Commission; or
(iii) To rectify the consequences of a material violation
by the issuer that caused, or may cause, substantial
injury to the financial interest or property of the issuer
or investors in the furtherance of which the attorney's
services were used.
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A threat to federalism?
Sarbanes Oxley preemption

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ABA lauds state control in


Dodd-Frank Act

The bill approved by the Conference


Committee provides that the new
Consumer Financial Protection
Bureau may not exercise any
supervisory or enforcement authority
with respect to an activity engaged
in by an attorney as part of the
practice of law under the laws of a
State in which the attorney is
licensed to practice law.
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17 CFR 205.3 Reporting out


(2) An attorney appearing and
practicing before the Commission in
the representation of an issuer may
reveal to the Commission, without
the issuer's consent, confidential
information related to the
representation to the extent the
Ch. 6 - Confidentiality - SOX reporting up and out

attorney reasonably believes

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17 CFR 205.3 Reporting out

(i) To prevent the issuer from


committing a material violation
that is likely to cause substantial
injury to the financial interest or
property of the issuer or
investors
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17 CFR 205.3 Reporting out


(iii) To rectify the consequences of a
material violation by the issuer that
caused, or may cause, substantial
injury to the financial interest or
property of the issuer or investors in
the furtherance of which the
attorney's services were used.
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Washington State Bar Proposed Formal


Ethics Opinion
Subsection (i) permits disclosure
of a civil violation that does not
rise to the level of a crime, but
RPC 1.6 (b)(1) does not.

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Washington State Bar Proposed Formal


Ethics Opinion
Under subsection (iii), a material
violation by the client which
could damage financial interests
or property of the client or
investors could include noncriminal conduct which would
also be barred from being
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Washington State Bar Proposed Formal


Ethics Opinion
It is the opinion of the Board that, to
the extent that this SEC regulation
authorizes but does not require
revelation of client's confidences and
secrets, the Washington lawyer
cannot reveal such confidences and
secrets unless authorized to do so
under

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SEC rebukes Washington State Ethics


Opinion
In opining that the Washington RPC
1.6 bars attorney disclosures
permitted by Section 205.3(d)(2) of
the Commission's rulesthe
Proposed Interim Formal Opinion is
inconsistent with prevailing Supreme
Court precedent (which) has
consistently upheld the authority of
federal agencies to implement rules
of conduct that diverge from and
supersede state laws that address
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