Jeffrey Knetsch, partner at Brownstein Hyatt & Farber, discussed the importance of the new attorney rules of conduct for securities lawyers, "The SEC's 'up the ladder' reporting requirements for attorneys went into effect in August 2003 and will have a significant impact on the traditional attorney client relationship for attorneys representing public companies. Attorneys are required to report material violations of federal or state securities law, or breach of fiduciary duty." Mr. Knetsch pointed out that key terms in the standards of conduct are defined broadly, including what it means to "appear and practice" before the SEC. "If you are working on a significant contract for your company, and that contract will end up being filed with the SEC as a material contract, then by working on that document—even if you are not a securities lawyer—and discovering something relevant to the rules, your reporting obligations are triggered."
Mr. Knetsch also noted that the new standards of conduct apply to supervising attorneys who oversee a working attorney, "so you may have attorneys who do not think of themselves as involved in the company's securities function, but those attorneys are going to be implicated at certain times." Furthermore, the new requirements apply equally to in-house and outside counsel, such as those hired by a company to do an investigation of a potential securities violation.
Looking at who is an "issuer" under the new ethical standards, Mr. Knetsch observed that this term is defined broadly to include subsidiaries of public companies. "Lawyers working on a contract for a subsidiary need to be aware that these rules of conduct will apply to you if the contract becomes a material contract for the parent company."
Once triggered, Mr. Knetsch explained, the obligation under the standards of conduct is to "report up the ladder" if the attorney does not believe that the issuer has responded appropriately. "Basically, if you think you may know something that can fall under these reporting requirements, you must report the evidence to either the Chief Legal Officer (CLO) or both the CLO and the Chief Executive Officer (CEO). As to the requirement that any report be made "forthwith", Mr. Knetsch cautioned that "hindsight will most likely be 20/20 to the SEC, so it makes a lot of sense to report almost immediately."
Mr. Knetsch reminded counsel that these new standards of ethical conduct for attorneys practicing before the SEC went into effect in August 2003, and facets such as "noisy withdrawal" requirements are still being considered by the SEC.
In the afternoon session, Mr. Knetsch focused on new equity compensation standards in both the New York Stock Exchange (NYSE) and NASDAQ, noting that both have proposed rules to enhance the independence of directors approving executive compensation. "The SEC has largely left to the exchanges the regulation of executive compensation."
Both the NYSE and NASDAQ have adopted standards requiring shareholder approval of equity compensation plans for directors and officers, and such rules are now in effect. Mr. Knetsch identified the main difference as "the NYSE requires approval of every compensation plan, and NASDAQ has said that any plan that includes compensation to directors or senior executives must be approved." Some exceptions do exist, such as for new hires and 401(k) style plans.
Other important developments that Mr. Knetsch advised counsel to take into consideration are that the SEC has adopted rules that prohibit most loans to directors and executives, and SEC staff will no longer permit issuers to omit shareholder proposals regarding equity compensation plans.
 | Jeffrey Knetsch, partner at Brownstein Hyatt & Farber, discussed the importance of the new attorney rules of conduct for securities lawyers at FindLaw Corporate Counsel Center's Corporate Governance seminar at Stanford University. |