"Noisy withdrawal" rule proposed by US Securities and Exchange Commission troubles Canadian lawyers
The Law Society of BC, through the Federation of Law Societies of Canada, has joined in a submission to the United States Securities and Exchange Commission (SEC) on the Implementation of Standards of Professional Conduct for Attorneys, new rules proposed by the Commission on November 21, 2002 (the "proposed rules"). For a copy of the Federation submission, see "What's new" on the Law Society of BC website.
The proposed rules were mandated by the Sarbanes-Oxley Act of 2002. Section 307 of that Act requires the SEC to prescribe minimum standards of professional conduct for attorneys appearing or practising before the SEC in any way in the representation of issuers. The Act requires these rules to be in place by late January, 2003.
It is unusual for Canadian regulatory bodies to comment on rules passed by a foreign regulatory authority pursuant to a statute of a foreign state. However, the proposed rules, as drafted, apply not only to American lawyers but to all lawyers, including non-US lawyers, who "appear and practise before" the SEC.
The Federation's submission focuses on the adverse effect that a "noisy withdrawal" rule would have on Canadian lawyers. Under this requirement, a lawyer who has identified and reported to a client a material violation by the client of securities laws may subsequently need to take several steps. If the lawyer does not receive an appropriate response from the client, and if the lawyer believes that the material violation is ongoing or is about to occur and is likely to result in serious injury to the financial interest of the client or investors, the lawyer would be required to:
- withdraw from representing the client,
- notify the SEC of the withdrawal, and
- disaffirm any submission he or she made to the SEC on behalf of the client that is tainted by the violation.
In the view of the Federation, such a requirement will cause a lawyer in Canada to breach duties of loyalty and confidentiality owed to a client - duties that are fundamental to the lawyer-client relationship.
The Federation has also emphasized that there is no need for the SEC to promulgate rules requiring Canadian lawyers to report material violations of law to a client or to withdraw from a retainer in the event a client were to continue to act contrary to the law after receiving a lawyer's advice. That is because Canadian rules of professional conduct already require such action, and provincial and territorial law societies are already mandated by statute to enforce these rules of conduct.