SEC Commissioner Calls for New Standards of Professional Conduct for Corporate Lawyers
Commentary by Steven Lofchie
SEC Commissioner Allison Herren Lee called for new standards of professional conduct to address “can-do” corporate lawyering.
In a speech at PLI’s Corporate Governance – A Master Class 2022, Ms. Lee emphasized that Congress instructed the SEC to set “minimum standards of professional conduct for attorneys appearing and practicing before the Commission” under Section 307 of Sarbanes-Oxley. Ms. Lee said it was “time to revisit this unfulfilled mandate” and address the substantial harm “bad legal advice” inflicts on investors.
Ms. Lee singled out securities lawyers who “compete for clients in high stakes matters and are pressured to provide the answers their clients seek.” Ms. Lee observed that the SEC increasingly relies on principle-based rules, leaving materiality determinations to lawyers who “ben[d] to management pressures.” She determined that these circumstances lead to a “can-do approach to lawyering that is ill-suited to lawyers in a gatekeeping role.” In support of this position, Ms. Lee referenced several recent cases where lawyers succumbed to goal-directed reasoning, committed fraud, or subverted fiduciary duties to appease their clients - although she conceded that none of these cases actually pertained to securities law disclosures.
Ms. Lee acknowledged that direct violations of substantive provisions of the federal securities laws are indeed subject to SEC enforcement, but suggested that the agency lacked the tools to address bad legal advice. Accordingly, Ms. Lee found that the SEC’s Rules of Practice, Rule 102(e), which allows it to “suspend or bar attorneys when their behavior falls below generally recognized norms,” seems to be applied only in instances where there are substantive violations of a provision of the securities law. She claimed that the SEC is frequently “hamstrung in [its] ability to charge individuals, particularly with respect to disclosure violations by public companies” because “contrived legal advice” protects those individuals from liability.
Further, Commissioner Lee singled out the cryptocurrency and digital assets as examples of an "entirely, new, multi-trillion dollar industry . . . that largely defies existing laws and regulations." Ms. Lee recommended that the SEC:
- provide greater detail about corporate client obligations, including “specifically how [a lawyer's] advice must reflect the interests of the corporation and its shareholders rather than the executives who hire them;"
- issue standards pertaining to the evaluation of materiality, "designed to ensure a sufficiently independent and rigorous analysis;"
- set minimum standards in regard to competence and expertise;
- require specific continuing education requirements for securities lawyers advising public companies; and
- establish a “system of quality control at the firm level” akin to what public auditors are required to implement.
Commentary
Yesterday's newsletter covered a speech delivered by U.S. Attorney General Merrick Garland in which he suggested that private lawyers should act as "force multipliers" for governmental enforcement actions. In a story that is at least thematically related, SEC Commissioner Lee criticizes "can do" lawyering that is "born from a desire to give management the answer it wants."
In her speech, Commissioner Lee acknowledges that "Most lawyers generally err on the side of caution." The implication of this observation is that failing to err on the side of caution is to commit malpractice, if not outright fraud. That implication is worrisome and clarity here is important. It is not the job of the lawyer to err on the side of caution, nor is it to err on the side of the governmental enforcement staff, or to err at all. It is the job of the lawyer to be as correct as he or she is capable of being, including in those situations where the law is not clear.
If the government concludes that a lawyer has assisted in the conduct of a fraud or other crime, then the government should pursue that lawyer, just as it would a business person. Individual acts in furtherance of gross misconduct may justify individual punishments; they do not justify telling lawyers to err on the side of caution lest the government be offended.
Commissioner Lee notes that digital assets have developed into a multi-trillion dollar industry by "def[ying] existing laws and regulations." A more accurate interpretation of the current reality is that the digital assets industry "defied" existing laws not because of legal advice, but because entrepreneurs determined that existing laws provided them no way forward and they chose to start up their businesses anyway. Some of those have been deemed fraudulent and some have created real value. Commissioner Peirce proposed a means by which the SEC might adapt existing regulations to provide an outlet for entrepreneurial vision. Yet the majority at the SEC has so far failed to engage on her proposal or with this new industry. (See also, Securities Law Treatment of Utility Tokens.) Rather than chastising securities lawyers for standing silent while entrepreneurs created a trillion dollar industry, the SEC might ask itself if it can not find a way to regulate the industry short of killing it.