New Regulations for Lawyers: The SEC's Final Rule for Professional Conduct in the Wake of Sarbanes-Oxley: Challenges for Foreign Attorneys


NEW REGULATIONS FOR LAWYERS: THE SEC'S
FINAL RULE FOR PROFESSIONAL CONDUCT IN

THE WAKE OF SARBANES-OXLEY:
CHALLENGES FOR FOREIGN ATTORNEYS

J. Curtis Greene*

I. INTRODUCTION

The 1990's was a period of great expansion and innovation in corporate
America.' The era was characterized by the growth and exploitation of the
technological industry.2 From both a personal and business standpoint,
technology throughout the decade became increasingly interwoven into the
fibers of everyday life.3 Unfortunately, the demand for innovation and
technology brought with it the evolution of a stock market of new and poorly
understood companies.4 Also, the robust financial times attracted millions of
investors who lacked business knowledge, and to business, the decade tempted
thousands of high-level professionals who lacked moral scruples.' What
followed was a number of major corporate and accounting scandals involving
some of the most prominent companies in the United States, including such
companies as WorldCom, Global Crossing, Tyco, Adelphia, and most notably
Enron.6

In the wake of these scandals, investor trust in corporate accounting and
financial reporting practices in public-issue companies significantly eroded.'

* J.D., Indiana University School of Law-Indianapolis, 2005 (expected); M.S., Ball

State University, 1994; B.S., Ball State University, 1992.
1. Lawrence A. Cunningham, Professor of Law and Business, Boston College, Sarbanes-

Oxley and all that: Impact Beyond America's Shores, Speech to the FESE in London (June 12,
2003), available at http://www.fese.be/efmc/2003/report/efmccunningham.htm: (last visited
Feb. 7, 2004) [hereinafter Cunningham Speech].

2. See id.
3. See id.
4. Lawrence A. Cunningham, Symposium, Crisis in Confidence: Corporate Governance

and Professional Ethics Post-Enron Sponsored by Wiggin &Dana: The Sarbanes-Oxley Yawn:
Heavy Rhetoric, Light Reform (And it Just Might Work), 35 CoNN. L. REv. 915, 923 (2003).

5. Id.
6. See William H. Donaldson, Chairman, U.S. Securities and Exchange Commission,

Testimony Concerning Implementation of the Sarbanes-Oxley Act, (Sep. 9,2003), available at
http://www.sec.gov/news/testimony/090903tswhd.htm (last visited Feb. 7, 2004) [hereinafter
Donaldson Testimony].

7. See id. See also Press Release, U.S. Securities and Exchange Commission, SEC
Charges Fastow, Former Enron CFO, With Fraud (Oct. 2, 2002), available at
http://www.sec.gov/news/press/2002-143.htm (last visited Feb. 7, 2004) [hereinafter SEC
Fastow Release].



IND. INT'L & COMP. L. REv.

In fact, the scandals left a large number of investors perplexed and destitute.'
Many experts, including Chairman of the U.S. Federal Reserve, Alan
Greenspan, believe that this lack of trust was a major contributor to the
economic slowdown in U.S. capital market performance in the early twenty-
first century.9

In response to the worldwide cries to do something, the U.S. Congress
enacted arguably the most sweeping and important federal securities
legislation since the 1930's,o the Sarbanes-Oxley Act of 2002 (Act).1'
Determined to reduce corporate misconduct and protect investors, the Act
establishes new standards for corporate accountability and penalties for
wrongdoing.' 2 Primarily, the standards place increased responsibilities on
those involved in the corporate financial reporting process.13 The broad scope
of the Act, which extends to foreign market participants accessing U.S. capital
markets, largely ignores the differences in practices and corporate governance
regimes between the United States and other countries.' 4 Although the Act
provides for the Securities and Exchange Commission (SEC) to reduce
application of certain provisions to foreign companies, many are surprised by
the extent to which U.S. law and regulatory authority has been extended
beyond its borders to areas that would normally be governed exclusively by
the law of foreign jurisdictions. 5

8. See Rosanna Ruiz, Enron Employees file Suit Over Their 401(k) Losses, HOUS.
CHRON., Jan. 28, 2002, available at http://www.chron.com/cs/CDA/prinstory.hts/topstory/
1228980.htm (last visited Feb. 7, 2004); Marilyn Geewax, Accounting Reform Faces Key Vote
in Senate Panel, Cox NEWS SERV., May 20, 2002, at Financial Pages (noting that the Enron
bankruptcy wiped out thousands of jobs and tens of billions in investors' savings).

9. See PriceWaterhouseCoopers, Understanding the Independent Auditor's Role in
Building Public Trust: A White Paper, at 2, (2003), available at
http://www.pwcglobal.com/images/gx/eng/about/svcs/grms/pwc-sowp3.pdf (last visited Sept.
2, 2003); Rebuilding Trust, LEGAL WEEK GLOBAL, July 24, 2002, available at
http://www.legalweekglobal.netlViewltem.asp?id=9949&Keyword=Rebuilding (last visited
Feb. 7, 2004).

10. Ethiopis Tafara, Acting Director, Office of International Affairs, U.S. Securities and
Exchange Commission, Addressing International Concerns Under the Sarbanes-Oxley Act (June
10, 2003), available at http://www.sec.gov/news/speech/spch06l003et.htm (last visited Feb.
7, 2004)[hereinafter Tafara Speech].

11. Public Accounting Reform and Investor Protection Act of 2002, Pub. L. No. 107-204,
116 Stat. 745 (2002) (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.). The Act
is better known by its short title "The Sarbanes-Oxley Act of 2002." The backdrop of this Note
is Chapter 98 Public Company Accounting Reform and Corporate Responsibility codified at 15
U.S.C. § 7201 (et. seq.) (2003), which contains the new rules of professional responsibility for
attorneys, 15 U.S.C. § 7245 (2003).

12. See Tafara speech, supra note 10.
13. See id.
14. Id.
15. See Wayne Kirk, Thelen Reid & Priest LLP, Sarbanes-Oxley Act of2002: Application

to Foreign Private Issuers with Securities Registered Under the 1934 Act (Aug. 8, 2002), at
http://www.thelenreid.com/articles/article/art_135_idx.htm (last visited Feb. 7,2004). See also
Tafara Speech, supra note 10.

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CHALLENGES FOR FOREIGN ATTORNEYS

Recognizing the role of attorneys as corporate gatekeepers, Section 307
of the Act establishes new standards of professional conduct for attorneys
"appearing and practicing" before the SEC in the representation of public-
issue corporations. 6 This includes attorneys of foreign private issuers 7 and
those that are licensed to practice in foreign jurisdictions.'" Particularly, the
Act and the subsequent final regulations established by the SEC impose
responsibilities on corporate attorneys to monitor and report "up the corporate
ladder" evidence of material violations of securities laws or fiduciary duties
on the part of those involved in financial reporting process.'9 These respon-
sibilities represent new territory in the realm of attorney accountability. 20 The
controversial nature of the new SEC regulations has generated significant and
extensive debate in the worldwide legal community.2'

This Note analyzes the responsibilities the SEC's final rule enacting
Section 307 imposes on corporate attorneys, specifically with regard to
foreign attorneys who do not meet the SEC's definition of "non-appearing. "22

It begins in Part Two with a discussion of the events, including the many
corporate scandals that occurred prior to the passage of the Act and the sharp
decline in investor confidence that followed. Part Two also reviews the role
of attorneys as gatekeepers in the corporate governance process, including an
analysis of the attorneys' participation in the Enron scandal. Part Three then
turns to congressional response to the corporate scandals, particularly the
passage of the Act. This part provides an overview of the Act and discusses
its scope and general impact on the foreign corporate community. Next, Part
Four examines the details of the SEC's final regulations mandated by Section
307 of the Act. The discussion includes an in-depth analysis of the scope of
the regulations, an analysis of each section, and the consequences of non-
compliance. Finally, Part Five discusses the international community's
reaction to the new regulations, reviews various application issues for foreign
attorneys who do not meet the SEC' s definition of "non-appearing," and offers
practical suggestions for those attorneys to ensure compliance.

16. See 15 U.S.C. § 7245. See also Tafara Speech, supra note 10.
17. See 17 C.F.R. § 240.3b-4 (2003).
18. See 15 C.F.R. § 205.20) (2003).
19. See 15 U.S.C. § 7245; 17 C.F.R. § 205.3 (2003).
20. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

6,296 (Feb. 6, 2003) (codified at 17 C.F.R. pt. 205). See also Tafara Speech, supra note 10.
21. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,296. See also Tafara Speech, supra note 10.
22. 17 C.F.R. § 205.2(a)(1) (2003).

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IND. INT'L & COMP. L. REv.

II. WHAT WENT WRONG IN CORPORATE AMERICA: THE BACKDROP OF THE

SARBANES-OXLEY ACT

A. Scandal and Corruption in Corporate America

The 1990's was a period of tremendous expansion and innovation in
corporate America.23 The economic growth was fueled largely in part by the
exploitation of communications and information technology, which provided
companies tremendous resources for conducting more efficient and broader
scale operations.24 In particular, the exploitation enabled widespread use of
the internet and proliferation of the nation's extensive telecom infrastructure. 5

This was also true with the general public where technology throughout the
decade became increasingly interwoven into the fabric of everyday life.26 The
use of cell phones and email serve as prime examples, where their usage grew
from next to nothing in the mid-1990's to becoming the norm by 2000.27

Unfortunately, this demand for innovation and technology during that
same time period brought with it the evolution of a "telecom/dot.com-infused"
stock market of new and poorly understood companies. 28 Also, the robust
financial times attracted to investing millions of first-time investors who
lacked general business knowledge and to business, the decade attracted
thousands of savvy executives who lacked moral scruples.29 This combination
produced and sustained a period of exaggerated achievements and
camouflaged setbacks.3 °

The delusions of the 1990's came to an end in March of 2001 when
investors began to realize that a "financial bubble" had developed.3' The
insecurity immediately drove stock prices sharply down, leaving them
stagnant for months.32 Eighteen months later, the market index was further
jolted by the September 11, 2001 terrorist attacks and resulting threats of

23. Cunningham Speech, supra note 1; Donaldson Testimony, supra note 6.
24. See Cunningham Speech, supra note 1; Donaldson Testimony, supra note 6.
25. See Cunningham Speech, supra note 1.
26. See id.
27. See id.
28. Cunningham, supra note 4, at 923. See also Donaldson Testimony, supra note 6

(noting that during the stock market boom of the mid 1990s through early 2000, new entrants
undertaking IPOs in the market were among the biggest gainers, especially those from the
"dot.com" sector of the economy).

29. Cunningham, supra note 4, at 923. See Donaldson Testimony, supra note 6.
"Communications, the explosion of information technology and changes in the culture of equity
investing, including the shift to more self-directed retirement accounts, brought millions of
individuals with their savings into our stock market for the first time." Id.

30. Cunningham, supra note 4, at 923.
31. Id.
32. Id. See also Donaldson Testimony, supra note 6 (noting that investors fled the

financial markets and the IPO market, which had been so strong during the 1990s, had
disappeared).

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CHALLENGES FOR FOREIGN ATTORNEYS

war.33 Similar to the events of 1929, the strong economic times and
subsequent market decline revealed a series of major corporate scandals that
significantly shook investor confidence in public-issue companies.34 In fact,
between December 2001 and July 2002, four of the six largest corporate
bankruptcy filings in U.S. history occurred.35 These four corporations, along
with many others, concealed their true financial performance from creditors
and shareholders until an inability to meet financial commitments forced them
to restate earnings and reveal massive losses.36

The catalyst for the greed, malfeasance, and other illicit behavior was
that during the boom years, corporate America became increasingly focused
on short-term financial results, measured by quarter-to-quarter earnings."
"Hitting the numbers," rather than creating a strategy for sound, long-term
strength and performance, became the primary business goal.3" Ultimately, as
noted by William H. Donaldson, SEC Chairman, "the perception that
uninterrupted earnings growth was the standard for sound corporate progress
caused too many managers to adjust financial results with the purpose of
meeting projected results-in ways that were sometimes large and sometimes
small, but especially given the purpose, in all cases unacceptable."39

The first of the major scandals and perhaps the most well known was
Enron.40 The corporation's financial troubles were the result of several Enron
executives manipulating the corporation's reported financial results through

33. Cunningham, supra note 4, at 923.
34. See SEC Fastow Release, supra note 7, See also Donaldson Testimony, supra note

6.
As happened after the crash of 1929, the falling market that began in 2000 led to
other revelations. Starting with the unfolding of the Enron story in October of
2001, it became apparent that the boom years had been accompanied by fraud,
other misconduct and a serious erosion in business principles.

Id.
35. See Simon Romero & Riva D. Atlas, WorldCom Declares Bankruptcy; $107 Billion

Filing Largest in U.S. History, Hous. CHRON., July 22, 2002, at Al (noting that the six largest
bankruptcies in U.S. history by assets, in billions include WorldCom (2002) (107), Enron
(2001) (63.3), Texaco (1987) (35.8), Financial Corp. of America (1988) (33.8), Global Crossing
(2002) (25.5), and Adelphia Communications (2002) (23.2)).

36. See U.S. Securities and Exchange Commission, Litigation Release No. 18335, SEC
v. Glisan, Case No. H-03-3628 (S.D. Tx.), SEC Charges Ben F. Glisan, Jr., Enron's Former
Treasurer with Securities Fraud (Sept. 10, 2003), available at
http://www.sec.gov/litigation/litrelease/lrl 8335.htm (last visited Feb. 7, 2004) [herinafter SEC
Glisan Release]. See also U.S. Securities and Exchange Commission, Litigation Release No.
18277, SEC v. WorldCom, Inc., Civil Action No. 02-CV-4963 (S.D.N.Y.), J. Gonzalez
Approves Settlement of SEC's Claim for Civil Penalty Against WorldCom (Aug. 7, 2003),
available at http://www.sec.gov/litigation/litrelease/lr18277.htm (last visited Feb. 7, 2004).

37. Donaldson Testimony, supra note 6. Even with corporate financial analysts, the
emphasis was on the game of "hitting the numbers." Id.

38. Id.
39. Id.
40. Geewax, supra note 8.

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IND. INT'L & COMP. L. REV.

a series of fraudulent business transactions. 4' These transactions effectively
inflated Enron's earnings and cashflows, while at the same time concealing
the full extent of the company's debt.42 They included several sham off-
balance sheet partnerships and the manipulation of the company's reported
financial results through a series of complex finance transactions, known as
"prepays., 43 The off-balance sheet partnerships, which were formed using
Enron equity to hedge against potential decline in its market-to-market
investments, ultimately allowed Enron to avoid earnings write-downs of over
one billion dollars." The prepays, on the other hand, were fraudulently used
to bolster financial results by reporting loans from financial institutions as
cash from operating activities.45 As the corporation's bankruptcy proceeded
and as the SEC's subsequent investigation began to unfold, the number of
Enron executives responsible for the misconduct began to grow.46 Also, it
became clear that a number of prominent financial institutions and
professional service firms had aided in the wrongdoing, including Arthur
Anderson, LLP; J.P. Morgan Chase & Co.; and Citigroup, Inc.47 In the wake
of the scandal and the massive decline in the company's stock price, Enron
employees and outside shareholders were devastated.4

' Early estimates
suggest that, in addition to the thousands of jobs that were lost, Enron
employees collectively lost more than one billion dollars as a result of the
decline in share value.49

The next major scandal to hit the mainstream occurred in January of
2002, with Global Crossing's announcement that it was filing bankruptcy. °

Once again, it was faulty accounting methods and misleading financial
reporting that signaled the end of the telecommunications giant.5

Specifically, when Global Crossing's costly investment strategy failed to

41. SEC Glisan Release, supra note 36.
42. Id.
43. Id.
44. Id.
45. Id.
46. Cunningham, supra note 4, at 924.
47. Id. See also In Re Enron Corporation Securities, Derivative & ERISA Litig., 235 F.

Supp. 2d 549 (S.D. Tex. 2002); Press Release, U.S. Securities and Exchange Commission, SEC
Settles Enforcement Proceedings Against J.P. Morgan Chase and Citigroup (July 28, 2003),
available athttp://www.sec.gov/news/press/2003-87.htm (last visited Feb. 7, 2004) (noting that
J.P. Morgan Chase agreed to pay $135 million to settle SEC allegations that it helped Enron
commit fraud, while Citigroup agreed to pay $120 million).

48. See Ruiz, supra note 8. See also Geewax, supra note 8 (noting that the Enron
bankruptcy wiped out thousands of jobs and tens of billions in investors' savings).

49. See Enron Employees First Consolidated and Amended Complaint at 1-8 and 247-50,
In Re Enron Corporation Securities, Derivative & ERISA Litig., 235 F. Supp. 2d 549, available
at http://www.enronerisa.com/pdf/enronlstconsolidatedAmendedComplaint.pdf (last visited
Feb. 7, 2004).

50. See Simon Romero & Seth Schiesel, The Fiber Optic Fantasy Slips Away, N.Y.
TIMES, Feb. 17, 2002, § 3, at 1.

51. Cunningham, supra note 4, at 924.

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CHALLENGES FOR FOREIGN ATrORNEYS

materialize, the company began to use questionable accounting methods,
including engaging in "swapping" fiber capacity with other communications
companies and improperly disclosing the transactions in its financial reports. 2

During these swaps, the company would count the outgoing transfer of
capacity as revenue while the incoming capacity was transacted as a capital
expense, making it appear that the company's cashflow was climbing from
such deals.53 During some of these illicit transactions, Global Crossing and
its counterparts issued checks to each other in equal amounts, allowing each
to use the proceeds as an increase in revenue.54 Like Enron, the scandals
resulted in SEC allegations, criminal prosecutions, and left investors
perplexed and destitute.5

In the Spring of 2002, a wave of corporate misbehavior of a different
sort began to surface.56 This time, the motivation was based on greed rather
than direct accounting corruption.57 The widely publicized cases of Adelphia
Communications Corp. and Tyco International Ltd. serve as prime examples.58

Both instances involved massive corporate loans to company executives at
extremely favorable terms.59 Most notably, in March of 2002, Adelphia
disclosed that it had failed to report at least $2.3 billion in debt that was
attributable to fraudulent loans made by the corporation to the founding family
of Adelphia.6 ° In July, shortly after the company filed for Chapter 11
bankruptcy, John Rigas, founder, Chairman, and CEO, and two of his sons,
along with two other executives, were arrested and charged with nine counts
of conspiracy and fraud.61

There are many other examples of accounting corruption and executive
misbehavior that occurred between 2000 and 2002 that did not get the same
notoriety, although they did not go completely unnoticed either.62 Notable

52. See Romero & Schiesel, supra note 50.
53. Id. Global Crossing engaged in these swapping transactions with many telecom-

munication companies around the world. The most notable transactions occurred with Qwest
Communications International; however, other companies included Flag Telecom of Britain,
China Netcom, and Telecom New Zealand. Id.

54. Id. In other transactions, no money changed hands. Id.
55. See id.
56. Cunningham, supra note 4, at 924.
57. Id.
58. See id.
59. Id.
60. Andrew Ross Sorkin, Corporate Conduct Prosecution, N.Y. TIMES, July 25, 2002, §

C, at 1. See also Abigail Rayner, Fallen King Pounced on by Sleazebusters, THE TIMES
(London), July 27, 2002, Business, at 46. In March of 2002 the Rigas family stated that they
had borrowed $2.3 billion in company funds without the board's approval. On June 25, 2002
the company filed chapter 11 bankruptcy. Id.

61. Id. See also Christopher Stem, Members of Rigas Family Indicted; 3 Ex-Adelphia
Officials Accused of Conspiracy, WASH. POST, Sep. 24,2002, Financial, at E01 (stating that the
Rigas family had been indicted on charges of conspiring to defraud investors out of $250
million and for failing to disclose $2.3 billion in loans to the family).

62. Cunningham, supra note 4, at 925.

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IND. INT'L & COMP. L. REv.

corporations, such as AOL Time Warner Inc., Rite Aid Corp., Tyco, and
Xerox Corp all faced allegations of corruption and fraud during that time
period.63 The final straw, however, occurred in June of 2002 with "a true and
pure accounting deception so large that there was no turning away from
Congressional action."'  That month, WorldCom, the telecommunications
goliath and parent company of MCI, announced that corporate financial
executives had misled investors by overstating its income from as early as
1999 through the first quarter of 2002.65 As a result of undisclosed and
improper accounting, WorldCom materially overstated the income it reported
on its financial statements for that time period by approximately $7.2 billion.66

The magnitude of the deception was so great that it resulted in civil charges
by the SEC against four corporate executives and the payment of a penalty by
WorldCom that was seventy-five times greater than any prior penalty imposed
on a U.S. corporation.67 Once again, employees and shareholders were
devastated.68 More than 20,000 employees were laid off between January
2001 and June 2002,69 and the company's stock price had fallen from its high
of $61.99 per share to its post-scandal low of less than one dollar.7 °

B. The Impact of the Scandals on Investor Confidence

The heart of the passage of the Sarbanes-Oxley Act is found in the
dramatic erosion in investor confidence and the public outcry that followed
the recent corporate scandals.7' Unquestionably, investor trust in corporate

63. Id.
64. Id. See also Geewax, supra note 8.
65. U.S. Securities and Exchange Commission, Litigation Release No. 17783, SEC

Charges Two Former WorldCom Accountants, Betty Vinson and Troy Normand, with
Participating in Multi-Billion Dollar Financial Fraud (Oct. 10, 2002), available at
http://www.sec.gov/litigation/litrelease/lr17783.htm (last visited Feb. 7, 2004).

66. Id.
67. U.S. Securities and Exchange Commission, Litigation Release No. 18219, The

Honorable Jed Rakoff Approves Settlement of the SEC's Claim for a Civil Penalty Against
WorldCom (July 7,2003), availableathttp://www.sec.gov/litigation/litrelease/lrl 8219.htm(last
visited Oct. 2, 2003). The court approved a settlement providing that WorldCom was liable for
a civil penalty in the amount of $2,250,000,000. Id. Thejudgment, however, was to be deemed
satisfied by the Company's payment of $500,000,000 in cash and by its transfer of common
stock in the reorganized company having a value of $250,000,000 to a distribution agent
appointed by the court. Id.

68. See Louis Uchitelle, Turmoil at WorldCom: The Workforce: Job Cuts Take Heavy
Toll on Telecom Industry, N.Y. TIMES, June 29, 2002, § C, at 1. By June of 2002, WorldCom
had announced that it would eliminate a total of 23,000 jobs, or roughly 16 percent of its entire
workforce. Id.

69. See id.
70. James P. Miller et al., SEC Accuses WorldCom of Fraud, CHI. TRIB., June 27, 2002,

News, at IN.
71. See Rebuilding Trust, supra note 9.

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CHALLENGES FOR FOREIGN ATrORNEYS

accounting and reporting practices was drastically shaken.72 In a recent press
release, the SEC noted that the actions of executives at Enron and other
similar companies had significantly "undermined investor confidence in our
markets and our system of financial reporting."73 The magnitude of the
public's distrust can be seen in several polls conducted in mid-2002, which
demonstrate that:

" Seventy-seven percent of the public believed that CEO
greed and corruption had caused the U.S. "financial
meltdown."74

" Seventy-one percent of investors believed that
accounting fraud was rampant.7

* Eighty-two percent of investors believed that though
new laws of corporate governance were necessary.76

" Eighty-one percent of fund managers and analysts
believed that executives placed their own interests
ahead of that of the shareholders.77

As noted by former SEC Chairman Harvey Pitt, the "[r]ecent events have
underscored what we already knew-confidence in our capital markets cannot
be maintained if the public believes that corporate leaders, their advisors or
their cohorts, are 'gaming' the system and focusing principally if not
exclusively, on their own personal gain., 78 Even as far as Europe, concerned
commentators noted, immediately after the fall of WorldCom, that "[t]he need
to rebuild investor confidence is now paramount. It is not just that without it
there will be no market recovery. It is also that America's reputation as a
place to do business will come under intense threat sending markets ever
lower., 79 Ultimately, in the minds of worldwide investors, the recurring issue

72. See Richard S. Dunham, The Vindication of Arthur Levitt, BUSINESSWEEK ONLINE,
Feb. 19, 2002, at http://www.businessweek.comfbwdaily/dnflash/feb2002/nf20020219_2045
.htm. (last visited Oct. 18, 2003).

73. SEC Fastow Release, supra note 7.
74. PriceWaterhouseCoopers, The Sarbanes-Oxley Act of 2002: Strategies for Meeting

New Internal Control Reporting Challenges: A White Paper, at 2 (2003), available at
http://www.pwcglobal.com/images/gx/eng/fs/acf/4.pdf (last visited Sept. 2, 2003), at 2 (citing
CNN/USA Today Poll, July 2002).

75. Id. (citing Survey of Main Street Investors, July 2002).
76. Id. (citing Harris Poll, July 2002).
77. Id. (citing Broadgate Consultants, March 2002).
78. Harvey L. Pitt, Chairman, U.S. Securities and Exchange Commission, Remarks Before

the Annual Meeting of the American Bar Association's Business Law Section (August 12,
2002), available at http://www.sec.gov/news/speech/spch579.htm (last visited Feb. 7, 2004)
[hereinafter Pitt Speech Before the ABA] (Harvey Pitt was Chairman of the SEC during the
passage of the Act).

79. Bill Jamieson, Posse Rides Out to Lasso Investor Confidence, THE SCOTSMAN, July
2, 2002, at 5. See also Rebuilding Trust, supra note 9.

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IND. INT'L & COMP. L. REV.

was whether the scandals were enabled, promoted, or caused by a lack of
corporate reform.8"

C. The Attorney's Role in Corporate Governance

Most experts agree that the wave of recent corporate scandals could not
have occurred without the widespread breakdown in the entire corporate
oversight system.8" As noted by former SEC Chairman, Arthur Levitt, this
breakdown was the result of a "vast cultural erosion cutting across virtually
every gatekeeper that operates in this arena."82 This group includes corporate
executives, corporate directors, accountants, investment bankers, analysts, and
most notably, corporate attorneys.83 These professionals appear to have
forgotten (or ignored) that their primary responsibility is to the corporation
and its shareholders.84 Unfortunately, a culture of "what can I get away with"
has engulfed the desired culture of "what is good for investors. 85

This is especially true for corporate lawyers.8" To restore public
confidence, it is important for corporate lawyers to keep their eyes firmly
fixed on their public responsibilities and to first make certain that those
responsibilities are satisfied. 87  That means putting the interests of the
corporation and its shareholders above all others, including their own.88 The
concept of attorneys guarding, defending, and promoting the interests of their

80. See Cunningham, supra note 4, at 940.
81. Dunham, supra note 72. See also Harvey J. Goldschmid, Commissioner, U.S.

Securities and Exchange Commission, Post-Enron America: An SEC Perspective, Speech at
Third Annual A.A. Sommer, Jr. Corporate Securities & Financial Law Lecture (Dec. 2, 2002),
available at http://www.sec.gov/news/speech/spchl20202hjg.htm (last visited Feb. 7, 2004)
(noting that what went wrong during the 1990s and early 2000s was the "systematic failure" of
the entire corporate governance checks and balances system) [hereinafter Goldschmid Speech].

82. Dunham, supra note 72. See also Rebuilding Trust, supra note 9.
83. See Dunham, supra note 72. See also Rebuilding Trust, supra note 9 (stating that

Alan Greenspan, Chairman of the U.S. Federal Reserve, blamed lawyers, among others for
failing to check the "infectious greed" of the 1990's that led to the recent collapse of share
values). See also Goldschmid Speech, supra note 81. As Judge Sporkin in Lincoln Savings put
it, "[d]uring the most dramatic financial scandals that have occurred during my professional life,
where were the lawyers?" Id. (quoting Lincoln Sav. Ass'n v. Wall, 743 F. Supp. 901 (D.D.C.
1990)).

84. Pitt Speech Before the ABA, supra note 78.
85. Dunham, supra note 72.
86. See id. (noting that in public companies, the most important "gatekeepers" are the

accountants and attorneys); see also Patti Waldmeir, Lawyers on Sentry Duty: Corporate
Governance: SEC Proposals to turn the US Legal Profession into Guardians of the Market are
Causing Controversy, FINANCIALTIMES (London), Nov. 6, 2002, Inside Track, at 15 [hereinafter
Waldmeir, Lawyers on Duty] (discussing comments by Harvey Pitt, former SEC Chairman, that
the recent corporate governance scandals have done nothing to improve the lawyers' image of
"greed and duplicity").

87. Pitt Speech Before the ABA, supra note 78.
88. Id.

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CHALLENGES FOR FOREIGN ATTORNEYS

clients is not new.89 Indeed, the ABA's Model Rules of Professional Conduct
state as much.9" This model, however, is premised on the idea that clients
must feel comfortable in confiding in their attorey.91 The sticking point is
that many feel that governmental controls on how lawyers fulfill their
responsibilities can negatively impact the willingness of clients to confide in
their lawyers, and thus, curtail the lawyer's ability to maximize the benefits
of the lawyer-client relationship. 92 The problem with this notion, however, is
that it misses the point. "Lawyers for public companies represent the
company as a whole and its shareholder-owners, not the managers who hire
and fire them." 93 Too often, corporate attorneys in an effort to please the
executives with which they have direct interaction, lose sight of the bigger
picture.9' The net result is that the eager attorney ends up as a necessary
partner to corporate misconduct.95 In fact, to be able to commit most complex
corporate fraud, corporations need legal help.96 It is the attorney's role to
make everything look legitimate. 97

If it is not a blatant violation of the law, the attorney will frequently
justify his or her actions, at least in his own mind, by trying to force-fit the
conduct into a potential gray area of the law. 98 However, as former SEC
Chairman Harvey Pitt recently noted in a speech before the American Bar
Association, "[h]elping [the] company to satisfy literal legal prescriptions,
even if doing so is contrary to what those legal prescriptions were intended to
accomplish, doesn't satisfy a corporate lawyer's duties." 99 Later he adds,
"[1]awyers cannot escape their role in giving assistance to corporate
wrongdoers by hiding behind their ability to craft a clever phrase to
circumvent what they know to be the right answer." ' He concludes that too
often attorneys use their "high mental gifts for guile, and because of their
higher endowment their sin is reckoned greater and their place is lower than
that of thieves."10'

89. Id.
90. See MODEL RuLES OF PROF'L CONDUCT R. 1.3 cmt. (2002). "A lawyer should act

with commitment and dedication to the interests of the client and with zeal in advocacy upon
the client's behalf." Id.

91. Pitt Speech Before the ABA, supra note 78.
92. Id.
93. Id. See also Pamela Palmer, Lawyers in the Spotlight, LEGAL WEEK GLOBAL, Sept.

18, 2002.
94. See Pitt Speech Before the ABA, supra note 78.
95. See Susan P. Koniak, Symposium, Regulating the Lawyer: Past Efforts and Future

Possibilities: When the Hurlyburly's Done: The BAR's Struggle with the SEC, 103 COLuM.
L. REv. 1236, 1239 (2003).

96. Id.
97. Id.
98. See Pitt Speech Before the ABA, supra note 78.
99. Id.

100. Id.
101. Id.

2004]



IND. INT'L & COMP. L. REV.

1. The Attorneys' Role in the Enron Scandal

An appropriate example of an attorney's role in corporate misconduct
is the allegations raised against the lawyers in the Enron case.'° 2 Specifically,
the involvement of the large and prestigious law firm of Vinson & Elkins
(V&E) was a necessary component of Enron's ability to execute its fraudulent
behavior.'0 3 Before going into the details of V&E's participation in the
misconduct, it is important to first lay the foundation of the relationship
between the two entities. Enron was V&E's largest client, accounting for
more than seven percent of the firm's total revenues. 4 Also, over the course
of their relationship, more than twenty lawyers left V&E to join Enron's in-
house legal department.0 5 There is no doubt that there was a deep long-
standing relationship between the two entities. 106

The complaint filed against V&E in 2002 includes a long, elaborate
history of improprieties on the part of V&E as Enron's chief outside
counsel. 107 However, for purposes of brevity, discussion will focus on a few
key behaviors. First, the complaint against V&E asserts that V&E
participated in the negotiations and prepared the transaction documents for the
illicit partnerships and Special Purpose Entities (SPE) that formed the basis
for Enron's fraudulent behavior.' 8 This was done with full knowledge that
they were "manipulative devices, not independent third parties and not valid
SPEs, designed to move debt off of Enron's books, inflate its earnings and
falsify Enron's reported financial results and financial condition at crucial
times."'" Moreover, V&E, knowing that the legitimate investor of one of the
SPE's had pulled out and that Enron wanted to keep the SPE's liabilities off
the books, formed a company totally controlled by Enron to take the investor's
place." The Firm then advised Enron to put a non-executive employee in
charge of the newly formed entity to avoid SEC and investor disclosure
issues. I

102. See In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549 (S.D.
Tex. 2002).

103. Id. at 627.
104. Id. at 656.
105. Id.
106. See generally id.
107. Id. at 657. The case included motions to dismiss by several of the secondary

defendants named in the original shareholder complaint. See In re Enron, 235 F. Supp. 2d at
686-707. With respect to V&E, the court denied its motion to dismiss the allegations. See id.
at 704-05.

108. ld. at 657-60.
109. Id. at 657. See id. at 658-65.
110. Id. at 656-59.
111. In re Enron, 235 F. Supp. 2d at 662.

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CHALLENGES FOR FOREIGN ATTORNEYS

Next, V&E proceeded to prepare and file Enron' s disclosure documents
and advised Enron executives that the documents satisfied the Companies
legal obligations, when they in fact did not." 2 The complaint alleges that
between 1998 and 2002, V&E drafted and approved SEC filings, shareholder
reports, and press releases knowing that they were false and misleading."'
This included concealing material facts in Enron's quarterly reports on form
10-Q, annual reports on form 10-K, and in its annual proxies."'

Finally, in 2001, as Enron's use of the SPE's became more aggressive,
an Enron Global Financing employee, Sherron Watkins, sent a memorandum
to Enron's CEO, Kenneth Lay, complaining that the company was engaging
in fraudulent misconduct that would likely lead to its collapse." 5 The letter
further warned Kenneth Lay not to use V&E to investigate the issue because
V&E had participated in the fraud and had a clear conflict of interest." 6

Despite her warning, Kenneth Lay immediately turned to V&E partners to
determine how to cover up the allegations."' V&E, disregarding its obvious
conflicts of interest, agreed to conduct an investigation and vowed to issue a
report dismissing the allegations of fraud. 18 V&E also allegedly agreed to not
second-guess the accounting services of Arthur Anderson and to limit its
investigation into top Enron Executives.'"' According to the complaint, during
the investigation, V&E only interviewed a few top executives that it knew
were involved in the fraud but would deny the misconduct. 2 ° Not surpris-
ingly, on October 15, 2001, V&E issued a letter that dismissed all of Watkins'
allegations.' 2 '

These allegations represent the type of behavior that can and does occur
in corporations. The problem is not so much that corporate attorneys engineer
massive fraud or that they did so in each of the corporate scandals listed at the
outset of this Note, but rather that different lawyer behavior might have
prevented or stopped the fraudulent activity on behalf of management. 22

112. Id. at 659.
113. Id. at 657, 660-65.
114. Id. at 660-65.
115. See id. at 657 n.92. See also Email from Sherron Watkins, Global Financing

employee, Enron Corp., to Kenneth Lay, Chairman, Enron Corp., (Jan. 20, 2002), at
http://www.itmweb.com/f012002.htm (last visited Feb. 7, 2004).

116. In Re Enron, 235 F. Supp. 2d at 657.
117. Id. at 665.
118. Id.
119. Id.
120. Id. at 666.
121. In Re Enron, F. Supp. 2d at 666. See also id. at 666-68 (includes the letter quoted in

part).
122. Jill E. Fisch & Kenneth M. Rosen, Symposium, Lessons From Enron, How Did

Corporate and Securities Law Fail? Is there a Role for Lawyers in Preventing Future Enrons?,
48 VIL. L. REV. 1097, 1104 (2003).

2004]



IND. INT'L & COMP. L. REv.

2. American Bar Association's Attempt to Deal with Attorney
Responsibility

It is true that the American Bar Association has attempted to deal with
the attorney's obligations as corporate gatekeepers in its Model Rules of
Professional Conduct. 123 At the outset, Rule 1.6 provides that:

[a] lawyer shall not reveal information relating to representa-
tion of a client unless the client consents after consultation,
except.., a lawyer may reveal such information to the extent
the lawyer reasonably believes necessary; to prevent the
client from committing a criminal act that the lawyer believes
is likely to result in imminent death or substantial bodily
harm.

124

The key to this rule, however, is the use of the word "may." As stated, the
lawyer is not required to disclose the information. 125 Also, because the rule
only permits the lawyer to reveal information that will prevent a client from
committing a criminal act that will likely result in death or bodily harm, the
rule essentially precludes a lawyer from revealing a corporations ongoing
financial fraud. 126

Further, pursuant to Rule 1.2, an attorney "shall not counsel a client to
engage, or assist a client, in conduct that the lawyer knows is criminal or
fraudulent." 127 The attorney may, however, discuss the legal consequences of
any proposed course of conduct with the client and may assist the client in
making a good faith effort to determine the application of the law as it relates
to that conduct. 128 The official comment to Rule 1.2 provides that:

The fact that a client uses advice in a course of action that is
criminal or fraudulent does not, of itself, make a lawyer a
party to the course of action. However, a lawyer may not
knowingly assist a client in criminal or fraudulent conduct.
There is a critical distinction between presenting an analysis
of legal aspects of questionable conduct and recommending
the means by which a crime or fraud might be committed
with impunity. 2 1

123. See generally Patti Waldmeir, Hidden Dangers of Turning our Lawyers into
Watchdogs, FINANCIAL TIMES (London), May 5, 2003, Features Law and Business, at 10.

124. MODEL RuLEs OF PROF'L CONDUCT R. 1.6(a) & (b)(1) (2002) (emphasis added).
125. See id.
126. See Goldschmid Speech, supra note 81.
127. MODEL RULES OF PROF'L CONDUCT R. 1.2(d) (2002).
128. Id.
129. MODEL RuLEs OF PROF'L CONDUCT R. 1.2 cmt. (2002).

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CHALLENGES FOR FOREIGN ATrORNEYS

If a lawyer discovers that his client is engaged in ongoing criminal or
fraudulent conduct, ABA Model Rule 1.16 provides the attorney's course of
action. 130 Essentially, the rule states that a lawyer must decline or withdraw
from representation if the client demands that the lawyer engage in conduct
that is illegal or violates the Rules of Professional Conduct.13' The rule also
provides that a lawyer "may" withdraw if the client persists in a course of
conduct that the attorney reasonably believes is criminal or fraudulent. 3 The
key to Rule 1.16 is that an attorney's obligation to withdraw is only invoked
if the client "demands" that the lawyer engage in criminal or unethical
conduct. 33 In other words, if the attorney knows the client is engaging in
illegal conduct with which he or she is not demanded to participate, the lawyer
does not have to withdraw. 134 Also, in such instances where the lawyer does
withdraw, he is not required to disclose the information. 135

Finally, the attorney-client relationship in the context of an organization
is described in Rule 1.13.136 Under Rule 1.13, when the attorney knows that
the organization or an employee is engaged in illegal conduct, the attorney is
permitted to: (1) ask for reconsideration in the matter, (2) advise that a second
legal opinion in the matter be sought, or (3) refer the matter to a higher
authority within the organization. 13 If the organization refuses to take action
to stop the behavior, the lawyer is permitted to resign. 138

In addition to the obvious lack of substance to these rules, they have also
been inadequately enforced. 139 Many believe that state bar associations have
been lax in their efforts to discipline attorneys for their misconduct, especially
when it comes to securities fraud."4° In fact, the legal profession has largely
taken advantage of the fact that it has been left to develop and enforce its own
system of self-governance with little or no oversight by the government. 141

130. See MODEL RULES OF PROF'L CONDUCT R. 1.16 cmt. (2002).
131. Id.
132. See MODEL RuLEs OF PROF'L CONDUCT R. 1.16 cmt., 116.
133. See id.
134. See id.
135. See MODEL RULES OFPROF'L CONDUCT R. 1.6 (2002).
136. See MODEL RULES OFPROF'L CONDUCT R. 1.13 (2002) (Rule 1.13 is discussed infra

text accompanying notes 235-39).
137. See MODEL RULES OF PROF'L CONDUCT R. 1.13(b) (2002) (emphasis added).
138. MODEL RULES OFPROF'L CONDUCT R. 1.13(c) (2002) (emphasis added).
139. See Pitt Speech Before the ABA, supra note 78.
140. Id. See Patti Waldmeir, SEC Retreats on Sarbanes-Oxley Measures for Company

Lawyers, FINANCIAL TIMES (London), Jan. 24, 2003, Companies & Finance The Americas, at
27 [hereinafter Waldmeir, SEC Retreats].

141. See Waldmeir, Lawyers on Duty, supra note 86. "For more than 200 years, the US
legal profession has been mostly allowed to police itself. State courts have exercised gentle
scrutiny, guided almost entirely by state Bar associations." Id. See also Linnea B. McCord &
Gia H. Weisdorn, Blowing the Whistle, Graziadio Business Report, 6 J. CONTEMP. BUS. PRAC.
3 (2003), available at http://www.gbr.pepperdine.edu/033lawyers.html (last visited Feb. 10,
2004); see also Palmer, supra note 93.

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IND. INT'L & CoMP. L. REV.

The frustration of the SEC in this regard is revealed in Harvey Pitt's recent
statement that "I'm not impressed, or pleased, by the generally low level of
effective responses we receive from state bar committees when we refer
possible disciplinary proceedings to them."' It is this frustration that helped
set the tone for new regulatory standards for corporate lawyers. 4 3

I. THE SARBANES-OXLEY Acr

A. Congressional Response to Corporate Misconduct

The collapse of WorldCom, Global Crossing, Adelphia and the many
others that followed, indicated to the world that Enron was not an anomaly
and that drastic corporate reform was needed.'" These catastrophes led to a
fast-developing international consensus on critical areas of corporate reform
necessary to restore investor confidence.'45 Responding to the worldwide
cries to do something, the U.S. Congress passed the Sarbanes-Oxley Act of
2002 (Act).

46

The Act was officially signed by President Bush on July 30, 2002, after
passing through Congress in relatively quick fashion, bypassing much of the
legislative process. 47 The Act is touted as arguably "the most sweeping and

In the 1970s and early 1980s, the SEC drew a firestorm of criticism from the US
legal profession for seeking sanctions against lawyers based on alleged "unethical
or improper professional conduct.". . . The SEC backed down, acknowledging
that it had no mandate or expertise to regulate lawyers, aside from enforcing the
securities laws and recognizing that there is not uniform US standard of legal
ethics and conduct. By 1982, it was the SEC's stated policy to refrain from
developing "independent standards of professional conduct" for lawyers.

Palmer, supra note 93.
142. Pitt Speech Before the ABA, supra note 78.
143. See Waldmeir, Lawyers on Duty, supra note 86.
144. See Tafara speech, supra note 10; Jamieson, supra note 79. See also, Corporate

Accountability: Hearing Before the House ofRep., 148th Cong. E1470, 1472 (2002) (statement
of Elliot Spitzer, New York Attorney General) [hereinafter Corporate Accountability Hearing].
Before the House of Representatives as it was contemplating the passage of the Act, Mr. Spitzer
stated that:

[i]t is time to restore to boards and institutional shareholders the obligation of
serious participation in corporate governance. We need to insist that public
companies report results that reflect reality and not cleaver gamesmanship, and
that allow investors to understand their true financial position. And we need to
strictly punish corporate executives who falsely certify their company's financial
statements.

Id.
145. Id.
146. Public Accounting Reform and Investor Protection Act of 2002, Pub. L. No. 107-204,

116 Stat. 745 (2002) (codified in scattered sections of 11, 15, 18, 28, and 29 U.S.C.).
147. President George W. Bush, President Bush signs Corporate Corruption Bill (July 30,

2002), available at http://www.whitehouse.gov/news/releases/2002/07/print120020730.html
(last visited Feb. 10, 2004). See also Corporate Accountability Hearing, supra note 144, at

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CHALLENGES FOR FOREIGN ATrORNEYS

important U.S. federal securities regulation since the SEC was created in
1934." 14

' Determined to reduce corporate malfeasance and restore investor
confidence, the Act establishes new standards for corporate accountability and
penalties for wrongdoing. 149  Primarily, these standards place increased
demands on those involved in the corporate financial reporting process. 50

The Act contains eleven titles, ranging from additional responsibilities
for corporate oversight to enhanced criminal penalties for white-collar crimes,
including securities fraud. "' Within those eleven titles, the Act contains sixty-
six sections and provides for more than eleven studies to be conducted by the
SEC and Comptroller General on various groups and issues relating to
corporate governance.' The general categories of reform include public
company disclosure, corporate governance, and auditor oversight.' 53 The
issues and groups addressed by the Act were singled out for their participation
in the conduct that led to the Act's passage.'54 Many of the Act's provisions
direct the SEC to establish regulating standards for implementation.'55

Without a doubt, the range of the act in terms of whom it affects within the
realm of corporate governance and enforceability is broad and powerful.'56

E1470 (statement of Richard Gephardt, Member, U.S. House of Rep.). The overwhelming
consensus of the U.S. Congress in passing the Sarbanes-Oxley Act can be seen in a statement
by Representative Richard Gephardt on the floor of the House of Representatives: "[t]his week,
... the Senate unanimously passed and I'll say it again, unanimously passed, and that's a rare
occasion, a crucial bill that would attack the current crisis in confidence." Corporate
Accountability Hearing, supra note 144, at E1470.

148. Tafara Speech, supra note 10; Goldschmit Speech, supra note 81.
149. See Donaldson Testimony, supra note 6. See also Palmer, supra note 93.
150. See Palmer, supra note 93 (noting that the Act focuses on individual officers,

directors, and accounting and legal professionals perceived as responsible for corporate
governance and financial reporting); Donaldson Testimony, supra note 6.

151. See Public Accounting Reform and Investor Protection Act of 2002, supra note 11
(Eleven titles include: 1) Public Company Accounting, 2) Auditor Independence, 3) Corporate
Responsibility, 4) Enhanced Financial Disclosures, 5) Analyst Conflicts of Interest, 6)
Commission Resources and Authority, 7) Studies and Reports, 8) Corporate and Criminal Fraud
Accountability, 9) White Collar Crime Penalty, 10) Corporate Tax Returns, and 11) Corporate
Fraud and Accountability).

152. See id.
153. Tafara Speech, supra note 10.
154. Id. See Donaldson Testimony, supra note 6.

The sweeping reforms of the Act address nearly every aspect and actor in our
nation's capital markets. The Act affects every reporting company, both
domestic and foreign, as well as their officers and directors. The Act also affects
those that play a role in ensuring the integrity of our capital markets, such as
accounting firms, research analysts and attorneys.

Id.
155. See Tafara Speech, supra note 10.
156. See Donaldson Testimony, supra note 6; Palmer, supra note 93.

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IND. INT'L & COMP. L. REv.

B. Regulating the World: SEC Regulations on an International Stage

In examining the scope of the Act, it is important to understand the
backdrop of foreign growth in U.S. markets. The increasing interdependence
of capital markets around the world has virtually made it impossible for the
SEC to enact securities regulation without considering its impact on foreign
companies.'57 In fact, competition from foreign markets as an alternative
source for raising equity capital, the fact that foreign companies often function
in an entirely different corporate governance environment, and investor desire
for foreign equities as a means for diversifying portfolios, are factors that the
SEC has had to seriously consider in drafting and implementing regulations.'58

These considerations have resulted in the SEC's grant of accommodations and
exemptions to foreign companies with regard to many of its regulations in the
past.'59 The net affect has been a dramatic increase in the number of listings
of foreign companies on U.S. public markets.160 For instance, the number of
foreign listings on the New York Stock Exchange (NYSE) increased from 33
listings in 1975 to 2,368 by the end of 2002, encompassing nearly seventeen
percent of all listings. 16 1 In terms of market capitalization, the NYSE reports
that in 2002, non-U.S. listed companies had a combined capitalization of $4.3
trillion, nearly one-third of the capitalization of the entire NYSE. 62 It is also
important to note that since 1990 the number of foreign listings has more than
quadrupled, while since 1998, the number of U.S. company listings has

157. See Tafara Speech, supra note 10. "It is clear that, more than ever, capital markets
around the world are increasingly interdependent, and changes to national laws can have
repercussions outside its borders." Id.

158. Id.
159. See Press Release, U.S. Securities and Exchange Commission, Division of Corporate

Finance: International Financial Reporting and Disclosure Issues (May 1, 2001), available at
http://www.sec.gov/divisions/corpfin/internatllissuesO5Ol.htm#P1052_165500 (last visited Feb.
11, 2004) (noting that the "integrated disclosure system designed for foreign private issuers
provides a number of accommodations to practices in other jurisdictions") [hereinafter SEC
Press Release, International Disclosure Issues]. See also Kirk, supra note 15 (recognizing the
different treatment between foreign private issuers and domestic issuers in registering securities
under 12(b) or 12(g) of the Securities and Exchange Act of 1934).

160. See John C. Coffee, Jr., Article, Racing Towards the Top?: The impact of Cross
Listings and Stock Market Competition on International Corporate Governance, 102 COLUM.
L. REv. 1757, 1759-66, 1770-73 & 1824-27 (2002).

161. Id. at 1771. See also SEC Press Release, International Disclosure Issues, supra note
159 (stating that by the end of 1999, there were more than 1,200 foreign registered companies
from more than fifty-five different countries registered with the SEC).

162. New York Stock Exchange, Annual Report 2002, at 14 & 43 (2002), available at
http://www.nyse.com/pdfs/2002arNYSE-2002.pdf (last visited Feb. 11, 2004) (noting that the
total global market capitalization for NYSE-listed companies for 2002 was 13.4 trillion,
including 4.3 trillion for non-U.S. listed companies). The NYSE annual report also noted that
it welcomed 152 new companies in 2002, 33 of which were non-U.S. Id. at 23. Further, the
average daily share volume for non-U.S. companies grew from approximately 10 million in
1987 to approximately 130 million in 2002. Id. at 34.

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CHALLENGES FOR FOREIGN ATTORNEYS

steadily declined.'63 Needless to say, the environment in which the SEC
operates has changed considerably."

Given this, the Act poses special concerns for foreign market
participants accessing U.S. capital markets.'65 That concern, of course, being
that the Act imposes new standards on foreign issuers who are already subject
to their home country's corporate governance regulations.'66 In making
decisions on the scope of the Act, Congress was clear that the Act was
generally to make no distinction between domestic and foreign firms.'67

Congress reasoned that "investors transacting on U.S. markets are entitled to
the same protections regardless of whether the issuer is foreign or
domestic."' 68 The SEC, however, in establishing the final regulations felt it
necessary to respect the growth and importance that foreign issuers play in
U.S. markets. 169 In fact, the SEC recently noted that the greatest challenge it
faced in implementing the Act was fulfilling the congressional mandate, while
at the same time respecting foreign law and regulatory schemes. 7° The SEC
concluded that the application of the provisions of the Act on foreign
companies would need to be done in a reasonable manner.'' Fittingly, the
SEC in drafting its final regulations weighed heavily the concerns and
comments of foreign countries expressed through open dialogue with its
foreign counterparts, particularly European Union member countries.'72

C. Scope of the Act and Foreign Private Issuers

The provisions of the Act are primarily directed at "issuers." The Act
provides that:

The term "issuer" means an issuer (as defined in section 3 of
the Securities Exchange Act of 1934), the securities of which
are registered under section 12 of that Act, or that is required
to file reports under section 15(d), or that files or has filed a
registration statement that has not yet become effective under
the Securities Act of 1933, and that it has not withdrawn. 17 3

163. Coffee, supra note 160, at 1771.
164. Tafara speech supra note 10. "It is clear that, more than ever, capital markets around

the world are increasingly interdependent, and changes to national laws can have repercussions
outside its borders." Id.

165. Id. See also Coffee, supra note 160, at 1824-27.
166. Tafara speech supra note 10. See also Coffee, supra note 160, at 1824-27.
167. Tafara speech supra note 10.
168. Id.
169. Id.
170. Id.
171. Id.
172. Id.
173. 15 U.S.C. § 7201(7) (2003) (reference to U.S. Code omitted)

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IND. INT'L & COMP. L. REV.

The breadth of this definition includes, "Foreign Private Issuers."' 7 4 The
definition of "Foreign Private Issuer" as proffered by the SEC in Rule 3b-4
includes any corporation or other organization established under the laws of
any foreign country unless:

1. More than fifty percent of the issuer's outstanding
voting securities are directly or indirectly held of
record by residents of the United States; and

2. Any of the following:
a. The majority of the executive officers or

directors are United States citizens or residents;
b. More than fifty percent of the assets of the issuer

are located in the United States; or
c. The business of the issuer is administered

principally in the United States.'75

Essentially, any foreign company that seeks to list its securities on the NYSE,
American Stock Exchange, or Nasdaq must register its securities with the SEC
and thus, comes under the purview of the Act.'76 In the past, the distinction
between foreign and domestic issuers has generally been important because
most foreign private issuers that register securities under Sections 12(b) or
12(g) of the Securities and Exchange Act of 19341'7 have been treated
differently and more favorably than their domestic counterparts. 178 As noted
above, the SEC has justified the differing treatment as accommodations to
attract foreign corporations and as recognition of the fact that foreign private
issuers are subject to conflicting corporate governance regulations from their
home country.'79

Given the environment during which it was passed, the Sarbanes-Oxley
Act, however, has generally disregarded this distinction.' The Act has, in
fact, "largely ignored the differences in practices and corporate governance
regimes between the United States and other countries, and has extended the
reach of the (sic) United States laws to many aspects of the internal affairs and
governance regimes of foreign companies and their auditors."'81 Although the
Act provides for the SEC to reduce application of certain provisions to foreign

174. Palmer, supra note 93.
175. 17 C.F.R. § 240.3b-4.
176. SEC Press Release, International Disclosure Issues, supra note 159. See Palmer,

supra note 93.
177. 15 U.S.C. § 781 (2003).
178. Kirk, supra note 15. See Tafara Speech, supra note 10.
179. Kirk, supra note 15. See Tafara Speech, supra note 10.
180. See Kirk, supra note 15; Tafara Speech, supra note 10.
181. Kirk, supra note 15.

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CHALLENGES FOR FOREIGN ATTORNEYS

companies, many will be surprised "by the extent to which United States law
and regulatory authority has primafacie been extended beyond the borders of
the United States into areas that would generally be considered to be governed
exclusively by the law of the home country." '182

Il. SECTION 307 AND SEC REGULATIONS

On January 23, 2003, the Securities and Exchange Commission adopted
its final rule as mandated by Section 307 of the Act, imposing new standards
of professional conduct for attorneys appearing and practicing the Commis-
sion in the representation of public companies.'83 The final regulations were
effective on August 5, 2003 and are detailed in Part 205 of Title seventeen of
the Code of Federal Regulations.' s4 Pursuant to Section 307, the standards
were to provide for "up the ladder reporting" of evidence of material
violations of securities law or breach of fiduciary duties or similar violations
by the issuer to the company's Chief Legal Counsel (CLC) or Chief Executive
Officer (CEO); and if they do not respond appropriately to the evidence, the
attorney must report the violation to the audit committee of the board of
directors, another committee of independent directors, or to the full board of
directors. '85

The final rule is intended to protect investors and increase their
confidence in public companies by ensuring that attorneys who work for those
companies respond appropriately to material misconduct.'86 Although this

182. Id.
183. Tafara Speech, supra note 10. See also 15 U.S.C. § 7245 (2003) (official code site

to Section 307, Rules of professional responsibility for attorneys).
184. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

6,296 (Feb. 6, 2003) (codified at 17 C.F.R. pt. 205) (regulations became effective August 5,
2003). The regulations can also be found at U.S. Securities and Exchange Commission, Final
Rule: Implementation of Standards of Professional Conduct for Attorneys, Release No. 33-
8185 (Jan. 29,2003), available athttp://www.sec.gov/rules/final/33-8185.htm (last visited Feb.
11,2004).

185. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,296. See also 15 U.S.C. § 7245. See generally European Commission, Study of Corporate
Governance Codes Relevant to the European Union and its Member States, at 43 (March 27,
2002), available at http://europa.eu.int/comm/intemal-market/en/company/company/news/corp-
gov-codes-rpten.htm (last visited Feb. 11, 2004) [hereinafter European Commission Study].
In the majority of European Union member countries, the independent board of directors is
known as the Unitary Board of Directors. See id. In countries that utilize a two-tiered board
system, the "Supervisory Board" meets this definition. See id. Countries that utilize a two-tiered
bard system include Germany, Austria, the Netherlands, and Denmark. Id.

186. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,297. See also 17 C.F.R. § 205.1 (2003). The purpose of Rule 205 is established under
Section 205.1, which states:

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

2004]



IND. INT'L & COMP. L. REv.

intent seems sensible enough, its embodiment within the final regulations
generated controversy, especially with regard to foreign attorneys. In fact, as
noted by the SEC, the original release of the regulations generated "significant
comment and extensive debate" in the worldwide legal community.187

Specifically, the SEC received 167 comment letters challenging various
provisions: 123 came from domestic parties, with forty-four coming from
foreign parties.188 The greatest concern involved a proposed requirement that
lawyers make a "noisy withdrawal" in the event that the board of directors
ignores the attorney's report."' In fact, foreign and domestic reaction was so
strong that the SEC decided to shelf but not abandon the noisy withdrawal
issue for now. 9 ° In its final rule, the SEC both modified and clarified its
proposed rules.' 9 '

A. The Scope of the SEC's Final Rule and its International Reach

Section 307 and Rule 205 place attorneys "appearing and practicing"
before the SEC "in the representation of an issuer" under the purview of the
SEC's rules of professional conduct.'92 Generally, an attorney is considered
to be "appearing and practicing" before the SEC when he or she:

(i) Transacts any business with the SEC, including
communications in any form;
(ii) Represents an issuer in an SEC administrative proceeding
or in connection with any SEC investigation, inquiry,
information request, or subpoena;
(iii) Provides advice with respect to U.S. securities laws or
the Commission's rules or regulations regarding any
document that the attorney has notice will be filed with or
submitted to the SEC; or

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.

Id.
187. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,296. See also Tafara Speech, supra note 10.
188. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,296.
189. Koniac, supra note 95, at 1270.
190. Tafara Speech, supra note 10; Donaldson Testimony, supra note 6 (noting that the

SEC has not yet made a decision on the implementation of the noisy withdrawal provision or
an alternative).

191. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,296.

192. See 15 U.S.C. § 7245; 17 C.F.R. § 205.1 (2003).

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CHALLENGES FOR FOREIGN ATrORNEYS

(iv) Advises an issuer as to whether information or a
statement, opinion or other writing is required to be filed with
or submitted to the SEC. 19 3

An attorney is not considered to be "appearing and practicing" before the SEC
if he or she (i) conducts the items listed above outside the context of providing
legal services to an issuer with whom the attorney has an attorney-client
relationship; or (ii) is a non-appearing foreign attorney.194  "In the
representation of an issuer" is then defined as "providing legal services as an
attorney for an issuer, regardless of whether the attorney is employed or
retained by the issuer."'' 95

Many commentators and practitioners interpreting these provisions have
concluded that the definition is extremely broad and covers both in-house and
outside counsel, as well as foreign and domestic attorneys. 96 The SEC notes
as an example that an attorney employed by an investment advisor who
prepares, or assists in preparing materials for a registered investment company
that the attorney has reason to believe will be submitted to or filed with the
SEC is appearing and practicing before the SEC. 19'

From this, it is clear that under the SEC's final rule, attorneys need not
serve in the legal department of an issuer to be covered, but they must be
providing legal services in the context of an attorney-client relationship. 98 In
other words, it would not include an attorney employed by a public company
working in a non-legal capacity.' 99 It is also important to note that an
attorney-client relationship can exist even in the absence of a formal retainer
or other agreement.2"' As for in-house attorneys, the Rule would encompass
an attorney working for a non-public subsidiary of a public company if the
attorney is assigned work that he or she has notice will be incorporated into
documents submitted to the SEC by the parent company.'°

193. 17 C.F.R. § 205.2(a)(1) (2003). See also Implementation of Standards of Professional
Conduct for Attorneys, 68 Fed. Reg. at 6,297-98.

194. 17 C.F.R. § 205.2(a)(2) (2003). See also Implementation of Standards of Professional
Conduct for Attorneys, 68 Fed. Reg. at 6,297-98.

195. 17 C.F.R. § 205.2(g) (2003).
196. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,298. See also Palmer, supra note 93 (recognizing that one of the Act's most far reaching
provisions is the standards imposed on lawyers practicing before the SEC, which will affect
lawyers worldwide).

197. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,298.

198. Id.
199. Id.
200. Id.
201. Thompson & Knight LLP, Client Alert: Sarbanes-Oxley ACT of 2002 SEC Adopts

Rules of Professional Conduct for Attorneys, Feb. 5, 2003, available at http://www.tklaw.com/
website.nsf/7 19da00bf30d821086256be400670924/6a7e003d8b5a7e6386256cc9005755c9/
$FILE/Sarbanes,%20SEC%20Adopts%2ORules.pdf (last visited Feb. 11, 2004) [hereinafter

2004]



IND. INT'L & COMP. L. REV.

With regard to attorneys of Foreign Private Issuers, the final rule
excludes foreign attorneys not licensed to practice law in the United States.2"2

"Non-appearing" foreign attorneys are described in section 205.2.203 Under
Section 205.2(j), a non-appearing foreign attorney is generally described as an
attorney: (1) who is admitted to practice law in a jurisdiction outside the
United States; and (2) who does not hold himself or herself out as practicing
and does not give legal advice regarding U.S. securities or other laws.204

Therefore, generally, only foreign attorneys who provide advice regarding
U.S. securities law will be subject to the SEC's final rule.2°5

Furthermore, in response to feedback the SEC received regarding the
proposed Rule 205.2(j), the SEC modified the regulation to include some
situations in which the foreign attorney would be considered to be non-
appearing even though the attorney's conduct would not fall under the
definition above.2°" Those situations include ones in which the attorney
conducts activities that would constitute appearing and practicing before the
SEC only (i) incidentally to the practice of law in a foreign jurisdiction, or (ii)
in consultation with U.S. counsel.2 °7 In other words, any foreign attorney that
provides legal advice other than incidentally regarding U.S. securities or other
law without working in conjunction with U.S. counsel will be accountable to
the SEC under the standards of professional conduct.2 °8 For example, an
attorney licensed in Canada who independently advises an issuer regarding the
application of SEC regulations regarding periodic filings without consulting
U.S. counsel will be subject to the Rule.2" While this final definition does
exclude some foreign attorneys, many others will fall squarely within its
scope.210

It is important to note that the proposed SEC Rule 205 made no
distinction between the obligations of U.S. and foreign attorneys. 2" That
release, however, requested comments from attorneys licensed in foreign

Thompson & Night].
202. Tafara Speech, supra note 10; Implementation of Standards of Professional Conduct

for Attorneys, 68 Fed. Reg. at 6,298.
203. See 17 C.F.R. § 205.20).
204. Id.
205. Tafara Speech, supra note 10; Implementation of Standards of Professional Conduct

for Attorneys, 68 Fed. Reg. at 6,298.
206. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,303 (noting that the definition of "non-appearing foreign attorney" was expanded due to
world-wide reaction to its initial rule proposal).

207. 17 C.F.R. § 205.20)(3) (2003).
208. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,303. See also Thompson & Night, supra note 201, at 2.
209. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,303.
210. Id.
211. Id. See also Implementation of Standards of Professional Conduct for Attorneys, 67

Fed. Reg.71,670 (proposed Dec. 2, 2002) (final Rule is codified at 17 C.F.R. pt. 205).

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CHALLENGES FOR FOREIGN ATTORNEYS

jurisdictions or otherwise subject to foreign law, rules and ethical standards
regarding the scope of the Rule.212 The SEC made this request realizing that
the proposed rule could pose difficult issues for foreign attorneys and
international law firms subject to conflicting standards and regulations. 213 The
SEC also recognized that many non-U.S. attorneys play a significant role in
ensuring the compliance of both foreign and domestic issuers regarding SEC
regulations.1 4

In December of 2002, the SEC conducted a roundtable on the
international impact of the proposed Rule 205.215 The roundtable participants
included, among others, international regulators, professional associations,
and foreign law firms.21 Not surprisingly, participants objected to many
aspects of the proposed Rule.217 With regard to the definition of "appearing
and practicing before the Commission," some expressed concern that a foreign
attorney who prepares a contract that is filed as an exhibit to an SEC filing
might be covered under the act.218 Also, some felt troubling that a foreign
attorney with little or no training on U.S. securities law may not be competent
to recognize whether a "material violation" had in fact occurred, thus
triggering his obligation to report the violation "up the corporate ladder.' 219

The SEC also received more than forty comment letters expressing
concern regarding the international aspects of the proposed Rule.22° Many
requested that non-U.S. attorneys be exempted from the Rule altogether.22'
They argued that the SEC would be violating principles of international
comity by exercising jurisdiction over the legal profession outside the shores
of the United States.222 Others alternatively recommended that the SEC take
additional time to consider these conflicts and provide, in the interim,
temporary exemption from the Rule.223

The SEC took these concerns under advisement in drafting the final
definition of "non-appearing foreign attorney" and the scope of "appearing
and practicing" before the commission.224 The SEC ultimately rejected any

212. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,303-04. See Implementation of Standards of Professional Conduct for Attorneys, 67 Fed.
Reg. at 71,670.

213. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,304.

214. Id.
215. Id.
216. Id.
217. See id.
218. Id.
219. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,304.
220. Id.
221. Id.
222. Id.
223. Id.
224. See id.

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IND. INT'L & COMP. L. REV.

notion of exempting foreign attorneys noting that foreign attorneys who are
concerned that they may not have the expertise to identify material violations
of U.S. law should decline to advise their clients on such issues. 225 The SEC
added that they should also seek the assistance of U.S. counsel when
undertaking an activity that could potentially fall under the guise of
"appearing and practicing before the Commission.,22' 6 Also, the SEC clarified
that mere preparation of a document that may be included as an exhibit to a
filing with the SEC does not constitute "appearing and practicing" before the
commission, "unless the attorney has notice that the document will be filed
with or submitted to the [SEC] and he or she provides advice on [U.S.]
securities law in preparing the document. '227 Finally, as discussed below, the
SEC noted that section 205.6 protects a lawyer practicing outside the United
States under circumstances where foreign law prohibits compliance with the
SEC's final rule.228

B. Issuer as Client

The core of Rule 205 is found in Section 205.3(a), which explicitly
states that an attorney representing an issuer, including foreign private issuers,
owes his or her professional and ethical duties to the issuer as an organization
and not to the individual officers or employees with whom the attorney
regularly interacts in the course of that representation.229

225. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,304.

226. Id. In response to any notion that foreign attorneys should be exempted from the
Rule, the SEC noted that:

[t]he Commission considers it appropriate... to prescribe standards of conduct
for an attorney who, although licensed to practice law in a foreign jurisdiction,
appears and practices on behalf of his clients before the Commission in a manner
that goes beyond the activities permitted to a non-appearing foreign attorney.

Id.
227. Id.
228. Id. See also discussion infra text accompanying notes 329-34.
229. Charles Axelrod, SEC's Proposed Attorney Responsibility Rules Present new

Challenges for In-House and Outside Counsel, CORPORATE COUNSEL WEEKLY, Jan. 1, 2003.
See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at 6,305;
17 C.F.R. § 205.3(a) (2003), which provides:

Representing an issuer. An attorney appearing and practicing before the
Commission in the representation of an issuer owes his or her professional and
ethical duties to the issuer as an organization. That the attorney may work with
and advise the issuer's officers, directors, or employees in the course of
representing the issuer does not make such individuals the attorney's clients.

17 C.F.R. § 205.3(a). See also Palmer, supra note 93. "The Act's message to lawyers is that the
issuer is 'the client'-not the CEO or CFO." Id.

[Vol. 14:3



CHALLENGES FOR FOREIGN ATTORNEYS

The proposed rule originally provided that an attorney "shall act in the
best interest of the issuer and its shareholders., 230 However, the statement
sparked significant controversy with both the foreign and domestic legal
communities.231 The concern was that: (i) the language was inapposite to
traditional ethical standards for attorneys in that it required an attorney to act
in the "best interest" of the issuer; and (ii) it implied that attorneys have a duty
to shareholders, creating the basis for a potential private right of action.232

After receiving extensive feedback from foreign and domestic sources, the
Rule was modified to its current version.233

With regard to the first concern, the SEC adopted the language
recognizing that it is the issuer/corporation acting through its management
who decides on the objectives the lawyer must pursue, so long as they are not
illegal.234 The SEC, however, took issue with the idea being proffered by
commenters that an attorney is never charged with acting in the "best
interests" of the corporation. 235 The SEC pointed to ABA Model Rule 1.13,
which provides that an attorney is obligated to act in the best interest of the
corporation in circumstances when the attorney knows the organization is
likely to be "substantially injured" by the actions of an individual associated
with the organization that is in violation of the law. 236 The Official Comment
to rule 1.13 states that in such instances, it is indeed in the best interests of the
corporation to report the violation to higher authority within the
organization. 237 However, the SEC ultimately determined that because the

230. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,305; Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg. at
71,670.

231. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,305. See generally, Koniac, supra note 95, at 1269-1273 (stating that proposed Rule 205
caught the BAR completely off-guard and that the BAR objected to many of the Rule's
provisions).

232. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,305 (citing Comments of Cleary, Gottlieb, Steen & Hamilton, at 3-4; Comments of
Corporations Committee, Business Law Section, The State Bar of California, at 7; Comments
of the American Corporate Counsel Association, at 11; Comments of Task Force on Corporate
Responsibility of the County of New York Lawyers' Association, at 2-3).

233. Id.
234. Id. at 6,305-06.
235. Id. at 6,306.
236. Id. (citing MODEL RULES OF PROF'L CONDUCT R. 1.13 (2002)); MODEL RULES OF

PROF'L CONDUCT R. 1.13(b) (2002). See MODEL RULES OF PROF'L CONDUCT R. 1.13 cmt. [3]
& [7] (2002). Official Comment seven states that:

There are times when the organization's interest may be or become adverse to
those of one or more of its constituents. In such circumstances the lawyer should
advise any constituent, whose interest the lawyer finds adverse to that of the
organization of the conflict or potential conflict of interest, that the lawyer cannot
represent such constituent, and that such person may wish to obtain independent
representation.

MODEL RULES OF PROF'L CONDUCT R. 1.13 cmt. [7].
237. MODEL RULES OF PROF'L CONDUCT R. 1.13 cmt. [3].

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IND. INT'L & COMP. L. REV.

corporate attorney is not obligated to act in the best interest of the issuer with
respect to corporate decisions traditionally reserved for management, the
statement would be removed." 8

As to the concern that the proposed language creates a potential basis for
a private right of action, the SEC made it clear that Rule 205 does not create
a fiduciary duty to the shareholders of the organization.239 The SEC was
cognizant of the fact that courts have generally held that that an attorney does
not owe a legal obligation to the constituents of an issuer, including its
shareholders. 2" Accordingly, the SEC deleted from the final rule any
reference to the attorney acting in the best interest of the shareholder.24' The
final rule makes it clear that the lawyer "owes his or her professional and
ethical duties to the issuer as an organization. 242

C. Material Violation and Up-the-Ladder Reporting

Section 205.3(b) clarifies the attorney's duty to protect the corporation
by requiring the attorney to report: (i) "evidence of a material violation" of
U.S. federal or state securities law; (ii) a material breach of fiduciary duty
arising under U.S. federal or state law; or (iii) a similar material violation of
any U.S. federal or state law.243 Under the Rule, an attorney that becomes
aware of evidence of a material violation of any of these categories committed
by any officer, director, employee, or agent of the issuer, must report the
evidence to the issuer's Chief Legal Officer (CLO) or Chief Executive Officer
(CEO) (or the equivalents thereof).24

First, it is important to clarify "material violation." The final rule makes
it clear that the violation must arise under U.S. federal or state law.245 The
rule does not apply to violations of foreign laws.2' Also, the rule does not

238. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,306.

239. Id.
240. Id. (citations omitted). See, e.g., Carlson v. Fredrickson & Byron P.A., 475 N.W.2d

882 (Minn. Ct. App. 1991) (court held that representation of a business does not amount to
representation of the business owner); Cole v. Ruidoso Mun. Sch., 43 F.3d 1373 (10th Cir.
1994); Bobbitt v. Victorian House, Inc. 545 F.Supp. 1124 (N.D. 1111982); Field v. Freedman,
527 F.Supp. 935 (Kan. 1981).

241. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,306.

242. 17 C.F.R. § 205.3(a). See also Palmer, supra note 93.
243. 17 C.F.R. § 205.3(b) (2003); 17 C.F.R. § 205.2(i) (2003). "Material violation means

a material violation of an applicable United States federal or state securities law, a material
breach of fiduciary duty arising under United States federal or state law, or a similar material
violation of any United States federal or state law." 17 C.F.R. § 205.2(i).

244. 17 C.F.R. § 205.3(b).
245. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,303. See also 17 C.F.R. § 205.2(i).
246. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,303. See also 17 C.F.R. § 205.2(i).

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CHALLENGES FOR FOREIGN ATTORNEYS

define the word "material." The SEC indicates that the omission was
intentional, stating that "[t]he final rule does not define the word 'material,'
because that term has a well-established meaning under the federal securities
laws and the Commission intends for that same meaning to apply here. 247

Case law to which the SEC was referring defined material violation as
"conduct or information about which a reasonable investor would want to be
informed before making an investment decision. 248

The SEC did, however, feel that it was important to define "breach of
fiduciary duty. 249 Under the final rule, a breach of fiduciary duty refers to
any "breach of fiduciary or similar duty to the issuer recognized under an
applicable Federal or State statute or at common law, including but not limited
to misfeasance, nonfeasance, abdication of duty, abuse of trust, and approval
of unlawful transactions. 2  This definition was only slightly modified from
the proposed rules.25'

The next challenge in enforcement comes with the sufficiency of
"evidence." Section 307 and Rule 205 require that the attorney report
"evidence" of a material violation.252 The final rule establishes that evidence
includes only, "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." '253 With this definition, the SEC
made it clear that whether evidence of a material violation exists will be
measured by an objective standard.254 Because this essentially triggers the
reporting requirement, the proposed definition brought with it extensive
debate.255 Many commenters felt the proposed standard was too high, while

247. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,303 (citing Basic v. Levinson, 485 U.S. 224, 231-36 (1988); TSC Indus. v. Northway, Inc.,
426 U.S. 438 (1976)).

248. See Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg.
at 71,679.

249. 17 C.F.R. § 205.2(d) (2003).
250. Id.
251. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,301.
Several commenters suggested that the definition in the proposing release should
be amended to include breaches of fiduciary duty arising under federal or state
statues. The phrase "under an applicable federal or state statute" has been added
to clarify that breaches of fiduciary duties imposed by federal and state statutes
are covered by the rule.

Id.
252. See 15 U.S.C. § 7245(1) (2003); 17 C.F.R. § 205.3(b).
253. 17 C.F.R. 205.2(e).
254. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,301.
255. See id.

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IND. INT'L & COMP. L. REv.

others thought it was too low.256 The SEC settled for the objective standard
currently imposed.257

Evidence of a material violation must first be credible.258 It is only upon
such evidence that an attorney must make the decision to determine whether
there has been a material violation of U.S. law.259 Determining the sufficiency
of the evidence in supporting a finding that a material violation has occurred
or is about to occur, will be a fact sensitive analysis, including the attorney's
professional skills, background and experience, the time constraints under
which the attorney is acting, the attorney's previous experience and familiarity
with the client, and the availability of other attorneys with whom the attorney
can consult." ° The rule makes it clear that the initial duty to report is not
triggered solely when the attorney "knows" that a material violation has
occurred or when the evidence is "clear and convincing."2 '' To be
"reasonably likely," the SEC states that a material violation must be more than
a mere possibility, but it need not be more likely than not.262 Thus, a report up
the corporate ladder is required when it is reasonably likely that a violation,
has occurred, is ongoing, or when it is reasonably likely that a violation is
about to occur.263

Once an attorney reports evidence of a material violation to the CLO,
the CLO becomes subject to the final rule.2 64 The CLO must make a
reasonable inquiry into the evidence to determine if a violation has occurred
or is about to occur.2 65 If the CLO reasonably believes that there is no
material violation, he or she must advise the reporting attorney of this
conclusion.2 66 If the CLO does believe that a material violation has occurred
or is about to occur, he or she must take all reasonable steps to cause the issuer
to adopt an "appropriate response," including remedial measures or sanctions

256. See id.
257. See id.
258. See 17 C.F.R. § 205.2(e) (2003).
259. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,302.
260. See id.
261. Id.
262. Id.
263. Id.
264. See 17 C.F.R. § 205.3(b) (2003).
265. See id.
266. See id.

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CHALLENGES FOR FOREIGN ATTORNEYS

to stop or prevent the violation.267 The CLO must then advise the reporting
attorney of the issuer's response.268

If the CLO does not provide an appropriate response to the reported
evidence of a material violation within a reasonable period of time, the
reporting attorney is then required to report "up the ladder," to the issuer's
audit committee, another committee of independent directors, or to the full
board of directors. 69 Similarly, as a bypass provision, if the attorney believes
that it would be futile to report evidence of a material violation to the CLO or
CEO, the attorney may report the information directly to the audit committee,
another committee of independent directors, or the full board of directors.27°

An attorney who has received what he believes to be a reasonable and timely
response to the reported evidence has satisfied his reporting requirement under
the Rule.27' If the reporting attorney does not believe that he has received an
appropriate response to the report, he must explain his reasons to the CLO,
CEO, or to the committee to whom he reported the evidence.272

By this point, the attorney has essentially navigated a legal minefield,
analyzing issues of "material violation," "breach of fiduciary duty," "evidence
of material violation," "appropriate response," "up-the-ladder reporting," and
others. Already the tangled web of legal definitions and processes has created
a labyrinth that will be challenging for foreign attorneys covered by the Act.273

The question now becomes, provided the attorney does report the evidence up-

267. 17 C.F.R. § 205.3(b)(2) (2003); Implementation of Standards of Professional Conduct
for Attorneys, 68 Fed. Reg. at 6,307. Under the Rule an "appropriate response" means:

a response to an attorney regarding reported evidence of a material violation as
a result of which the attorney reasonably believes: (1) That no material violation
... has occurred, is ongoing, or is about to occur; (2) That the issuer has, as
necessary, adopted appropriate remedial measures, including appropriate steps
or sanctions to stop any material violations that are ongoing, to prevent any
material violation that has yet to occur, and to remedy or otherwise appropriately
address any material violation that has already occurred and to minimize the
likelihood of its recurrence; or (3) The issuer, with the consent of the issuer's
board of directors ... has retained or directed an attorney to review the reported
evidence of a material violation and either: (i) Has substantially implemented
any remedial recommendations made by such attorney after a reasonable
investigation and evaluation of the reported evidence; or (ii) Has been advised
that such attorney may, consistent with his or her professional obligations, assert
a colorable defense on behalf of the issuer.., in any investigation ... relating
to the reported evidence of a material violation.

17 C.F.R. § 205.2(b).
268. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,307.
269. 17 C.F.R. § 205.3(b)(3) (2003); Implementation of Standards of Professional Conduct

for Attorneys, 67 Fed. Reg. at 6,307.
270. 17 C.F.R. § 205.3(b)(4) (2003).
271. 17 C.F.R. § 205.3(b)(8) (2003).
272. 17 C.F.R. § 205.3(b)(9) (2003).
273. Palmer, supra note 93.

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IND. INT'L & COMP. L. REv.

the-ladder, what happens if, after all of this, the attorney still has not received
an appropriate response to the reported evidence?

D. Noisy Withdrawal and Proposed Alternative

Under the 2002 proposed rule, the SEC detailed arguably the most
controversial aspect of Rule 205; the requirement of the "noisy withdrawal."274

The idea was to set a standard for notification of the SEC when appropriate
action has not being taken by the corporation.275 The provision, however,
generated so much negative feedback that the SEC decided to delay its
implementation while it further examines the issue.276 Foreign attorneys
argued that the "noisy withdrawal" requirement would conflict with laws and
principles of confidentiality and attorney-client privilege recognized in many
foreign jurisdictions.277

Under the proposed rule, an attorney who has not received an "appro-
priate response" from an issuer would be obligated or, in some cases,
permitted to initiate a "noisy withdrawal., 278 The requirement, however,
differs depending on whether the attorney is an outside counsel or one
employed by the issuer.2 79 With respect to outside counsel, the proposed rule
imposes an obligation on attorneys who have not received an appropriate
response to evidence of a material violation to withdraw from representation
of the issuer in all matters.280 This obligation, however, would only be
triggered in situations where the attorney believes that a material violation is
ongoing or is about to occur, and the violation is likely to result in substantial
injury to the financial interest or property of the issuer or its investors.28'
Then, within one business day of withdrawing, the attorney would be required
to notify the SEC, in writing, that the he or she had done so for "professional
considerations. 282 The use of the phrase "professional considerations" would
protect client confidences, while at the same time serving as a red flag to the

274. See Waldmeir, SEC Retreats, supra note 140 (noting that with regard to the "noisy
withdrawal" provision, "the legal profession unanimously condemned that measure, saying it
would have turned lawyers into police and undermined their ability to counsel clients").

275. Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg. at
71,689.

276. See Tafara Speech, supra note 10; Implementation of Standards of Professional
Conduct for Attorneys, 68 Fed. Reg. at 6,308.

277. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,304. See also Waldmeir, SEC Retreats, supra note 140.

278. See Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg.
at 71,688-89 (discussion of proposed rule 205.3(d) (2003)).

279. See id. at 71,688.
280. Id. at 71,689. The additional requirement that the attorney must believe that the

violation is likely to result in substantial injury to the financial interest or property of the issuer
or its investors makes the threshold for action higher than for reporting "up the ladder." See id.

281. Id.
282. Id.

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CHALLENGES FOR FOREIGN ATTORNEYS

SEC that a material violation of U.S. securities law was ongoing or was about
to occur. 283 Finally, the attorney would be required to disaffirm any document
or other information filed with the SEC that was materially false or
misleading.28 4 In situations where the violation had already occurred and
would not be considered ongoing, the proposed requirement would become
permissive.2 5 In other words, the attorney would be permitted to withdraw,
notify the commission, and disaffirm filings but would not be required to. 286

With regard to in-house attorneys, the proposed rule does not require the
attorney to resign.8 7 Instead, within one day of concluding that the issuer's
response to the reported evidence is inappropriate or unreasonable, the
attorney would be required to notify the SEC, in writing, that he or she intends
to disaffirm documents filed that he or she believes is false or misleading. 288

The SEC reasoned that requiring an in-house attorney to resign when the
attorney receives an inappropriate response to his or her reported evidence
would be unreasonably harsh.289 Similar to outside counsel, in circumstances
where the material violation has already occurred and has no on-going effect,
the in-house counsel would be permitted to take these steps but would not be
required to. 290

The SEC is also seeking comments from the public regarding an
alternative to the "noisy withdrawal" provision.29' Under this alternative
approach, an attorney retained by the issuer would still be required to
withdraw but instead of reporting this fact to the SEC, the attorney would be
required to notify the issuer, in writing, that his withdrawal was based on
professional considerations.292 If the attorney is employed by the issuer, he or
she would be required to cease participating in any matter concerning the
violation and would be required to notify the issuer that it has not provided an
appropriate response to the attorney's report of evidence of a material

283. Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg. at
71,689.

284. Id.
285. Id. at 71,690. The threshold for action includes the same requirement that the attorney

believe the past violation is likely to have resulted in substantial financial injury to the issuer.
See id.

286. Id.
287. See id. at 71,689.
288. Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg. at

71,689. The SEC notes that if the attorney did not prepare or assist in the preparation of any
false or misleading filings, the in-house attorney is not required to notify the SEC. See id.

289. Implementation of Standards of Professional Conduct for Attorneys, 67 Fed. Reg. at
71,690.

290. Id. at 71,690.
291. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

6,324, 6,328 (proposed February 6, 2003); Donaldson Testimony, supra note 6.
292. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,328.

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IND. INT'L & COMP. L. REv.

violation.293 Unlike the original "noisy withdrawal" proposal, in either
instance, the attorney would not be required to disaffirm any false or
misleading documents filed with the SEC.294 It would then become the
issuer's responsibility to publicly disclose the attorney's notice of withdrawal
or the in-house attorney's notice that he or she did not receive an appropriate
response to a report of evidence of a material violation to the SEC.295 The
issuer would be required to report the information on form 8-K, 20-F, or 40-F
within two business days of receiving the notice.296 If the issuer does not
comply with this disclosure requirement, the alternative proposal permits the
attorney to notify the SEC of his or her withdrawal.297 The SEC believes that
this alternative approach, by placing the responsibility on the issuer instead of
the attorney, addresses many of the concerns regarding conflicts of laws and
attorney-client privilege expressed by the foreign and domestic legal
communities.298

E. Qualified Legal Compliance Committee

As an alternative procedure for reporting evidence of a material
violation, an issuer may elect to establish a Qualified Legal Compliance
Committee (QLCC) 299 The composition of the QLCC must include at least
one member of the issuer's audit committee or, if the issuer does not have an
audit committee, one member from an equivalent committee of independent
directors and two or more members of the issuer's board of directors. 00 The
QLCC must be established by the issuer's board of directors and must adopt
written procedures for the confidential receipt, retention, and consideration of
any report of evidence of a material violation." 1 To meet SEC requirements,
the QLCC must be empowered with the authority to assess and investigate any
report of material violation by the issuer, its officers, directors, employees, or
agents and have the authority to recommend and oversee an appropriate
response to the evidence.30 2 The QLCC must also have the power to notify the

293. Id.
294. Id.
295. Id.
296. Id.
297. Id.
298. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,329.
299. Id. at 6,304. See 17 C.F.R. § 205.2(k)(1) (2003).
300. 17 C.F.R. § 205.2(k)(1). The provision provides that the members of the QLCC from

the issuer's board of directors must not be employed by the company directly or indirectly, and
in the case of a registered investment company, must not be "interested persons" as defined in
section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. § 80a-2(a)(19)(2003). Id.

301. 17 C.F.R. § 205.2(k)(2) & (3) (2003).
302. 17 C.F.R. § 205.2(k)(3). Section 205.3 provides:

a chief legal officer (or the equivalent thereof) may refer a report of evidence of
a material violation to a qualified legal compliance committee under paragraph

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CHALLENGES FOR FOREIGN ATrORNEYS

SEC in the event that the issuer fails in any material respect to implement an
appropriate remedial measure that has been recommended by the QLCC. °3

If the issuer elects to utilize a QLCC and provided the Committee is
formed prior to the report of evidence of a material violation, an attorney who
becomes aware of such evidence may report it directly to the QLCC.3 °4 In that
instance, the attorney's obligations under the final rule would be fulfilled.3"5

Additionally, under Section 205.3, a CLO may refer a report of evidence of
a material violation to the QLCC instead of conducting his or her own
inquiry.30 6 Once the CLO has reported the evidence to the QLCC, the QLCC
will be responsible for responding to the report, including making a deter-
mination as to whether an investigation is necessary, conducting the investiga-
tion, and adopting appropriate remedial measures.30 7 The CLO's only
remaining obligation is to inform the reporting attorney that the issue has been
referred to the corporation's QLCC for investigation.30 8

F. Supervisory Attorneys

A provision of the final rules that will be particularly important for
attorneys of foreign issuers is that of supervisory responsibility. Under the
final rules, a supervising attorney is an attorney who supervises or directs
another attorney who is appearing and practicing before the SEC in the repre-
sentation of an issuer.309  This includes an issuer's CLO or the equivalent
thereof.310 The provision is based in part on Rule 5.1 of the ABA's Model
Rules of Professional Conduct.311 Essentially, the language adopted by the
final rule provides that a supervisory attorney to whom a subordinate attorney
reports evidence of a material violation is responsible for complying with the

(c)(2) of this section if the issuer has duly established a qualified legal
compliance committee prior to the report of evidence of a material violation."

17 C.F.R. § 205.3(b)(2).
303. See 17 C.F.R. § 205.2(k)(4) (2003).
304. 17 C.F.R. § 205.3(c)(1) (2003).
305. Id. See also Implementation of Standards of Professional Conduct for Attorneys, 68

Fed. Reg. at 6,309 (noting that upon reporting to the QLCC of evidence of a material violation,
the attorney is freed from any obligation to assess the issuers response to the report).

306. See 17 C.F.R. § 205.3(c)(2) (2003).
307. See id.
308. See id.
309. 17 C.F.R. § 205.4(a) (2003).
310. Id.
311. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,313. See also MODEL RULES OF PROF'L CONDucT R. 5.1 (2002) (which provides (1) that a
lawyer having direct supervisory authority over another lawyer must make reasonable efforts
to ensure that the other lawyer conforms to the Rules of Professional Conduct; and (2) that a
supervisory attorney may be held liable for a subordinate attorney's violation of the rules of
professional conduct if he or she knowingly ratifies the behavior or fails to prevent the behavior
when he or she is able to do so).

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IND. INT'L & COMP. L. REV.

reporting requirements of Section 205.3.312 This language modified the
proposed rule by clarifying that "only a senior attorney who actually directs
or supervises the actions of a subordinate attorney appearing and practicing
before the Commission is a supervisory attorney under the rule., 313 An
attorney who supervises or directs a subordinate attorney on matters unrelated
to the subordinate's appearing and practicing before the SEC would not be a
supervisory attorney under the final rule.314 Conversely, if a senior attorney
does not normally exercise direct supervisory authority over a subordinate
attorney but does provide supervisory direction in matters related to the
subordinate's appearing and practicing before the SEC, he or she would be a
"supervisory attorney" under the final rule.315

This provision has potentially wide implications for supervisory
attorneys of foreign issuers. Any senior attorney of a foreign issuer who has
direct supervisory responsibility over an attorney who meets the definition of
appearing and practicing before the SEC will be subject to the final rule.316

In other words, even though the supervising attorney may not appear and
practice before the SEC, he or she will to an extent be responsible for
compliance with the Rule.317

G. Whistleblower Protection

It is important to note that the Act provides protection for in-house
attorneys who comply with the final rule through Section 806's "whistle-
blower" provision.1 ' Specifically, this "whistleblower" provision provides
protection to attorneys, or any other employee, against retaliation because the
employee provided information or assistance to a federal law enforcement
agency or to a person of supervisory authority regarding alleged violations of
U.S. securities law.319 If an employee experiences retaliation and is able to
bring a successful claim, the Act entitles the employee to all relief necessary
to make the employee whole.32 This includes reinstatement with the same

312. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,313.

313. Id. In response to the proposed rule, the ABA argued that defining a supervisory
attorney to include attorneys who "have supervisory authority over another attorney" would
unnecessarily cover "all partners in a law firm and even senior associates," many of which may
not actually exercise direct authority over the attorney in question. Id. (quoting Comments of
the American Bar Association, at 22-23).

314. Id.
315. Id.
316. See generally 17 C.F.R. § 205.4 (2003); Implementation of Standards of Professional

Conduct for Attorneys, 68 Fed. Reg. at 6,313.
317. See generally 17 C.F.R. § 205.4; Implementation of Standards of Professional

Conduct for Attorneys, 68 Fed. Reg. at 6,313.
318. See 15 U.S.C. § 1514A (2003); 29 C.F.R. § 1980.100 (et. seq.) (2003).
319. See 15 U.S.C. § 1514A(a) (2003); 29 C.F.R. § 1980.102(a) (2003).
320. 15 U.S.C. § 1514A(c) (2003); 29 C.F.R. § 1980.109(b) (2003).

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CHALLENGES FOR FOREIGN ATTORNEYS

seniority status that the employee would have had but for the discrimination,
back pay with interest, and compensation for any special damages sustained,
including litigation costs and attorney's fees.32' As can be seen, an in-house
attorney who elects to report evidence of a material violation will be provided
protection and also means of restoration under the Act.

H. Discipline and Sanctions

There are four subparts to the Discipline and Sanctions provision of
Rule 205, three of which are be applicable to foreign attorneys.322 The
underlying strategy of the SEC was to proceed against individuals violating
Rule 205 as it would any other violator of U.S. federal securities law and,
when appropriate, initiate proceedings under the Rule seeking appropriate
disciplinary sanctions.323

The first subpart provides that a violation of Rule 205 will subject such
attorney to the civil penalties and remedies for a violation of U.S. federal
securities laws in an action brought by the SEC.324 This provision clarifies
that only the SEC may bring an action for violation of Rule 205.325 The
second subpart provides that an attorney appearing and practicing before the
SEC who violates any provision of Rule 205 will be subject to the disciplinary
authority of the SEC, regardless of whether the attorney may also be subject
to discipline for the same conduct in a jurisdiction where the attorney is
admitted or practices.326 This could result in many attorneys who violate the
provisions of this rule being subject to discipline by both the SEC and the
attorney's home country disciplinary authority.3 27 Also, an administrative
proceeding initiated by the SEC for a violation of Rule 205 can result in an
attorney being censured or being temporarily or permanently denied the
privilege of appearing and practicing before the SEC.328

Next, subpart (d) speaks directly to the liability of non-U.S. attorneys
who do not meet the definition of a non-appearing foreign attorney.3 29 As
noted above, the adopted definition of non-appearing foreign attorney in
subpart 205.20) was the response to the large number of comments and

321. 15 U.S.C. § 1514A(c) (2003); 29 C.F.R. § 1980.109(b) (2003).
322. See generally 17 C.F.R. § 205.6 (2003).
323. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,314.
324. 17 C.F.R. § 205.6(a) (2003). See also Implementation of Standards of Professional

Conduct for Attorneys, 68 Fed. Reg. at 6,314.
325. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,314.
326. 17 C.F.R. § 205.6(b) (2003).
327. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,314.
328. Id.
329. See 17 C.F.R. § 205.6(d) (2003).

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IND. INT'L & COMP. L. REv.

feedback the SEC received from the legal community noting that attorneys
practicing in many foreign countries will be subject to other home-jurisdiction
regulations that will render compliance with the Rule impossible. 33

" This
point was also emphasized at the December 2002 Roundtable discussions. 33

,

As a result, the SEC implemented subpart (d) which provides that "[a]n
attorney practicing outside the United States shall not be required to comply
with the requirements of this part to the extent that such compliance is
prohibited by applicable foreign law." 332 Therefore, the foreign attorney does
not have to suffer the dilemma of which regulation to comply with.333 Instead,
the foreign attorney must comply with the final rule to the maximum extent
allowed by the laws to which the attorney is subject.334

There is also a subpart (c) that provides protection for attorneys who
comply with the rule in good faith under inconsistent standards imposed by
any state or jurisdiction where the attorney is admitted to practice.335 In such
instances, the attorney will not be subject to discipline.336 This provision,
however, relates solely to attorneys who practice in the United States.3 37

Finally, the final rules provide a "safe harbor" provision with regard to
private causes of action. 338 Specifically, Rule 205 does not create a private
cause of action against an attorney, foreign or domestic, or issuer, based on
their compliance or noncompliance with the Rule.339 Moreover, the provision
affirmatively states that only the SEC can enforce the requirements of Rule
205.340 The SEC notes that this is intended to "preclude, among other things,
private injunctive actions seeking to compel persons to take action under the
final rule and seeking private damages against such persons. 34' This
protection extends to law firms and issuers.34 2

330. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,314.

331. Id.
332. 17 C.F.R. § 205.6(d).
333. See id.
334. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,314-15.
335. 17 C.F.R. § 205.6(c) (2003).
336. Id.
337. See id.
338. See 17 C.F.R. § 205.7(a) (2003).
339. Id.
340. 17 C.F.R. § 205.7(b) (2003).
341. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,315.
342. Id.

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CHALLENGES FOR FOREIGN ATTORNEYS

IV. INTERNATIONAL REACTION, APPLICATION ISSUES,
AND PRACTICAL SUGGESTIONS

A. International Reaction to the SEC's Final Rule

While U.S corporate counsel are loudly struggling with the requirements
and implications of the Sarbanes-Oxley Act, the SEC's final rule has had a
slightly different impact on their foreign counterparts."4 The concerns of the
legal international community can be seen in a recent poll of delegates of the
International Bar Association (IBA) conducted by Martindale-Hubbell.3"
While the issue of greatest importance in the minds of the members of the 113A
was the application of the European Union (EU) Merger Regulations, the
potential implications of the Sarbanes-Oxley Act and the SEC's final
Regulations was an issue as well.345 As a preliminary matter, of those
surveyed, sixty-three percent revealed that their legal department's work
crosses more than one jurisdiction, with a substantial portion (twenty-eight
percent) indicating that ninety percent or more of their work is multi-
jurisdictional.346 Also, forty-six percent of the companies represented in the
survey reported annual revenues in excess of one billion U.S. dollars.347 The
poll did not state what percentage of the attorneys surveyed provide legal
advice regarding U.S. securities law or who might not otherwise meet the
Rule's definition of "non-appearing foreign attorney." '348 That is the group
that will feel the greatest effects and is likely to express the greatest concerns
over the application of the new Rule.349

The poll indicates that the majority of the members of the IBA see
corporate counsel playing an increasingly substantive role in the day-to-day
business operations in the future.35 ° This is supported by the fact that sixty
percent of those surveyed see the broadening of the legal function as
"essential" in business operations.35' The members of the IBA ranked in
order of importance the primary legal/business functions.352 They included in
order: 1) mergers and acquisitions; 2) business-focused legal advice; and 3)

343. See International Reaction to Enron and Sarbanes-Oxley: Results of2003 IBA Poll,
Martindale-Hubbell's Counsel to Counsel, 3 CONNECTIONs 2 (Summer 2003) [hereinafter
Martindale-Hubble Poll].

344. See id. Martindale-Hubbell polled delegates at the annual International Bar
Association Conference held in February of 2003 in Barcelona, Spain. See id. at 1.

345. See id at 1.
346. Id. at 2.
347. Id.
348. See generally Martindale-Hubble Poll, supra note 343.
349. See discussion, supra text accompanying notes 192-228.
350. See Martindale-Hubble Poll, supra note 343, at 1.
351. Id.
352. Id.

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IND. INT'L & COMP. L. REv.

corporate governance. 3" Interestingly, general management priorities for
legal counsel were more focused on contributing to business strategy and
solving business problems than on solving legal problems.354 The single most
important issue facing corporate counsel, however, was risk management. 355

With regard to the repercussions of the Sarbanes-Oxley Act and the
SEC's final regulations, fifty-eight percent indicated that the new regulations
would impact their international legal function in some way.356 The impact on
legal counsel includes, more reporting responsibilities, more time spent
understanding and applying the new regulations, and more paperwork.357 Only
thirty-two percent of the IBA reported that the regulations would not affect the
legal function.5 The survey further notes that of the companies represented
in the survey, fifty-nine percent predicted that their reliance on outside
counsel would remain stable, while those who did expect a change thought
their reliance on outside counsel would increase.359

Finally, the President and CEO of Martindale-Hubbell, John Lawler, in
discussing the impact of the new regulations and the corresponding public
expectations noted that:

[c]ommon perceptions--or misconceptions-are arguably the
most difficult issues confronting counsel in the post-Enron,
post-[Sarbanes-Oxleyl environment. Regulations are a cake-
walk compared to the shifting expectations of corporate
clients, public feelings on pervasive misconduct, and even the
self-image of the company itself, which may have unwittingly
outgrown the style and structure of its governance program. 360

He concluded that "[t]he slow process of refashioning corporate culture rests
largely in the hands of the legal department. 361

B. Application Issues For Foreign Attorneys and Foreign Private Issuers

The SEC's final rule for corporate attorneys was meant to change the
culture of corporate governance that produced Enron, but some suggest that
the real cultural revolution may come not in the way companies are ran but in

353. Id.
354. Id.
355. Id.
356. Martindale-Hubble Poll, supra note 343, at 1.
357. Id.
358. Id. Ten percent of the IBA indicated that they were not sure how the new U.S.

regulations would impact their legal responsibilities. Id.
359. Id. at 2.
360. John Lawler, A letter from the President, Martindale Hubbell's Counsel to Counsel,

3 CONNECTIONS 2, at 2 (Summer, 2003).
361. Id.

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CHALLENGES FOR FOREIGN AT'rORNEYS

the way they relate to their lawyers.362 They reason that turning corporate
lawyers into "watchdogs" will cause corporate executives to avoid them not
confide in them.363 After all, corporate executives often avoid gatekeepers;
they are attracted to problem solvers.3'6 As a result, corporate executives
"may end up breaking more laws out of ignorance than they ever did by
design. 3 6

' The unintended consequence may be that corporations will
become more secretive, not more transparent.3 66

Furthermore, with regard to the behavioral impact of the SEC's final
rule, some foresee potential personal dilemmas, especially with regard to
outside counsel. 367 It starts with the notion that outside attorneys generally
do not retain clients, rather clients retain attorneys.16

' Also, even though the
organization is the client, the attorney is typically hired by and has primary
contact with only a few corporate managers.3 69  Those same individuals
generally define the objectives of the representation and identify the
responsibilities for which the attorney has been retained.37 Ultimately, they
make the critical decisions as to the attorney's retention, compensation, and
performance evaluation.37" ' As a result, even though the attorney's final
allegiance runs to the corporation, the attorney's day-to-day responsibilities
include reporting to and pleasing these individuals.372 In an era in which
major corporations routinely retain a number of outside law firms, no
attorney's position is safe.373

The personal dilemma arises when the attorney becomes aware of a
material violation of U.S. securities law (assuming the attorney meets the

362. Waldmeir, Hidden Dangers, supra note 123.
363. See id.
364. Id.
365. Id. (quoting Burton Staniar, Chief Executive of Knoll, from his speech before a

conference of attorneys at Georgetown University Law School). See also Waldmeir, Lawyers
on Duly, supra note 86.

Where lawyers are forced to spy on everything management does, second-
guessing business decisions and ratting on managers to the board, company
officials may be reluctant to seek legal advice... And if they do not know what
the law is, there is even more chance they will break it.

Id.
366. Waldmeir, Hidden Dangers, supra note 123.
367. See Fisch & Rosen, supra note 122, at 1123. See also Palmer, supra note 93 (stating

that the reporting duties raise "thorny management issues"). For global law firms serving
international issuers, the difficulties are compounded. Id. Firms must determine how to comply
with the new rule while at the same time preserving the confidentiality of communication and
trust fundamental to the attorney-client relationship. Id.

368. Fisch & Rosen, supra note 122, at 1123.
369. Id.
370. Id.
371. Id.
372. Id.
373. Id.

2004]



IND. INT'L & COMP. L. REv.

elements of the final rules subjecting him or her to liability).374 The attorney
is faced with the option of reporting the violation to the corporation's CEO or
Board of Directors or keeping it quiet and risking potential sanctions.375 In
many corporations, the attorney's decision to report the violation is likely to
have serious consequences with his or her relationship with that client.37 6

Particularly, if the Board of Directors has confidence in management, the
attorney's report may place the Board in the undesirable position of taking
sides between its trusted executives and the outside attorney.377 The
consequence is that if the attorney's report does not result in a finding of
tangible evidence of a material violation, his or her future with that client will
likely be jeopardized.378 In addition, the attorney, in such an instance, may
compromise his or her professional reputation.37 9 Other managers and
executives may be unwilling to hire an attorney known in the corporate
community as a "whistleblower. '' 38 0 Legitimately, they will be concerned with
the lack of trust in the attorney and the quality of the representation. 38 ' Given
the abundance of attorneys in the world's legal market, this is a situation
attorneys will want to avoid.38 2

On the other end of the spectrum, one can envision an attorney that is
eager to avoid liability over-reporting evidence of material violations. 383 This
might especially be true for in-house counsel, who will not likely face the
replacement issues of outside counsel.384 Given the somewhat vague stand-
ards contained in the final rule for "material violation," "credible evidence,"
and "appropriate response," an overzealous in-house attorney motivated by
avoiding liability is likely to over-report, wasting time and resources. 38 5 The
idea is that "if the scope of the reporting obligations is unclear or ambiguous
and the attorney faces meaningful risk of liability, it becomes rational for him
or her to report all evidence related to actual, likely or even improbable
wrongdoing up the corporate ladder." '386 In fact, some suggest that over-

374. See Fisch & Rosen, supra note 122, at 1124-25.
375. See id.
376. Id. at 1125.
377. Id. (The situation is similar for in-house attorneys, however, the point is better

illustrated with outside counsel).
378. Id. at 1126.
379. Id.
380. Fisch & Rosen, supra note 122, at 1126.
381. Id. See also At the Top Table, LEGAL WEEK, Sept. 26, 2002, available at LEXIS,

News & Business, News, Major World Publications (last visited March. 4, 2004) (noting that
"[t]here is... a fear that by being branded as potential whistleblowers corporate counsel may
lose the trust of their bosses-and with it the ability to influence the decisions their companies
make").

382. See generally Fisch & Rosen, supra note 122, at 1123.
383. See id. at 1125.
384. See id.
385. See id. at 1126.
386. See id.

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CHALLENGES FOR FOREIGN ATTORNEYS

disclosure is consistent with existing operational practices for corporate
attorneys.387

The fear of potential liability may also reduce the corporate attorney's
incentive to become fully informed about the client's business."' The final
rule does not create a "should have known" standard.3 8 9 As a result, the less
the attorney knows, the more likely he or she is to avoid reporting obligations
and ultimately liability.3 90 Some have suggested that by reducing the lawyer's
incentive to get more involved in the operations of the business, the final rule
will reduce attorneys' overall performance as counselors.39'

The SEC's final rule will also impose costs on corporations that fall
under the Act.392 As discussed above, the rule will ultimately cause the
corporation's CLO to investigate evidence of material violations, evaluate
such evidence, and implement necessary remedial action.393 The Rule will
also cause the CEO, QLCC, and Board of Directors to review evidence of
material violations.3 94 Each of which will cost in terms of time and financial
resources.3 95 For instance, a company that elects to form a QLCC might incur
costs that include increased compensation and insurance for QLCC members
and general administrative CoStS;396 not to mention the cost of the corporate
legal division's and executive management's time and resources spent
learning, circulating, and implementing the new regulations.397

Finally, the foreign community has expressed concerns that the
requirements of the new rules of professional conduct may have implications
where an attorney is subject to conflicting home country ethical
requirements.398 The SEC, however, has made it clear that the provisions of
the final rules will prevail.3 99

387. See id.
388. Fisch & Rosen, supra note 122, at 1127.
389. See id.
390. See id. See also Implementation of Standards of Professional Conduct for Attorneys,

68 Fed. Reg. at 6,302.
391. See Fisch & Rosen, supra note 122, at 1125.
392. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,317.
393. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,307. See discussion supra, text accompanying notes 243-72. See also 17 C.F.R. § 205.3.
394. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,307 & 6,313. See discussion supra text accompanying notes 243-72 & 298-307. See also 17
C.F.R. § 205.3.

395. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at
6,317.

396. See id.
397. See id.
398. See Tafara Speech, supra note 10.
399. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,304. The SEC stated that, "[n]on-United States attorneys who believe that the requirements
of the rule conflict with law or professional standards of their home jurisdiction may avoid being
subject to the rule by consulting with United States counsel whenever they engage in any

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IND. INT'L & COMP. L. REV.

C. Practical Suggestions to Ensure Compliance

There are a number of things that foreign attorneys and the companies
they represent can do to put themselves in the best position to ensure
compliance with the new Rule. 4

'
° First, it may be prudent for foreign private

issuers to establish a QLCC, which can be the company's audit committee.4 °1

A properly-functioning QLCC can benefit everyone involved in the corporate
governance process.4 °2 Under the SEC's final rule, if an attorney reports
evidence of a possible material violation to the QLCC, his or her reporting
obligations have been satisfied.4 °3 Also, the QLCC can relieve the CLO of the
obligation to investigate and respond to reports of potential violations, which
would free the CLO up to conduct his or her other legal functions and would
likely result in a more consistent and efficient method of dealing with
violations. 4" Some suggest that these benefits would outweigh any potential
costs in establishing the Committee.4 5

Instituting a QLCC should not be such a leap for much of the world. For
instance, Supervisory Body Committees, which function similarly to QLCC' s,
are common in many European Union member countries. 6 Generally, E.U.
member countries rely on such committees to help organize the work of the
supervisory board, particularly in areas where the personal interests of
management and the interests of the company may come into conflict, such as
with financial reporting, auditing, and remuneration. 7 In fact, the trend to
use these committees among E.U. countries seems to be growing.48 The only
issue to overcome with regard to the establishment of the QLCC would be in
the makeup of the committee itself. Generally, Supervisory Body Committees
are composed of a mixture of independent directors and non-executive
employees.40 9 Under the SEC's final rule, the composition of a QLCC cannot
contain a member that is employed directly or indirectly by the issuer.410 As

activity that constitutes appearing and practicing before the commission." Id.
400. See Thompson & Night, supra note 201, at 6.
401. Id.
402. Id.
403. Id. See 17 C.F.R. § 205.3(c)(1); discussion supra text accompanying notes 299-308.
404. See Thompson & Night, supra note 201, at 6.
405. See id.
406. See generally European Commission study, supra note 124.
407. See id.
408. See id. at 78 (nominating committees, audit committees, and remuneration committees

are all common occurrences in Belgium, France, the Netherlands, Spain, Sweden, UK and
others).

409. See id. The reason for having non-executive employees to serve on Supervisory Body
Committees is that their presence provides additional assurance to market investors that their
interests are defended. Id.

410. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.
at 6,305.

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CHALLENGES FOR FOREIGN ATTORNEYS

a result, the QLCC would have to function as a subcommittee, excluding the
employees of the issuer.

Next, depending on its size and structure, it may be advisable for foreign
private issuers to establish a clear hierarchy within the company's legal
department. 41' Designating "supervisory attorneys" within the department can
minimize the obligations of subordinate attorneys to report evidence of
material violations up to the Board of Directors or QLCC.412 This will not
only define roles and responsibilities with regard to the final rule but will also
provide a system of checks and balances as to what is being reported and to
whom.4t 3

Moreover, to combat the inclination on the part of executives to avoid
lawyers subject to the final rule, general counsels may want to establish
regular meetings with a committee of independent directors and executives,
dedicated to the discussion of breaches of law and duty.414 The idea is that
rather than trying to meet only in times of crisis, these gatherings would be
routine.41 5 As one expert put it, this "may sound like a structural solution to a
substantive problem but anyone who has worked in a large organization knows
that once the structure exists the substance will follow., 4 6 If the two sides
make it a practice to meet regularly to discuss the law, the company will likely
end up obeying it more often.4 17

Also, foreign attorneys should take necessary steps to learn the new
regulations.41 8 According to the above survey, nearly sixty percent believe
that, in some way, the new SEC regulations will affect their performance as
corporate counsel.419 It stands to reason that foreign corporate counsel should
take time to learn the new standards. This also applies to those individuals in
supervisory roles that do not directly appear and practice before the SEC.420

As the Rule notes, supervising attorneys have an obligation to ensure that

411. See Briefing Paper, Securities and Litigation Teams, Pillsbury Winthrop LLP, SEC
Sets Attorney Professional Conduct Standards under Sarbanes-Oxley Act, at 1 (Feb. 27, 2003),
a t
http://www.pillsburywinthrop.com/files/tbls3 lPublication/PDFUpload2O8/8727/Client%20
Alert%20Securities-Litigation%2002-28-03_1069410.pdf (last visited March 4, 2004)
[hereinafter Pillsbury Briefing Paper].

412. Id. See generally 17 C.F.R. § 205.4 (discussion supra text accompanying notes 309-
17); 17 C.F.R. § 205.5 (2003).

413. See generally Pillsbury Briefing Paper, supra note 411, at 1.
414. Waldmeir, Hidden Dangers, supra note 123.
415. Id.
416. Id.
417. Id.
418. See Palmer, supra note 93; Thompson & Night, supra note 201, at 6.
419. See Martindale-Hubbell Poll, supra note 343, at 1.
420. See generally 17 C.F.R. § 205.4.

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IND. INT'L & COMP. L. REV.

subordinate attorneys abide by the new rules.421' This holds true for
supervising attorneys practicing as in-house or as outside counsel.422

The learning process, however, should not stop there. In-house
attorneys should also take time to educate and train the foreign issuer's
officers and directors so that the company will be adequately equipped to
handle evidence of possible material violations.423 This includes training
those individuals on the new governance standards imposed by the Act,
generally with regard to securities law, and the attorney's obligations imposed
by Section 307.424 Also, it would be wise for the board of directors to
establish and circulate throughout the company, written procedures for
handling the receipt, consideration, and investigation of reports of material
violations.425 Only then will the company put itself in the best position to
head-off potential securities law violations.426

With regard to outside law firms, it would be advisable to ensure that all
attorneys within the firm know and understand the SEC's new regulations
implementing section 307.427 This includes every lawyer, not just those
working within the corporate/securities practice group.428 Once again, the
goal being that with awareness of the proposed rules, the firm will put itself
in the best position to ensure that it meets SEC standards.

Also with regard to the learning process, it is important for attorneys of
foreign issuers to become familiar with U.S. securities laws. According to the
final rule, the only way for an attorney who would not otherwise meet the
definition of a non-appearing foreign attorney to avoid being subject to the
rule would be to decline to advise their client on U.S. securities law or to seek
the assistance of U.S. counsel when undertaking an issue that could constitute
"appearing and practicing before the Commission. ' '429 As mentioned above,
the final rule does not define "material" with regard to "material violation. '430

Instead, the final rule relies on the term's "well-established meaning under
federal securities laws.,,43' Naturally, an attorney who may be subject to
liability under this rule would be well-served to know precisely what that
definition is and how it applies to a given set of facts. In short, any attorney
that could fall under the definition of "appearing and practicing before the

421. See id.
422. See id.
423. See Thompson & Night, supra note 201, at 6.
424. See id.
425. See id.
426. See generally id.
427. See id. See also Palmer, supra note 93.
428. See Palmer, supra note 93.
429. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,304.
430. Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at

6,303.
431. Id.

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CHALLENGES FOR FOREIGN ATTORNEYS

Commission" should put forth the time and effort to know and understand
U.S. securities law.432 This will minimize risk to the attorney and to the
corporation. Furthermore, because so much of the Rule suggests that a foreign
attorney practicing before the SEC can avoid liability by consulting a U.S.
attorney, it would be advisable for foreign issuers to retain U.S. law firms to
serve as a resource for U.S. securities law issues. 433 Given the potential for
liability and the immunity it provides, this might be well worth it.434

Finally, as a risk management measure, outside law firms may want to
engage in stricter client screening.435 Some suggest that when a client
undergoes a change in control, such as in bankruptcy, merger, or takeover, the
risk for SEC involvement and regulatory action will increase.43

' As a result,
a law firm will want to screen the potential for such circumstances, and unless
the firm specifically practices in those areas, it may want to avoid
representation of that client.437

V. CONCLUSION

Section 307 of the Sarbanes-Oxley Act and Rule 205 are designed to
protect investors and increase their confidence in public companies by
ensuring that attorneys who represent issuers report up the corporate ladder
evidence of material violations committed by their officers and employees.438

The idea is that by requiring attorneys to act in this manner, investors will be
comforted knowing that the corporation's executives and independent board
members will evaluate and deal swiftly with such issues.4 39 At the same time,
general awareness of the corporate attorney's obligations under the SEC's
final rule should deter incidents of corporate misconduct by company
employees for fear that wrongdoing will be detected and reported as a matter
of course."4 Ultimately, the SEC' s final rule improves the overall governance
of corporations, by providing attorneys who appear and practice before the
SEC clarity and guidance with regard to their duties and ethical obligations."

Furthermore, the broad scope of the SEC's final rule reaches and will
impact foreign attorneys who do not meet the SEC's definition of "non-

432. See generally Palmer, supra note 93.
433. See 17 C.F.R. § 205.20)(3) (2003).
434. See 17 C.F.R. § 205.6; Implementation of Standards of Professional Conduct for

Attorneys, 68 Fed. Reg. at 6,314-15.
435. See Palmer, supra note 93.
436. Id.
437. See generally id.
438. See Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg.

at 6,297; 17 C.F.R. § 205.1. See also Tafara Speech, supra note 10; Palmer, supra note 93.
439. See Pitt Speech Before the ABA, supra note 78.
440. Id.
441. Id.

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IND. INT'L & COMP. L. REV.

appearing and practicing."" 2 At very least, the impact will come in the form
of heightened reporting responsibilities, more time spent understanding and
applying the complexities of the new regulations, and more paperwork. 443

Also, the Rule poses several potentially significant application issues in terms
of the way corporations interact with their attorneys and with the personal
choices attorneys will have to make in complying with the Rule. 4 However,
by implementing a few practical suggestions, attorneys and the corporations
that employ them can head off many of these application issues and can put
themselves in the best position to ensure compliance with the new Rule." 5

Some have even suggested that as client service professionals, implementing
the Rule in the right light may actually improve attorney performance." 6 As
one expert put it, "[p]roactive firms will use the new conduct rules to enhance
the quality of client service. After all, the new reporting obligations are
intended to deter harm to clients from breaches of duty and to improve the
quality of their public reporting."" 7 Consequently, the net effect should be a
reduction in material violations of U.S. securities law and ultimately an
increase in investor confidence.

442. Palmer, supra note 93. See also17 C.F.R. § 205.2(a)(2) (2003); Implementation of
Standards of Professional Conduct for Attorneys, 68 Fed. Reg. at 6,297-98.

443. See Martindale-Hubble Poll, supra note 343, at 1.
444. See supra text accompanying notes 362-91.
445. See supra text accompanying notes 400-437.
446. See Palmer, supra note 93.
447. Id.

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