In late November, rules governing the conduct of legal counsel for public companies were also proposed. Perhaps the most controversial proposal deals with an attorney’s response if he/she has a reasonable, well-founded suspicion that a securities law has been, or will be, violated, or that a fiduciary duty to the corporation and its shareholders may have been violated by an officer or employee of the company. The attorney must report his suspicions to the chief legal officer or board of directors immediately. If the company does not take prompt, effective action, the attorney must conduct a "noisy withdrawal" from representing the company, by giving immediate notice to the SEC under terms that will make it clear that a suspected violation of law or fiduciary duty has occurred.

               Under the current timetable in Sarbanes-Oxley, the proposed rules governing attorney conduct will become effective at the end of January, 2003. If they are passed in their present form, they will create a profound change in the attorney/client relationship for publicly traded companies. Directors and officers requiring frank legal advice on complex legal, financial, and ethical issues will now face the concern that the company’s lawyer may have a duty to disclose their request for legal advice to the SEC.

               Although the effects of Sarbanes-Oxley are primarily directed at publicly traded companies, the provisions will also affect privately held companies, and the way all business is carried out. As a result, directors and officers of all companies should become familiar with the requirements imposed by Sarbanes-Oxley, and consider at least the following issues:

Insurance Coverage. Are officers and directors covered for the new duties that Sarbanes-Oxley imposes, and the potential liabilities it creates? Is there "entity coverage" for violations of Sarbanes-Oxley?

Legal Representation. Now is the time for a frank discussion with counsel on their new duties to the company, its shareholders and the SEC. The situations that may create the need for separate counsel for officers and directors should be reviewed so that if a crisis occurs, good, ethical legal advice can be obtained without the risk that the attorney/client privilege will be broken, and disclosure compelled by the provisions of Sarbanes-Oxley.

Records Retention. Sarbanes-Oxley requires the creation and retention of a great deal of detailed corporate and financial information. It also creates severe penalties for the intentional destruction of documents deemed relevant to a federal investigation.

               The significant changes wrought by Sarbanes-Oxley are too numerous and detailed to list in this article. If you would like a copy of the Act or the proposed rules for attorney conduct, please contact us. We would be happy to discuss any questions or outline a compliance plan for you or your company.

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