The Duties Of The Securities Lawyer - Securities Regulation

The Duties of the Securities Lawyer

1. The SEC's Power to Discipline Professionals

   1. An highly potent and controversial enforcement tool that the SEC possesses is Rule 102(e) of the SEC's Rules of Practice provides that the Commission "may deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission" after notice and hearing:

      1. (i) not to possess the requisite qualifications to represent others, or

      2. (ii) to be lacking in character or integrity or to have engaged in unethical or improper professional conduct, or

      3. (iii) to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws . . . or the rules and regulations thereunder.

   2. Rule 102(f) of the Commission Rules of Practice provides a nonexclusive definition of practice so that it includes not only transacting business with the Commission but also, more significantly, preparing "any statement, opinion, or other paper by any attorney, accountant, engineer, or other professional or expert" that is included in any document filed with the Commission.

      1. Thus, Rule 102(e) reaches the activities of professionals who in the course of rendering a professional service well beyond the Commission's hearing rooms have acted in a dishonest, incompetent, unethical, or unprofessional manner.

   3. Rule 102(e)(1)(iv) provides that "improper professional conduct" with respect to accountants means:

      1. (A) Intentional or knowing conduct, including reckless conduct, that results in a violation of applicable professional standards; or

      2. (B) Either of the following two types of negligent conduct:

         • (1) A single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted.

         • (2) Repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to practice before the Commission.

   4. The Commission is furthered empowered under Rule 102(e)(3) to temporarily suspend without a hearing any person from practicing before the Commission if the person has been permanently enjoined in a Commission action from violating the securities laws or has been found by a court in a Commission action or in a Commission administrative proceeding to have violated or aided and abetted the violation of the securities laws.

      1. The suspension becomes permanent if the person so suspended does not within 30 days petition the Commission for a hearing to consider lifting the suspension.

         • In such a proceeding, the petitioner has the burden of proof.

   5. In imposing the disciplinary sanction under Rule 102(e), the Commission is not required to prove a reasonable likelihood of any further violations as required in judicial injunctive actions. See, e.g., SEC v. Geotek (pg. 831)

      1. The length of the bar is guided roughly by how egregious the professional's offense was, so that willful participation in the client's fraudulent scheme has resulted in a lifetime ban on practicing before the Commission, see, e.g., In re James McGovern, whereas less culpable involvement has resulted in bars of five years or less, see, e.g., McCurdy v. SEC (pg. 831)

2. Attorney as Aider and Abettor

   1. Aiding and Abetting ELEMENTS - SEC v. National Student Marketing Corp. (pg. 835)

      1. (1) Another person has committed a securities law violation;

      2. (2) The alleged aider and abettor had a general awareness that his role was part of an overall activity that is improper; and

      3. (3) He knowingly and substantially assisted the violation.

   2. In SEC v. National Student Marketing Corp. (pg. 835), in an action by the SEC seeking injunctive relief, the court found that the attorneys had aided and abetted the violation of § 10(b) and § 17(a).

      1. The primary violators were liable for their participation in the closing of the Interstate/NSMC merger without first disclosing the material information contained in the unsigned comfort letter.

      2. The attorneys were found to be aiders and abettors because the attorneys did not protest at all the fact that the closing was moving forward notwithstanding the fact that material information had come to light right before the closing that had not been disclosed to the shareholders who originally approved the transaction.This was enough to show that the third element of knowing and substantial assistance in the violation was satisfied; the first two elements were not disputed.

         • The court stated that "at the very least, [the attorneys] were required to speak out at the closing concerning the obvious materiality of the information and the concomitant requirement that the merger not be closed until the adjustments were disclosed and approval of the merger was again obtained from the Interstate shareholders. Their silence was not only a breach of this duty to speak, but in addition lent the appearance of legitimacy to the closing. . . . The combination of these factors clearly provided assistance to the closing of the merger." SEC v. National Student Marketing Corp. (pg. 844)

3. The SEC's Rules of Professional Conduct for Attorneys

   1. SOX Section 307 directed the SEC to adopt "standards of professional conduct for attorneys appearing and practicing before the Commission."

   2. In response, the SEC adopted Part 205 of the Commission Rules of Practice

   3. Rule 205.3(b) provides the following:

      1. 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 the equivalent thereof) or to both the issuer's chief legal officer and its chief executive officer (or the equivalents thereof) forthwith. By communicating such information to the issuer's officers or directors, an attorney does not reveal client confidences or secrets or privileged or otherwise protected information related to the attorney's representation of an issuer.

         • A material violation is defined in Part 205.2(i) as a material breach of an applicable federal or state securities law, a material breach of fiduciary duty, "or similar violation of any . . . federal or state law."

         • The attorney's "report" of evidence of a violation there upon triggers the obligation of the chief legal officer or undertake an inquiry to determine if a material violation has occurred, is occurring, or is about to occur.

           • Alternatively, the chief legal officer can refer the attorney's report to a "qualified legal compliance committee," the composition and operation of which is set forth in great detail in Part 205

             • This is rarely ever used.

         • The attorney must also raise his concerns with the audit committee or the full board of directors (when there is no committee made up exclusively of independent directors), unless the attorney "believes that the chief legal officer or the chief executive officer of the issuer . . . .has provided an appropriate response within a reasonable time."

           • When the company has a qualified legal compliance committee, the attorney, instead of lodging his report with the chief legal officer, may report the evidence of a violation to the committee.

             • If this course is taken, the attorney has no further obligation under the rule.

             • This option is never used because the chief counsel is not exactly excited about being circumvented in the process being out of the loop.

   4. Part 205 of the Commission Rules of Practice

      1. § 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. 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. 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 govern.

      2. § 205.2 - Definitions

         • (a) Appearing and practicing before the Commission:

           • (1) Means:

             • (i) Transacting any business with the Commission, including communications in any form;

             • (ii) Representing an issuer in a Commission administrative proceeding or in connection with any Commission investigation, inquiry, information request, or subpoena;

             • (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; or

             • (iv) Advising an issuer as to whether information or a statement, opinion, or other writing is required under the United States securities laws or the Commission's rules or regulations thereunder to be filed with or submitted to, or incorporated into any document that will be filed with or submitted to, the Commission; but

           • (2) Does not include an attorney who:

             • (i) Conducts the activities in paragraphs (a)(1)(i) through (a)(1)(iv) of this section other than...