Which ethics rules apply to in-house counsel? As licensed attorneys, in-house counsel are bound by all of the ethical and professional rules that govern lawyers in general. An attorney’s status as an employee of a client does not exempt one from the rules, such as those prescribing loyalty to the client, preserving the confidences of the client, and avoiding conflicts of interest.
The past fifteen years have produced dramatic changes in both public opinion and Federal laws related to the role of corporate counsel. In reaction to several dramatic failures of publicly traded corporations and the resulting allegations of corporate wrongdoing, the role of corporate counsel has been placed under intense public scrutiny. The Sarbanes-Oxley Act was signed into law on July 30, 2002, largely in response to a number of major corporate and accounting scandals. While the Act applies only to public companies, many commentators believe that it establishes new or enhanced standards of accountability for all organizations, publicly traded and privately held, profit and non-profit. As a result, the changes in Federal law have impacted the ethical obligations of all lawyers representing corporations and other legal entities, regardless of whether the representation is as outside counsel or in-house counsel.
In January 2003, the SEC adopted final rules to implement Section 307 of the Sarbanes-Oxley Act of 2002, setting new reporting duties for lawyers who practice before the SEC. Counsel must now report evidence of any material violations of securities laws or material breaches of fiduciary duty up a corporate chain, extending from the issuer's chief legal officer through the directors or a new Qualified Legal Compliance Committee.
The rules apply to attorneys transacting business with the SEC, representing companies in proceedings before the SEC, or advising a company on documents to be filed with the Commission. The rules could be read broadly enough to cover an attorney's preparation of documents that are exhibits to SEC filings, such as executive employment agreements, even though the attorney's representation in those matters is not related to the securities laws. In addition, many commentators believe that the new SEC rules will become the de facto standards by which all corporate counsel will be measured, not merely those who are representing publicly traded companies.
Perhaps the most controversial aspect of the SEC Rules is the proposal to require an attorney, without the consent of their client, to reveal confidential information related to his or her representation to the extent the attorney reasonably believes necessary: (1) to prevent the issuer from committing a material violation likely to cause substantial financial injury to the financial interests or property of the issuer or investors; (2) to prevent the issuer from committing an illegal act; or (3) to rectify the consequences of a material violation or illegal act in which the attorney's services have been used. This aspect of the proposed new rules, generally labeled the “whistleblower rule,” is under review and will likely be reported-out by the SEC in the near future.
Prior to the adoption of the SEC rules, ABA Model Rule 1.6 provided that a lawyer may only reveal information relating to the representation of a client “to prevent reasonably certain death or substantial bodily injury” or “to comply with other law or a court order.” In response to the SEC rules, the ABA modified Rule 1.6 in August 2003 to add the following two provisions:
(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:
(2) to prevent the client from committing a crime or fraud that is reasonable certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services;
(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of which the client has used the lawyer’s services.
At the same time, the ABA changed Model Rule 1.13 regarding confidentiality. The amended rule requires that if a lawyer for the organization knows that an officer, employee or other person associated with the organization is engaged in an illegal action that is likely to result in substantial injury to the organization, the lawyer shall “refer the matter to higher authority in the organization.” If the higher authority refuses to address the matter in a timely and appropriate manner, the lawyer may “reveal information relating to the representation” to appropriate authorities outside of the organization.
These are substantial changes to the traditional in-house counsel’s ethical obligations. The combination of the SEC rules adopted under the authority of Sarbanes-Oxley and the revised ABA rules provide that an attorney may disclose confidential, privileged information to third parties to prevent, mitigate or rectify substantial financial injury to the organization or its investors.
Under the Texas Disciplinary Rules of Professional Conduct there are similar ethical obligations for corporate counsel. Although TDRPC Rule 1.05 protects the confidentiality of client information, under Rule 1.12 there are specific circumstances that require an attorney to take action. Rule 1.12(b) requires that a lawyer representing an organization must take reasonable remedial actions whenever the lawyer learns or knows that:
(1) an officer, employee, or other person associated with the organization has committed or intends to commit a violation of a legal obligation to the organization or a violation of law which reasonably might be imputed to the organization;
(2) the violation is likely to result in substantial injury to the organization; and
(3) the violation is related to a matter within the scope of the lawyer’s representation of the organization.
The Rule also cautions that in circumstances defined by Rule 1.12(b), the lawyer shall proceed as reasonably necessary in the best interest of the organization without involving unreasonable risks of disrupting the organization and of revealing information relating to the representation to persons outside the organization.