Do corporate lawyers have obligations to rat out clients to the U.S. Securities and Exchange Commission? Many believe the SEC requires this result. Is that right? What if state-based ethics rules mandate the opposite? What is a lawyer to do?

For a number of years, I have been predicting a test case/showdown between lawyers who follow the dictates of the states in which they are licensed to practice law versus the conflicting dictates of the rules and regulations promulgated by the U.S. Securities and Exchange Commission after Congress passed the Sarbanes-Oxley Act of 2002.1 The contrast between the two regimes can be pretty dramatic. Under the SEC’s way of doing things, a capital markets lawyer may disclose “material violations” (past, current, future) to the Commission. If a lawyer does not handle that “permissive” disclosure obligation correctly, she can be subject to a liability whipsaw: If you fail to disclose to the SEC and you are wrong, the SEC (and possibly the plaintiffs’ bar) can go after you; if you disclose to the SEC and you are wrong, clients and stockholders can sue you. In judging the appropriateness of your conduct, the SEC (with the benefit of hindsight) will judge you under the “reasonable lawyer” standard; and the Commission has at its disposal the full panoply of sanctions under the Securities and Exchange Act of 1934 to punish the offending lawyer.

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