SEC retracts regulation of foreign lawyers while pondering silent withdrawal option

SARBANES-OXLEY: 'significance and complexity of issues' heralds retreat on noisy withdrawal

The US Securities and Exchange Commission (SEC) was last week praised by solicitors for pulling back from plans to extend its regulatory authority to foreign lawyers who have only a tangential connection to the SEC's work.

It also gave corporate lawyers a two-month breathing space to continue lobbying against forcing them to effect a 'noisy withdrawal' from acting for a client which has not dealt satisfactorily with concerns about corporate wrongdoing.

As predicted, the SEC is now considering a 'silent withdrawal' alternative.

The SEC last week adopted final rules to implement section 307 of the post-Enron Sarbanes-Oxley Act by setting 'standards of professional conduct for attorneys appearing and practising before the commission in any way in the representation of issuers'.

The rules require a lawyer to report evidence of a 'material violation' up the ladder within the issuer, all the way to the board if necessary.

A material violation is subject to the objective test of whether there is 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'.

They say that foreign lawyers who are not advising on US law are not affected.

Foreign lawyers who provide legal advice on US law will be covered to the extent they are appearing and practising before the SEC, unless they provide such advice in consultation with US counsel.

They also allow lawyers to reveal confidential information without the consent of an issuer client to prevent a material violation or illegal act.

The SEC said it had extended for 60 days the comment period on 'noisy withdrawal' because of 'the significance and complexity of the issues involved, including the implications of a reporting out requirement on the relationship between issuers and their counsel'.

Many have complained it would breach client confidentiality.

The SEC voted to propose the 'silent withdrawal' alternative.

This would require lawyer withdrawal, but would oblige the issuer, rather than the lawyer, to disclose the withdrawal publicly.

The moves follow a round-table meeting held by the SEC with the international legal community last month, including Alison Hook, the Law Society's head of international.

Society President Carolyn Kirby said: 'We are delighted with what appears to be a significant change of direction by the SEC, who have taken on board most of our concerns.'

Freshfields Bruckhaus Deringer partner Tom Joyce, who was also at the meeting, said the rules 'are a significant improvement on the original proposals'.

Fellow Freshfields partner Stephen Revell, who represented the International Bar Association at the meeting, said: 'It is encouraging to have from the SEC a proposed alternative to noisy withdrawal which so fully recognises the importance of attorney/client privilege, while also ensuring the SEC will be alerted to potential malpractice which may be damaging to investors.'

Neil Rose