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.