New rules established by the Securities and Exchange Commission encourage lawyers to break their client confidentiality compact when clients are suspected of financial fraud.
The SEC rules, part of the fallout from the Sarbanes-Oxley Act of 2002, require lawyers to report concerns of violations of securities laws to corporate executives. If companies continue the violations after discussions with lawyers, the SEC wants lawyers to become whistle-blowers, advising federal regulators that a company is engaged in fraudulent activities.
The SEC also wants to require lawyers to resign and notify the government if a company warned about securities laws violations continues to engage in such activities.
Lawyers have traditionally stood behind the attorney-client privilege to prevent them from having to disclose client wrongdoing. "One way to ensure greater transparency is to make sure clients and lawyers have free-flowing discussion," said Scott Falk, partner in Chicago law firm Kirkland & Ellis.
State and local bar associations have sent letters to regulators stating their opposition to the rules, as has the Securities Industry Association and the Business Roundtable, an organization made up of chief executives from the nation's largest companies.
Several states already allow voluntary whistle-blowing by lawyers. The ABA is expected to vote on this issue at its annual meeting later this month. An ABA task force on corporate governance has recommended that lawyers voluntarily disclose situations of fraud to an outside party but not be required to publicly resign from an engagement.