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Sarbanes-Oxley and the OkRPC Drew L. Kershen Earl Sneed Centennial Professor Univ. of Oklahoma College of Law Copyright 2003, Drew L. Kershen, all rights.

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Presentation on theme: "Sarbanes-Oxley and the OkRPC Drew L. Kershen Earl Sneed Centennial Professor Univ. of Oklahoma College of Law Copyright 2003, Drew L. Kershen, all rights."— Presentation transcript:

1 Sarbanes-Oxley and the OkRPC Drew L. Kershen Earl Sneed Centennial Professor Univ. of Oklahoma College of Law Copyright 2003, Drew L. Kershen, all rights reserved

2 Sarbanes Oxley Law and Regulations 15 U.S.C. secs (2002) 15 U.S.C. secs (2002) Corporate governance Corporate governance Financial disclosure Financial disclosure Accounting/auditing Accounting/auditing 15 U.S.C. sec U.S.C. sec Sec. 307 on attorneys Sec. 307 on attorneys Report evidence of material violation to chief legal officer or to chief executive officer Report evidence of material violation to chief legal officer or to chief executive officer No appropriate response, report to audit committee or other independent committee of the corporate board of directors No appropriate response, report to audit committee or other independent committee of the corporate board of directors SEC regulations: Part 205 – Standards of Professional Conduct for Attorneys appearing and practicing before the Commission in the representation of issuers, 68 Fed. Reg (Feb. 6, 2003) SEC regulations: Part 205 – Standards of Professional Conduct for Attorneys appearing and practicing before the Commission in the representation of issuers, 68 Fed. Reg (Feb. 6, 2003) Purpose and scope Purpose and scope Definitions Definitions Issuer as client Issuer as client Responsibilities of supervisory attorneys Responsibilities of supervisory attorneys Responsibilities of a subordinate attorney Responsibilities of a subordinate attorney Sanctions and discipline Sanctions and discipline No private right of action No private right of action

3 Section Purpose and Scope Sec. 307 standards are minimum professional standards for those covered Sec. 307 standards are minimum professional standards for those covered States are free to impose additional stricter professional standards States are free to impose additional stricter professional standards Sec. 307 preempts state standards only when state standards conflict or set lower minimum standards Sec. 307 preempts state standards only when state standards conflict or set lower minimum standards Default – always-the-stricter standard Default – always-the-stricter standard

4 Section Definitions 3 definitions define who is covered 3 definitions define who is covered appearing and practicing before the Commission appearing and practicing before the Commission in the representation of the issuer in the representation of the issuer Issuer Issuer Coverage is broad Coverage is broad Goal of presentation Goal of presentation Information about Sarbanes- Oxley professional standards Information about Sarbanes- Oxley professional standards Comparison to OkRPC standards Comparison to OkRPC standards How to comply simultaneously with both professional standards How to comply simultaneously with both professional standards Attorneys who practice federal securities law Attorneys who practice federal securities law Attorneys who advise about exemptions from federal securities law Attorneys who advise about exemptions from federal securities law Attorneys (probably) who provides legal services on work that will be incorporated into any SEC filing – e.g. a title opinion Attorneys (probably) who provides legal services on work that will be incorporated into any SEC filing – e.g. a title opinion Attorneys (probably) who advise about legal matters sufficiently serious to be mentioned in financial statements as contingent legal liabilities – e.g. environmental claims Attorneys (probably) who advise about legal matters sufficiently serious to be mentioned in financial statements as contingent legal liabilities – e.g. environmental claims

5 Section Issuer as client Sec (a)&(b)(1) 205.3(a) 205.3(a) entity as client entity as client OkR 1.13(a) – identical answer OkR 1.13(a) – identical answer 205.3(b)(1) – Reporting Attorney 205.3(b)(1) – Reporting Attorney Duty to report evidence of a material violation forthwith to CLO or CEO Duty to report evidence of a material violation forthwith to CLO or CEO By-pass procedure in 205.3(b)(4) – direct report to Board of Directors or a Committee of the Board By-pass procedure in 205.3(b)(4) – direct report to Board of Directors or a Committee of the Board OkR 1.13(b) – comparable provision OkR 1.13(b) – comparable provision Three comparative issues Three comparative issues When to take action When to take action Sarbox reasonably likely credible evidence of material violation Objective awareness OkR Violation of legal obligation to entity or violation of law imputed And likely substantial injury to entity Subjective knowledge Role of advisor and conscience of the entity More frequent role as conscience of the entity under Sarbox

6 Issuer as client 205.3(b)(1) continued What action to take What action to take Sarbox Sarbox Mandatory Report Mandatory Report CLO and/or CEO CLO and/or CEO OkR 1.13(b) OkR 1.13(b) Significant Discretion Significant Discretion Designed to minimize disruption Designed to minimize disruption Cautious duty to report Cautious duty to report Sarbox removes discretion Sarbox removes discretion specific senior constituents must be informed and make decisions specific senior constituents must be informed and make decisions Timing Timing Sarbox Forthwith OkR 1.13(b) Three options – significant discretion Behavioral reality Mandatory duty to report Send to higher authority Duty of Communication strengthened – information for client decision, not attorney decision Decision at senior levels, not lower levels

7 Issuer as client Sec (b)(2) Duties of the Chief Legal Officer (CLO) Duties of the Chief Legal Officer (CLO) To investigate To investigate To decide whether material violation has occurred, is occurring, or will occur To decide whether material violation has occurred, is occurring, or will occur To cause compliance by avoiding or rectifying material violation To cause compliance by avoiding or rectifying material violation To report back actions taken to reporting attorney To report back actions taken to reporting attorney Comparable to Rule 1.13(b) Comparable to Rule 1.13(b) Compatible duties but specific, concrete actions removes discretion Compatible duties but specific, concrete actions removes discretion New duty to report back so that reporting attorney can serve as a check & balance on CLO New duty to report back so that reporting attorney can serve as a check & balance on CLO

8 Issuer as client Sec (b)(3 ) Focus returns to reporting attorney Focus returns to reporting attorney Duty to expect timely response from CLO Duty to expect timely response from CLO Duty to determine whether CLO has given an appropriate response – reasonably believes standard Duty to determine whether CLO has given an appropriate response – reasonably believes standard No material violation No material violation Entity has adopted remedial measures to stop and to remedy Entity has adopted remedial measures to stop and to remedy Issuer’s Board of Directors has retained or directed an investigatory attorney who, after investigation, has advised of a colorable defense Issuer’s Board of Directors has retained or directed an investigatory attorney who, after investigation, has advised of a colorable defense If no appropriate response, duty to report to an appropriate committee of Board or the Board of Directors itself If no appropriate response, duty to report to an appropriate committee of Board or the Board of Directors itself If appropriate response, reporting attorney has complied and has no further Sarbox or OkRPC ethical duties – sec (b)(8) If appropriate response, reporting attorney has complied and has no further Sarbox or OkRPC ethical duties – sec (b)(8) Comparable to Rule 1.13(b)(3) but Sarbox mandates reporting to the highest authority to involve the Board in the appropriate response Comparable to Rule 1.13(b)(3) but Sarbox mandates reporting to the highest authority to involve the Board in the appropriate response Clear check and balance obligation for the original reporting attorney Clear check and balance obligation for the original reporting attorney CLO cannot ignore or cover-up material violations CLO cannot ignore or cover-up material violations

9 Issuer as client Sec (b)(5)&(6) Focus on investigatory attorney and CLO Focus on investigatory attorney and CLO To evaluate investigative report using a reasonably- believes standard To evaluate investigative report using a reasonably- believes standard To report results to Board of Directors To report results to Board of Directors Directly under Sarbox if material violation Directly under Sarbox if material violation Indirectly under OkR 1.4 Communication Indirectly under OkR 1.4 Communication To report existence of a colorable defense “consistent with his or her professional obligations” To report existence of a colorable defense “consistent with his or her professional obligations” To report back to the reporting attorney To report back to the reporting attorney Comparable to OkR 1.13(b)(2) – second opinion Comparable to OkR 1.13(b)(2) – second opinion Compatible but Sarbox requires concrete steps, removes discretion implied in OkR 1.13(b) Compatible but Sarbox requires concrete steps, removes discretion implied in OkR 1.13(b)

10 Issuer as client Sec (b)(5)&(6) continued Colorable defense consistent with professional obligations as an appropriate response Colorable defense consistent with professional obligations as an appropriate response Must not be a frivolous defense – OkR 3.1 Must not be a frivolous defense – OkR 3.1 Must not involve the attorney in counseling or assisting crime or fraud – OkR 1.2(c) Must not involve the attorney in counseling or assisting crime or fraud – OkR 1.2(c) Contrast Oklahoma definition of fraud to the new ABA MRPC 1.0(e) definition of fraud Contrast Oklahoma definition of fraud to the new ABA MRPC 1.0(e) definition of fraud Must not be a false statement of material fact or knowingly failing to disclose a material fact to avoid assisting a criminal or fraudulent act by issuer – OkR 4.1 Must not be a false statement of material fact or knowingly failing to disclose a material fact to avoid assisting a criminal or fraudulent act by issuer – OkR 4.1 Violation of these OkRules means violation of Sarbanes-Oxley Violation of these OkRules means violation of Sarbanes-Oxley

11 Issuer as client Sec (b)(9)&(10) Duty of tenacious courage – sec (b)(9) Duty of tenacious courage – sec (b)(9) Reporting attorney must explain reasons for deciding no appropriate response received Reporting attorney must explain reasons for deciding no appropriate response received No comparable duty under OkR 1.13 – OkR 1.13(c) states a “may resign” option No comparable duty under OkR 1.13 – OkR 1.13(c) states a “may resign” option OkR 1.1 (competence), 1.4(communication), 2.1 (advisor) OkR 1.1 (competence), 1.4(communication), 2.1 (advisor) Sarbox imposes no comparable duty on the CLO or the investigatory attorney – the OkRPC Sarbox imposes no comparable duty on the CLO or the investigatory attorney – the OkRPC Retaliatory discharge – sec (b)(10) Retaliatory discharge – sec (b)(10) If CEO or CLO discharge the reporting attorney, reporting attorney may report to Board of Directors If CEO or CLO discharge the reporting attorney, reporting attorney may report to Board of Directors OkRPC have no comparable provision – issue of wrongful discharge of attorneys for compliance with ethical obligations OkRPC have no comparable provision – issue of wrongful discharge of attorneys for compliance with ethical obligations

12 Section Sanctions and Discipline Two independent disciplinary systems Two independent disciplinary systems 205.6(a) – SEC sanctions: civil penalties and remedies – securities law violations including Sarbox 205.6(a) – SEC sanctions: civil penalties and remedies – securities law violations including Sarbox OkRPC Rule 8.4 Misconduct OkRPC Rule 8.4 Misconduct 205.6(b) – subject to SEC discipline regardless of state discipline 205.6(b) – subject to SEC discipline regardless of state discipline Discipline in SEC & OK 205.6(c) 205.6(c) SEC can discipline when state is weaker – preemption OK can discipline when OK is stricter

13 Section Sanctions and Discipline Implications of the dual discipline Implications of the dual discipline SEC will be much more active – other federal agencies are beginning to imitate (EPA, IRS) SEC will be much more active – other federal agencies are beginning to imitate (EPA, IRS) SEC will file grievances with the General Counsel of the OBA to seek OK discipline SEC will file grievances with the General Counsel of the OBA to seek OK discipline SEC does not qualify as “another jurisdiction” under OkRGDP 7.7 Disciplinary action in other jurisdiction, as basis for discipline SEC does not qualify as “another jurisdiction” under OkRGDP 7.7 Disciplinary action in other jurisdiction, as basis for discipline Duty to report discipline Duty to report discipline Summary discipline through show cause order Summary discipline through show cause order Various initiatives between NOBC, ABA, and Conf. of Chief Justices create potential for SEC to be recognized Various initiatives between NOBC, ABA, and Conf. of Chief Justices create potential for SEC to be recognized

14 References Drew L. Kershen, Sarbanes-Oxley and the Oklahoma Rules of Professional Conduct, 28 Okla. City U. L. Rev (2003) Drew L. Kershen, Sarbanes-Oxley and the Oklahoma Rules of Professional Conduct, 28 Okla. City U. L. Rev (2003) Jennifer Wheeler, Securities Law: Section 307 of the Sarbanes-Oxley Act: Irreconcilable Conflict with the ABA’s Model Rules and the Oklahoma Rules of Professional Conduct, 56 OKLA. L. REV. 461 (2003) Jennifer Wheeler, Securities Law: Section 307 of the Sarbanes-Oxley Act: Irreconcilable Conflict with the ABA’s Model Rules and the Oklahoma Rules of Professional Conduct, 56 OKLA. L. REV. 461 (2003) Roger Cramton, George Cohen, Susan Koniak, Legal and Ethical Duties of Lawyers After Sarbanes-Oxley, 49 Villanova L. Rev (2004) Roger Cramton, George Cohen, Susan Koniak, Legal and Ethical Duties of Lawyers After Sarbanes-Oxley, 49 Villanova L. Rev (2004) Fred C. Zacharias, Understanding Recent Trends in Federal Regulation of Lawyers, ABA The Professional Lawyer Symposium Issue (2004) Fred C. Zacharias, Understanding Recent Trends in Federal Regulation of Lawyers, ABA The Professional Lawyer Symposium Issue (2004)


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