Some Major ABA Issues Of Particular Interest To Corporate Counsel

To provide a few examples of major issues on which the ABA has focused that are of particular interest to corporate counsel and which have been the subject of various activities and initiatives, we have asked lawyers from our law firm supporters or who have personally supported this newspaper to discuss ABA initiatives in which they have been involved.

Lynne B. Barr

ABA Task Force on Financial Markets Regulatory Reform

The Task Force was initially established as a working group in the Business Law Section and then converted into a Presidential Task Force, with additional members from a number of Sections in the ABA, by Tommy Wells, the former ABA President. The Task Force has several goals, including coordinating the ABA's response to financial services regulatory reform proposals and commenting on the ongoing efforts to achieve reform. The Task Force worked over the summer to formulate the ABA Principles for Financial Markets Regulatory Reform Principles that were embodied in ABA Resolution 301, which was formally adopted by the ABA House of Delegates during its Annual Meeting in August. These principles enunciate certain basic goals and objectives for financial regulatory reform and are designed to serve as the basis for the Association's comments on legislative and regulatory proposals in the area. The principles contained in the resolution now constitute the official policy of the ABA.

In a letter to key Administration and Congressional leaders transmitting the ABA Principles, president Lamm stated:

"The ABA Principles recommend, among other things, that the regulation and supervision of financial intermediaries, products and services should be integrated and comprehensive to the extent appropriate to achieve articulated policy objectives. While the ABA has not taken a position on whether Congress should create the proposed Consumer Financial Protection Agency, the ABA Principles urge that any federal regulation of consumer financial products and services be integrated with other regulations in order to protect investors and consumers, assure safety and soundness, and protect against systemic risk. Furthermore, the ABA Principles explicitly state that the federal financial regulatory system should be simplified and the number of regulatory agencies reduced, and urges numerous other reforms as well. We believe that if our nation's regime of regulations had previously met the criteria contained in the ABA Principles, it is very likely that the recent economic near meltdown could have been substantially mitigated, if not avoided."

The Task Force is now using the ABA Principles as a blueprint for making more focused and detailed comments. These comments will be used by Lamm and the Government Affairs Office of the ABA to express the ABA's views on the specific financial services reform proposals.

At the moment we are working on several papers that will address issues such as systemic risk, resolution of failing non-bank entities, and the Consumer Financial Protection Agency Act. We are examining these specific matters as they become part of the legislative agenda and plan to comment in the near future on what aspects of proposed legislation we feel do and do not comport with the principles that the House of Delegates has approved, as well as other ABA policies. For example, our review includes looking at whether and to what extent lawyers should be subject to the jurisdiction of the proposed consumer protection agency. It probably won't come as a surprise that we are generally opposed to lawyers being subject to the jurisdiction of that agency, given the fact that the ABA has been a stalwart defender of the confidential nature of the attorney-client relationship.

The Task Force is well suited to the tasks it faces because it represents a cross section of the ABA membership - not just business lawyers, but public interest lawyers, administrative law experts, and other members and liaisons from many other fields.

As to the impact of what we're doing, that of course remains to be seen, but the country's financial system affects everyone, as the current economic crisis has amply demonstrated, and we think that the ABA can have an important role in helping to make that system stronger.

Lynne B. Barr is a Member of the ABA Task Force on Financial Markets Regulatory Reform and Chair-Elect of the Business Law Section of the American Bar Association. She is a Partner at Goodwin Procter LLP, one of this newspaper's law firm supporters.

R. William "Bill" Ide

ABA Task Force on Attorney-Client Privilege

If a client is not comfortable that it can have a confidential conversation when seeking legal advice, the best tool for self-regulation is completely chilled. If full information about the facts cannot flow to the lawyer, the lawyer can't properly assess the situation in which the corporate client finds itself. You then run the risk of self-regulation losing its ability to correct a developing situation that may lead to a violation of law.

Our Task Force was formed because the reactions of the enforcement community to corporate scandals threatened to undermine the attorney-client privilege and work product rights of companies ("privilege"). The enforcement community promulgated guidelines like the Department of Justice's Thompson Memorandum which gave corporations credit for cooperating in various respects with their enforcement efforts, including by waiving the privilege and not reimbursing company witnesses for their legal expenses. This developing trend was reflected in the practices of state attorneys general like Eliot Spitzer and of some government regulatory agencies.

The Task Force pointed out to the DOJ that its actions had an impact far beyond their application to specific cases and that communications so necessary to this country's traditional dedication to self-regulation would not take place and company witnesses would be deterred from seeking the services of lawyers. We were able to get the DOJ to understand this and are proud that our Task Force contributed to changes in the DOJ's position. This is reflected in the Fillip Memorandum issued by DOJ which said that cooperation credit would not be granted for waiver of the privilege, not advancing attorneys' fees to employees, officers or directors and not entering into joint defense agreements.

The Task Force felt the protection of the privilege and the work product rule was so important that it should be firmly rooted in our laws and made applicable to all agency proceedings. It has therefore drafted proposed federal legislation which passed the House and is pending in the Senate. It has encouraged the White House to issue an executive order so that all federal agencies will understand that they should not directly or indirectly impinge on the attorney-client privilege. The Supreme Court captured it best in the Upjohn case when it said that "an uncertain privilege is no privilege at all."

The work of the Task Force is never ending because we are concerned that the attorney-client privilege and the work product doctrine be honored by the enforcement community, by the executive branch and understood better by the judicial branch. A few of our other activities are described below.

The Task Force is addressing the applicability of the privilege to discussions between a lawyer and a clients' auditor. The Task Force has supported the more enlightened view that it is in the client's interest for the lawyer to talk to the auditor in order to properly advise the client, and that lawyers' discussions with auditors should therefore be covered by the privilege.

The Task Force was also given the task of coordinating the ABA's submission to the FASB relating to its Exposure Draft with respect an amendment to FASB Statements 5 and 141(R). The Task Force was deeply involved because of its concern that the Exposure Draft would jeopardize the attorney-client privilege and work product rights of companies by requiring them to speculate about litigation outcomes.

The Task Force is also monitoring developing case law relating to the privilege. For example, the Task Force filed an amicus brief in a case involving Textron in which the First Circuit Court of Appeals held that the work product rule did not protect work papers prepared by its general counsel's office to evaluate the company's liability in potential litigation with the IRS.

R. William "Bill" Ide, a Partner with McKenna Long & Aldridge LLP, is the former chair and presently a member of the ABA Task Force on Attorney-Client Privilege and of this newspaper's Advisory Committee. Todd Lang

ABA Task Force on Shareholder Proposals

In 2003, the Committee on Federal Regulation of Securities, Section of Business Law of the American Bar Association, established a Task Force on Shareholder Proposals to consider the subject known colloquially as "proxy access." This encompasses the right of eligible shareholders to use the corporation's proxy materials to nominate candidates of their choice for election as directors as well as proposals for shareholders to vote on bylaws which provide such access. This is the seventh year of activity on the subject, which includes seven comment letters on various access proposals and initiatives, sponsoring programs and other participation in the ongoing debate.

During this period, corporate governance rules and practices have changed significantly. Proxy access needs to be considered in that context. As changes have occurred, our recommendations have evolved. This year, the SEC has proposed a new set of access rules. Briefly, a new right of access would be created by virtue of a prescriptive SEC rule which would be applicable to virtually all publicly traded corporations. The proposal establishes eligibility requirements for proponent shareholders, some qualifications for candidates and a requirement that access not be exercised for control purposes. We have identified a number of fundamental issues, which include:

The purpose of the creation of an access right needs to be clearly defined so that it will set the parameters for rulemaking or private ordering on the access right. We have suggested that purpose be defined in terms of the ability of long-term shareholders who have a meaningful ownership stake in the company to use the corporation's proxy materials to seek without control effect the election of a limited number of independent persons who they nominate to serve as directors. This definition is intended to align the interests of a proponent shareholder with those of the stockholder body. To avoid control implications, we propose that the candidate be independent of the sponsor and its affiliates, the same proposal made by the SEC in 2003.

A key concern is workability of a prescriptive rule providing the right of access. It is estimated that it would apply to approximately 7,000 corporations. Each has its own capital and voting structures and arrangements which could be significantly affected by such a rule. In our comment letter, we explain in detail how this might occur.

In view of the lack of flexibility of such a prescriptive rule which can be interpreted, but rarely amended, we suggested that a bylaw creating the access right would be more suitable in that it could take into account the structure and arrangements of each corporation individually and be adapted to future events and circumstances.

We recommended the SEC enable private ordering so as to establish workability and flexibility. We also emphasized the importance of defining the purpose of the creation of an access right.

This illustrates the commitment of ABA committees to comment on important proposals, adjust analysis to changing circumstances and make recommendations in the public interest. To that end, prior to the publication of the SEC proposal in June of this year, we had anticipated a workability issue and prepared and published an Illustrative Access Bylaw with commentary to assist those who may intend to propose or adopt an access bylaw. We are in the process of updating the bylaw in view of the SEC rule proposals and the substantial number of public comments on those proposals.

We are hopeful that our comments and analysis are of meaningful assistance to the SEC and its staff in their deliberations.

Todd Lang is a co-chair of the ABA Task Force on Shareholder Proposals. He is a Senior Partner at Weil, Gotshal & Manges LLP, one of this newspaper's law firm supporters.

E. Norman Veasey

ABA Ethics Initiatives of Significant Concern to Corporate Counsel

The general counsel wears many hats, as we all know. One of those hats is that of "Ethicist." This responsibility includes not only the mandated business ethics program but also the responsibility to ensure that legal ethics compliance is properly carried out by supervisory and subordinate lawyers in the corporate legal department.

The American Bar Association, through its Model Rules of Professional Conduct, has articulated these duties in several contexts. The Securities and Exchange Commission, as well, regulates lawyers in the context of the lawyer's professional standards in "appearing and practicing before the Commission" (an extraordinarily broad term, as defined by the SEC).

For over one hundred years the ABA has provided leadership in legal ethics and professional responsibility through the adoption of professional standards that serve as models of the regulatory law governing the legal profession. The ethical standards articulated by the ABA have evolved over many decades and iterations - from Canons of Professional Ethics to the Model Code of Professional Responsibility to the Model Rules of Professional Conduct.

Two recent ABA groups have tackled anew the policy and drafting issues applicable to ethical responsibilities of corporate counsel. First, there was the establishment in 1997 of The Commission on the Evaluation of the Rules of Professional Conduct (Ethics 2000 Commission, which I had the honor to chair). Our Commission undertook not only a comprehensive general revision of the Model Rules but also addressed some important specific provisions that are relevant to the corporate lawyer's ethical responsibilities in the face of alleged corporate misconduct by others.

The second group was the Task Force on Corporate Responsibility, chaired by James H. Cheek, III of Nashville. The President of the ABA appointed the Task Force in March 2002 and gave it the following charge: "[To] examine systemic issues arising out of the unexpected and traumatic bankruptcy of Enron and other Enron-like situations [and to] examine the ethical principles governing the roles of lawyers, executive officers, directors and other key participants to enhance the public trust "

Both the Ethics 2000 Commission and the Corporate Responsibility Task Force focused on the need to give corporate lawyers the ethical tools needed to address, report, prevent, rectify and mitigate corporate wrongdoing. Ethics 2000 proposed a change in Model Rule 1.6(b)(2) to permit a lawyer to report a client's confidential information "to the extent the lawyer reasonably believes necessary to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial [financial injury to others] and in furtherance of which the client has used or is using the lawyer's services." There was a companion Rule 1.6(b)(3), that also permitted the lawyer to disclose a client's confidence if necessary to "mitigate or rectify" financial harm already inflicted on others by the client's wrongdoing. After an initial rejection by the ABA House of Delegates (pre-Enron) these provisions were finally adopted (post-Enron), when the Task Force strongly recommended that the Ethics 2000 proposals be restored.

Model Rule 1.13 (Organization As Client) had for many years provided simply that the lawyer for the corporation who reasonably concludes that there may have been wrongdoing "shall proceed as reasonably necessary in the best interest" of the corporation, including referring the matter to the "highest authority" in the corporation, if warranted by the seriousness of the matter."

The present Model Rule 1.13, strengthened as proposed by the Corporate Responsibility Task Force and adopted (post-Enron) by the House, requires the corporate lawyer who knows of wrongdoing by a corporate constituent to report up the ladder, ultimately to the board, if necessary. In addition, if the board does not act, the lawyer may reveal confidential information outside the corporation if necessary to prevent injury to the corporation whether or not Rule 1.6 permits the disclosure. These requirements apply to supervising and subordinate lawyers, whose general responsibility to follow ethics rules are set forth in Model Rules 5.1 and 5.2.

In Section 307 of the Sarbanes-Oxley Act, Congress also required in 2002 that the SEC adopt professional conduct rules. In 2003, the SEC did adopt its Part 205 rules in requiring up-the-ladder reporting of wrongdoing by supervising and subordinate lawyers "appearing and practicing before the SEC." The SEC Rules are in somewhat different language from ABA Model Rules 1.6, 1.13, 5.1 and 5.2, but are designed to achieve the same end of empowering lawyers to ferret out and report wrongdoing.

The ABA Model Rules are considered a template for ethics rules adoption by state supreme courts, the ultimate authority governing lawyers in each state. Following the promulgation of the official revision of the Model Rules many states have adopted essentially the same provisions as those set forth in Model Rules 1.6, 1.13, 5.1 and 5.2. So, each corporate lawyer (including those who are also subject to Part 205 of the SEC Rules) must follow the applicable version of these Model Rules as adopted by the supreme court of the jurisdiction where that lawyer is authorized to practice.

This year marks a new beginning in the evolution of ABA ethics initiatives. ABA President Carolyn Lamm has recently appointed the ABA Commission on Ethics 20/20 to perform a thorough review of the Model Rules and system of lawyer regulation. The Commission expects its work to take three years.

E. Norman Veasey, Chief Justice of the Delaware Supreme Court (Retired), chaired the ABA's Commission on the Evaluation of the Rules of Professional Conduct (Ethics 2000 Commission). He is a Senior Partner at Weil, Gotshal & Manges LLP, one of this newspaper's law firm supporters.