Preemption showdowns could be on the horizon
By George A. Riemer
As society has become more and more complex, the collisions between federal regulations and state regulations affecting lawyers and the practice of law continue to increase. The purpose of this column is to highlight the problem and urge vigilance, lest the legal profession find itself on the firing line before Congress and/or a multitude of federal agencies and departments.
One of the key principles contained in the 2002 report of the American Bar Association’s Multijurisdictional Practice Commission was that the ABA should continue its support of state-based judicial regulation of the practice of law. The ABA House of Delegates approved this recommendation, and this principle is ABA policy. At present, 57 U. S. jurisdictions, through their courts and legislatures, regulate admission to the practice of law and the professional conduct of lawyers. Of course, federal courts have jurisdiction to admit and discipline lawyers admitted to appear before them, and certain federal agencies regulate the conduct of practitioners before the agencies, including lawyers.
The multitude of corporate scandals, past and present, has focused the attention of federal regulators on the conduct of various professionals, including lawyers. The Securities and Exchange Commission, under authority of the federal Sarbanes-Oxley Act of 2002, has adopted rules requiring lawyers representing publicly traded corporations to report corporate misconduct to superiors within the corporation. These rules went into effect in August 2003. The SEC still has under consideration additional requirements relating to the disclosure by corporations of the withdrawal of their counsel from representation of the corporation under certain circumstances. The ABA’s Task Force on Implementation of Section 307 of the Sarbanes-Oxley Act of 2002 has been submitting comments to the SEC on these rules. As noted in the November-December 2003 issue of the ABA’s Bar Leader magazine, ABA President Dennis Archer is encouraging state bar leaders to convey the message to Congress and the SEC that state regulation of lawyers is better than federal mandates. Archer is quoted as saying that state regulation is a better choice because it allows for more 'confidence and closeness of oversight' and simply 'makes more common sense.' The article goes on to state that 'Archer’s hope is that keeping the lines open will encourage the SEC to communicate with the Conference of Chief Justices and with the ABA about how the state courts can best fulfill this responsibility.'
While the ABA is trying to keep lines of communication open with the SEC so as to avoid a confrontation over the adoption of additional requirements that could adversely affect lawyers, developments in several states have raised the possibility of a significant collision between the regulation of lawyers by the SEC and the regulation of lawyers by state supreme courts.
For example, the Board of Governors of the Washington State Bar Association approved an interim formal ethics opinion on July 26, 2003 addressing the following question: 'Have the obligations of a Washington lawyer under the Rules of Professional Conduct been affected by Security and Exchange Commission regulations under the Sarbanes-Oxley Act imposing and/or authorizing reporting, disclosure and/or withdrawal obligations in certain circumstances?'
The opinion expresses the view of the WSBA Board of Governors that, 'to the extent (the) SEC(’s) regulation authorizes but does not require revelation of client confidences and secrets the Washington lawyer cannot reveal such confidences and secrets unless authorized to do so under the Washington RPCs.'
The opinion also states that the board is of the opinion that none of the requirements of the Washington rules conflicts with any of the SEC’s regulations. Under the circumstances the board declined to reach the question whether the federal regulations would preempt Washington’s ethics rules in the event of a conflict. 'Though the Board recognizes the possibility that Section 205 may ultimately be interpreted as preempting Washington law, a cautious attorney should refrain from making any disclosures in violation of the Washington RPCs until this issue is resolved by the courts.'
In California, the Corporations Committee of the Business Law Section of the State Bar of California wrote the general counsel of the SEC in August 2003, taking issue with SEC statements to the effect that certain SEC regulations supercede state laws or rules of conduct that prohibit disclosure of client confidences; that certain SEC regulations shield a lawyer from discipline or liability when he or she complies in good faith with the SEC’s lawyer conduct rules; and that state bar disciplinary authorities may not even institute disciplinary charges with respect to matters covered by the SEC’s lawyer conduct rules. The letter stated, among other things, that '(t)he Committee believes that the authority of the SEC to adopt either Rule 205.3(d) or Rule 205.6(c) is likely to be challenged. An attorney faced with choosing between potentially irreparable harm to a client’s interests arising from disclosure of a confidence or the cost of a good faith, well founded objection to the SEC’s rules is virtually duty-bound to select the latter. As the Committee has previously articulated, one significant potential basis of the challenge will be that there is no evidence of Congressional intent to preempt state ethics rules. Because the rules have only been recently adopted and become effective, the outcome of any such challenges remains to be seen. However, the Committee notes that in other instances, courts have struck down SEC rulemaking for lack of authority.' (footnote omitted).
Is the general public uneasy and concerned about whether professional self-regulation works? The scandals of the recent past (accountants, stockbrokers, investment bankers, corporate management and boards, the New York Stock Exchange and the mutual fund industry) have generated and continue to generate adverse publicity and regulatory responses ostensibly geared toward alleviating the public’s concerns. The SEC and other federal regulatory agencies have been called upon by Congress to increase their oversight of professionals, not only by way of investigations and prosecutions for violations of existing laws, but also in the context of new requirements and preventative measures to ensure compliance with the law. Friction is generated when professionals consider the new regulatory responses to be more than necessary to address the true problems. We appear to be at that stage in the context of SEC regulations concerning the conduct of lawyers who advise and represent publicly traded companies. Whether that friction with turn into fire remains to be seen.
If the state-based regulation of the legal profession is a core principle of the profession, as I believe it is, the American Bar Association and state lawyer regulators must propose and implement measures at the state level to ensure lawyers are not involved in duplicitous conduct with corrupt corporate boards and executives. Recently approved changes to the ABA Model Rules of Professional Conduct which permit lawyers to reveal confidential client information to prevent a crime or fraud that is reasonably certain to result in substantial injury to the property or financial interests of others are a step in the right direction, but the states must adopt these changes before they have the force and effect of law. If Congress, the SEC and other federal agencies conclude that current measures to check corporate corruption and ensure corporate compliance with the law are not stemming the tide, it is safe to predict that state bars will continue to grapple with the federalization of lawyer regulation. The outcome depends on what state-based lawyer regulators do. This is a huge issue. The regulation of lawyers could shift to the federal level in the years to come, depending on how well or poorly state lawyer regulators respond. I hope the ABA and state and local bar leaders will respond in an effective manner to show that the states continue to be capable of effectively regulating lawyers and that the federalization of lawyer regulation is not necessary to protect the public.
© 2003 George A. Riemer
ABOUT THE AUTHOR
George A. Riemer is general counsel and deputy director of the Oregon State Bar. He can be reached at email@example.com or by phone at (503) 620-0222 or toll-free in Oregon, (800) 452-8260, ext. 405.