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 Letters to the 107th Congress July 19, 2002 The Honorable Paul S. Sarbanes Re: The "Public Company Accounting Reform and Investor Protection Act of 2002" (H.R. 3763) – Federal Preemption of State Court Ethical Rules for Lawyers Issue Dear Chairman Sarbanes: As you prepare to participate in the upcoming conference committee for H.R. 3763, the "Public Company Accounting Reform and Investor Protection Act of 2002," I write to express our concerns regarding several specific provisions in the legislation that could result in inconsistent and conflicting ethical rules for certain types of attorneys. In particular, the American Bar Association ("ABA") has serious concerns regarding: (1) the overly broad definition of "persons associated" with an accounting firm in both bills, that would inadvertently subject lawyers representing accounting firms to new national ethics standards issued by the oversight board; (2) the provisions in the Senate bill that would require the Securities and Exchange Commission ("SEC") to impose new "minimum standards of professional conduct" for attorneys appearing before the agency; and (3) the provision in the House bill that would require the Comptroller General to study the ABA Model Rules of Professional Conduct and existing SEC rules and possibly recommend new federal legislation or regulations to override the existing rules. Attached for your review and consideration are specific amendments supported by the ABA that would resolve the problems raised by these provisions. The ABA, with over 400,000 members throughout the country, supports strong ethical standards for all attorneys, including those who practice in the corporate arena. Indeed, for more than ninety years, the ABA has provided leadership in the field of legal ethics by crafting professional standards that have then been adopted by the vast majority of the state and federal courts that oversee the legal profession. The ABA Model Rules of Professional Conduct, adopted by the ABA House of Delegates in 1983, and then revised and updated on fourteen separate occasions since then, are a comprehensive and uniform set of ethical standards for lawyers. Since the ABA Model Rules were approved by the ABA, the vast majority of state supreme courts have adopted professional standards based on the Model Rules, and these state court ethical codes have served the public well over time. As a result, the ABA believes that the provisions in the pending legislation granting the oversight board and the SEC the power to preempt state court rules by issuing conflicting national ethical rules for certain corporate attorneys are unnecessary and counterproductive. Both the Senate and the House-passed versions of H.R. 3763 would create an accounting oversight board with sweeping powers to regulate public accounting firms, as well as "persons associated" with such firms, including the power to establish and enforce binding ethical standards and to seek testimony and the production of documents. While the legislation is aimed at regulating the activities of accountants and their staffs, the definition of "persons associated" with an accounting firm is so broad that it would also cover lawyers who merely provide legal advice to accounting firms in connection with audits. Section 22(6) of the House bill1 would cover all officers and directors of accounting firms, including its general counsel. Section 2(a)(9) of the Senate bill2 is even broader and would cover both in-house counsel and attorneys in law firms that are retained to provide legal advice to the accounting firm in connection with the preparation or issuance of any audit report. In fact, the language in the Senate bill would even cover outside law firms that are merely hired to defend accounting firms if an audit is ever called into question. Furthermore, by defining these outside law firms as "persons associated with a public accounting firm," the Senate bill would have the unintended consequence of prohibiting a law firm that represents an accountant from providing any legal services to the corporation being audited if the legal services are unrelated to the audit (See Section 201(a)). In addition to the overly broad definition of "persons associated with a public accounting firm," Section 602 of the Senate bill also contains provisions instructing the SEC to adopt a sweeping set of new lawyer ethical standards that could conflict with the state-court issued ethical rules that currently bind all attorneys. In addition, the bill also instructs the SEC to adopt a specific new federal rule that overrides existing state court ethical standards on the issue of when a corporate lawyer must report misconduct to the company’s board of directors. Under this provision, all corporate lawyers practicing before the agency would be required to report misconduct to the company’s management, and if no remedial action is taken, the lawyer would be required to report the misconduct directly to the company’s board of directors. Instead of instructing the SEC to adopt new national ethical standards, Section 19 of the House bill directs the Comptroller General to study the ABA Model Rules of Professional Conduct and lawyer ethical rules established by the SEC to determine whether new federal legislation or regulations should be adopted. The American Bar Association opposes the provisions in H.R. 3763 outlined above that would grant the accounting oversight board and the SEC the power to preempt state law and override the existing state court ethical rules that currently govern the conduct of all lawyers in the United States for several reasons. Attorneys are already subject to strict ethical rules adopted and enforced by the state courts, and the ABA believes that the courts should retain their traditional authority to govern lawyer conduct. All attorneys are licensed by the highest court of the state in which they practice and are subject to the ethical rules adopted by that court. Those rules are enforceable through a range of sanctions—including private and public reprimands, suspension, and disbarment—usually administered by or under the authority of the state’s highest court. These state court rules have stood the test of time, and additional national rules are unnecessary. While lawyer disciplinary rules have been, and will continue to be, periodically updated, these changes should be accomplished through the orderly adoption of new state court rules. Regulation of lawyers should remain the province of the judiciary, not the executive, and any attempt to grant the accounting oversight board or the SEC the power to adopt a set of national rules would violate separation of powers principles. The ABA also opposes the creation of new federal standards by the oversight board and the SEC because these standards will likely conflict with existing state bar ethical rules, resulting in unnecessary confusion regarding the attorney’s ethical duties and obligations. Under the ABA Model Rules of Professional Conduct--and the specific rules that are ultimately adopted by the individual state court systems--a lawyer is expected to serve as both an officer of the court and a zealous advocate for the client, and these rules provide clear instructions for reconciling these duties. Allowing the oversight board or the SEC to superimpose a new set of national ethical rules on the well-established state court rules will likely cause unnecessary confusion regarding the duties and obligations of lawyers who represent accounting firms or who practice before the SEC. In addition, the ABA is also concerned that granting the oversight board and the SEC the power to overturn existing state ethical rules could interfere with the attorney-client relationship. By granting these entities unlimited authority to adopt new sets of national ethical rules for lawyers who represent accounting firms or who practice before the commission, the legislation could threaten a number of important existing state court ethical rules designed to protect the fiduciary relationship between attorney and client. In particular, both the oversight board and the SEC would have the power to override the attorney-client privilege, the work product doctrine and other evidentiary rules designed to encourage open and frank communications between the client and advocate. There is no reason why certain types of clients, like corporations and accounting firms, should have fewer rights in this regard than those currently enjoyed by all other clients under the existing state court rules. Finally, the American Bar Association opposes these attempts to create new national standards for lawyers because the ABA is already examining ways to strengthen the existing state court ethical rules. In March 2002, ABA President Robert Hirshon appointed an ABA Task Force on Corporate Responsibility to examine the current framework of laws, regulations, and ethical principles involving corporate governance in order to determine how the current system of checks and balances can be improved. The ABA Task Force already has crafted specific proposals to clarify and strengthen several of the ABA Model Rules of Professional Conduct governing the ethical duties of corporate lawyers, including Model Rule 1.13, which governs the duty of a corporate lawyer to report misconduct to the company’s senior management and board of directors. The Task Force will release its Preliminary Report in the near future, and if its recommendations are adopted by the ABA House of Delegates, it is likely that most state courts will choose to incorporate these changes into their state law as well. The ABA believes that changes to the legal ethics rules, if any, should be accomplished through the orderly adoption of new state court rules, not imposed by federal legislation or federal agency regulations. The American Bar Association believes that the provisions in H.R. 3763 authorizing the oversight board and the SEC to preempt state law and override the existing state court ethical rules that govern the conduct of all lawyers in the nation are counterproductive and will have an adverse effect on the legal system. To avoid these problems, the ABA urges you to support the proposed amendments to H.R. 3763 that are attached to this letter. Thank you for your consideration, and if you would like to discuss the ABA’s views on these important issues in greater detail, please feel free to contact Larson Frisby or Ellen McBarnette at (202) 662-1760. Sincerely, Robert D. Evans Cc: All Senate and House conferees on H.R. 3763 1Section 22(6) of the House bill defines a "person associated with an accountant" to include "…any partner, officer, director, or manager of such accountant (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such accountant, or any employee of such accountant who performs a supervisory role in the auditing process." 2 Section 2(a)(9) of the Senate bill defines "person associated with a public accounting firm" to include both a "professional employee of a public accounting firm, or any other independent contractor or entity that, in connection with the preparation or issuance of any audit report…receives compensation …from, that firm…or participates as agent or otherwise on behalf of such accounting firm in any activity of that firm." |
AMERICAN BAR ASSOCIATION Governmental Affairs Office 740 Fifteenth Street, NW Washington, DC 20005 ph: 202-662-1760 fx: 202-662-1762 |