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St. Thomas Law Review

First Page

371

Document Type

Article

Abstract

"Sarbanes-Oxley," this phrase has echoed in the minds of corporate attorneys for almost two years now. Over this period of time, most corporate attorneys have come to recognize the general breadth of this Act. Aside from having a basic understanding, however, do corporate attorneys know the true effects this Act and the corresponding proposal will have on the legal profession and the companies they represent? The scope of this article is concerned with just that. Specifically, this examination concerns the U.S. Securities and Exchange Commission's proposed "noisy withdrawal" provision. Briefly, noisy withdrawal refers to the final measures an attorney would be required to take after reporting concerns up the corporate ladder and receiving an inadequate response. As proposed, noisy withdrawal requires withdrawal from representation, disaffirmance of any related documents, and notification to the Commission of the attorney's withdrawal. Although this proposal has merit, as we approach a point in time when "Enron type" corporate scandals become relatively distant, corporate attorneys should take a moment to consider the farreaching implications. In an effort to garnish support, this proposal has been strategically attached to an Act deemed the long awaited and needed elixir, created to improve corporate governance and to heal the ailing securities markets. Beneath the pretext of this administrative proposal lies the ultimate question that must be resolved before further steps are taken. As a matter of public policy, corporate attorneys must ask themselves whether the perceived need to protect investors by imposing a duty on attorneys to report evidence of corporate fraud outweighs the traditional protections afforded to the sanctity of the attorney-corporate client privilege. As this article suggests, the noisy withdrawal proposal should not be adopted because its negative effects on the long-standing relationship between attorney and corporate client far outweigh the likely benefits to the securities markets. In the wake of corporate irresponsibility evidenced by the Enron fiasco and other corporate catastrophes, Congress prudently passed the Sarbanes-Oxley Act of 2002. The Act is primarily concerned with preventing corporate fraud through increased accounting oversight. As a secondary issue, the Act imposed new guidelines on corporate attorneys to ensure that they are vigilant in their representation of their corporate clients. Congress entrusted the Commission with the implementation of this Act through its rulemaking authority Accordingly, the Commission issued final rule Part 205, requiring corporate attorneys who discover wrongdoing on the part of corporate management to report such malfeasance up the proverbial "ladder" until the attorney is provided with "an appropriate response. With fear that this rule, by itself, would not have the sharp teeth desired to bite down on corporate malfeasance, the Commission, independent of explicit congressional support, proposed the noisy withdrawal provision. Theoretically, this proposal may appear to be the solution to end all corporate malfeasance without any downside costs; however, an objective examination of its practical consequences reveals that it is not. Noisy withdrawal violates the attorney-corporate client privilege and "risk[s] destroying the trust and confidence many [corporations] have up to now placed in their legal counsel, creating divided loyalties." Consequently, the attorney's duty to advocate zealously is likely to be negatively affected. Additionally, the client may be discouraged from seeking counsel's advice, leading to the exclusion of the attorney from client meetings; ultimately resulting in the corporate client's deteriorating compliance with securities laws. As will be demonstrated, noisy withdrawal, if implemented, will infringe on the sanctity of the attorney-corporate client relationship, ultimately leading to increased corporate malfeasance. Accordingly, Part 205, as adopted, appropriately balances the competing goals of protecting investors and the market with the long-standing attorney-client relationship. For these reasons, the noisy withdrawal proposal should not be implemented. This article addresses important issues relating to the Commission's rule Part 205, as promulgated, and its noisy withdrawal proposal. The discussion focuses on the likely effects of noisy withdrawal on the attorney-corporate client relationship and asserts that its negative effects outweigh any perceived benefits. Part II provides background information on the development of the attorney-corporate client privilege and the role of the corporate attorney. It then describes the events leading to the enactment of the Sarbanes-Oxley Act of 2002. Part III examines final rule Part 205, the noisy withdrawal proposal, and its alternatives. Part IV addresses the implications of Part 205 on investors, corporate governance and the attorney-corporate client relationship. Part V examines the Commission's authority to promulgate noisy withdrawal. Additionally, it addresses the arguments in favor of noisy withdrawal and concludes with an analysis of the implications of noisy withdrawal if adopted. Part VI offers a proposed amendment to Part 205, which attempts to balance the competing interests of protecting investors against preserving the sanctity of the attorney-corporate client relationship.

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