On March 4, 2022, U.S. Securities and Exchange Commissioner Allison Herren Lee, in remarks before the Practicing Law Institute, called on federal regulators to work to issue rules adopting standards of professional conduct for attorneys practicing before the commission representing issuers. 

Commissioner Lee noted that Section 307 of the Sarbanes-Oxley Act empowers the SEC to “issue rules, in the public interest, and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission[].”  In the twenty years since the Act’s passage, however, the SEC has only adopted one such standard – the “up-the-ladder” rule requiring lawyers to report potential violations to a corporate client’s managers.

Commissioner Lee made clear that further rulemaking would be necessary to fulfill Section 307’s mandate and to refine the role of corporate lawyers as “gatekeepers in the capital markets.”  Citing a slew of financial crises dating back to the Enron era, she stated that “[t]he bottom line is this: when corporate lawyers give bad advice, the consequences befall not just their clients, but the investing public and capital markets more broadly – especially when it comes to disclosure advice.”

Commissioner Lee explained that bad advice often stems from a “can-do” approach to lawyering whereby zealous attorneys skew ethical boundaries in the interest of satisfying clients.  She pointed out that time and again, however, attorneys using that approach have steered their clients to bad results.  Commissioner Lee made clear that the most dramatic ethical breaches do not represent the securities bar at large but noted that the risk of eroding the public’s trust warranted increased professional regulation.

Commissioner Lee explained how, in the absence of increased rulemaking, the risk of overreach by corporate managers in an attorney’s decision-making process remains far too high.  What begins as a problem-solving approach can quickly devolve into an effort to avoid reputational harm regardless of the legal opinion rendered.

Commissioner Lee noted that existing state and federal ethical rules are inadequate and provided some thoughts on where the bar might start in formulating new rules:

• re-orienting a lawyer’s duties to shareholders rather than executives;

• articulating standards for advice on materiality;

• establishing minimum requirements for competence and expertise; and

• oversight for securities lawyers at the firm level.

While further rulemaking by the SEC under Section 307 remains to be seen, securities attorneys ought to read Commissioner Lee’s remarks as a warning that the SEC has not forgotten to look at the role attorneys – both in-house and outside counsel – play when advising issuers.  By enhancing public confidence in the securities bar and mitigating the chances of marketplace impropriety, the benefits of ethical reforms promise to outweigh the burdens of compliance.  For these reasons, securities attorneys should welcome prospective rulemaking with the understanding and expectation that higher standards will lead to better results.