Altered States

A few months after the Sarbanes-Oxley Act was passed, Richard Ely reports on the real effects of the rules and how non-US lawyers may not be as hard-hit as first thought

It is now nearly eight months since President Bush signed into law the Sarbanes-Oxley Act of 2002 (the act). It largely left the adoption of implementing rules and regulations to the Securities and Exchange Commission (SEC), and since that time the Commission (EC) has generated thousands of pages of rule proposals and received thousands more pages of comments in return.

Legal and accounting firms have deluged their current and prospective clients with thousands more pages of memoranda, summaries, guidelines and the like.

Commentary has ranged from the cautionary (“far-reaching implications”), to the flamboyantly hyperbolic (“the most far-reaching reform of American business practice since the time of Franklin Delano Roosevelt”). What effect, then, has all this had on the practice of law by non-US lawyers? The short answer seems to be: not much.

Few provisions of the act have prompted greater outcry – at least from US and international bar associations and law societies – than Section 307, which directs the SEC to establish rules setting forth minimum standards of professional conduct for attorneys “appearing and practising” before the SEC.

As originally proposed last November, the attorney conduct rules would have cut very broadly, reaching virtually any lawyer, whether or not US-qualified, who participated in preparing documents to be filed with the SEC.

The proposed rules would have required “up-the-ladder” reporting of material violations of US and non-US law. And the rules would have mandated an attorney's “noisy withdrawal”, ie resignation with notice to the SEC, in situations where a material violation was ongoing or about to occur and was likely to result in substantial injury to a company or its investors.

Following publication of the proposed rules, the SEC received 167 separate comment letters (including 44 from outside the US), and in December held a much publicised round table discussion with representatives of various international and non-US legal groups (including representatives from the UK Law Society). As a result of this input, the final rules adopted by the SEC in January this year will have minimal, if any, impact on most attorneys not engaged in the practice of US securities law.

While all non-US lawyers continue to be included in the final rule's definition of “attorney”, the SEC largely negated the effect of this inclusion by narrowing the scope of the rules in three significant ways.

First, at least as it relates to the preparation of documents filed with the SEC, the term “appearing and practising” now covers only those attorneys “providing advice in respect of US securities laws or the SEC's rules and regulations”.

In other words, simply participating in the preparation of a filed document (such as a description in an annual report or press release, or the negotiation of an agreement filed as an exhibit to an SEC filing) will not bring a lawyer within the scope of the attorney conduct rules, unless that lawyer also provides US securities law advice in respect of that document.

Second, non-US lawyers are excluded from the coverage of the attorney conduct rules if they fall within a new definition of “non-appearing foreign attorneys”, which includes most non-US lawyers who work alongside US securities lawyers in the representation of a US-listed issuer.

On this latter point, the EC pointed out with commendable clarity that “non-United States attorneys who believe that the requirements of their rule conflict with law or professional standards in their home jurisdiction, may avoid being subject to the rule by consulting with US counsel whenever they engage in any activity that constitutes appearing and practising before the [European] Commission”.

Third, the final rules narrow the scope of reportable violations to those arising under US federal and state law and exclude violations arising under the law of other jurisdictions.

While violations of non-US laws may conceivably also give rise in some cases to indirect violations of US law (particularly where the non-US violation is not adequately disclosed in US filings), it is difficult to envisage a non-US lawyer being held to account for such an indirect violation, particularly where the issuer is acting on the advice of qualified US counsel.

If all this did not provide enough comfort for non-US lawyers, the EC also adopted a 'safe harbour' provision to permit non-compliance with the attorney conduct rules by lawyers (including US lawyers) practising outside the US if compliance with the rules would be prohibited by applicable non-US law.

Whether this provision will actually be helpful in practice (and what constitutes a 'prohibition' under non-US law?) remains to be seen.

Without doubt, the most controversial provisions of the attorney conduct rules proposed in November were those calling for “noisy withdrawal” in situations involving ongoing material violations. Many felt that the SEC had exceeded its mandate under the act, which contains no express authorisation for these provisions, and in any event exceeded its jurisdictional authority by seeking to apply the provisions to non-US lawyers.

In adopting the final rules, the SEC deferred action on its noisy withdrawal provision, giving respondents two more months in which to submit their views. In addition, the SEC published a potential alternative to noisy withdrawal, which would see an attorney required to withdraw from representation of a company only where the attorney reasonably concluded that there was substantial evidence that a material violation was ongoing, or about to occur, and was likely to cause substantial injury to the company or investors. Under this proposal, the onus of reporting the attorney's withdrawal would be placed on the client company rather than on the withdrawing attorney.

The attorney conduct rules adopted in January will take effect on 5 August. The SEC is seeking to have either the noisy withdrawal proposal or its alternative take effect at the same time. In practical terms, however, it is hard to imagine many instances in which non-US lawyers will be swept up by the new rules. Most non-US law firms and general counsel will have taken steps to show that they have consulted with US counsel prior to making a filing or submission to the EC. In most instances, this will simply involve documenting what is currently standard practice.

So what can be concluded about the effects of the act on non-US lawyers? Well, it has them pretty worked up and has induced them to generate a lot of comments.

In fairness, it is undoubtedly going to impact on their clients and, at least for in-house lawyers, increase the amount of time they spend on corporate compliance and in related discussions with US counsel.

In terms of their role as lawyers and the ethical standards to which they are subject, though? The effect is nada.

Richard Ely is a corporate partner at Skadden Arps Slate Meagher & Flom