The Leader Column

For UK law firms, the clock is ticking down to 26 January. By that Sunday, the unelected administrative body of a foreign government will release strict rules on what client information lawyers in London, Paris and Tokyo can keep confidential.
Despite heavy lobbying from City firms over the Sarbanes-Oxley regulation, the Securities and Exchange Commission (SEC) looks set to pass rules that require a “noisy withdrawal” where a foreign lawyer finds its SEC-registered client is fraudulent or in breach of fiduciary duty. For “noisy withdrawal” read: if your client's chairman denies the shenanigans you must call your friendly SEC commissioner and snitch on the client.
Six UK firms – Allen & Overy, Freshfields, Herbert Smith, Linklaters, Lovells and Norton Rose – wrote to the SEC to point out that the extra-territorial application of Sarbanes was wholly unfair. Clifford Chance (it's a US firm, don't you know) wrote separately with similar points.
One magic circle lawyer heavily involved with the lobbying insists that the sort of corporate behaviour necessary to trigger the Sarbanes regulation is extremely rare, but he won't stake his firm's reputation on it. His firm has already made changes to its regime that incorporate whistleblowing to the SEC in the last resort.
If the rules go through unamended, the problem will be this: a UK corporate lawyer who finds irregularities within an SEC-registered client will have to choose between hacking off the regulator or hacking off the client. If they snitch, the client may sue in the UK, if not, the SEC can publicly censor the firm and its name will be all over the press faster than you can say “Paddinggate”.
On 18 December the SEC bigwigs, led by lame duck chairman Harvey Pitt, met international legal bodies, including the Law Society. Predictably, the six City firms decided to send their own representative rather than rely solely on Chancery Lane. Pitt, the man who resigned his SEC chairmanship following his own failure to report a fraud by one of his staff, stonewalled the foreign lawyers. Hopes now turn to a political solution and Pitt's boss, republican senator Richard Baker, is being heavily lobbied.
The Bush government hardly shies away from extra-territorial effects – think of the SEC's decision to force foreign US-listed companies to disclose their interests in “rogue states” rather than the invasion of Afghanistan. A star-spangled new year looks likely for UK firms and whether or not they try to fudge the application of Sarbanes, they know it already.