1. Association of Corporate Counsel
Reporting Up and Out Juggling the competing requirements of state ethical rules and SEC standards of professional conduct
Association of Corporate Counsel
© 2015
ACC would like to extend its gratitude to Lily Hughes, Esq. for her assistance with these materials. Ms. Hughes provided valuable insight and permitted ACC to draw from her ideas in order to enhance the content of this program.

2. AGENDA What Rules Apply? Reporting Up the Ladder
Rule 205 & RPC
Appearing and Practicing before SEC
Reporting Up the Ladder
When?
Level of awareness
Gravity of Wrongdoing
Lawyer actions
Permissive Reporting Out
ABA Model Rule
Rule 205
Preemption of ethical state rules?

3. HYPOTHETICAL
IHC finds out that a potential round-tripping transaction is taking place within the company:
A services sale contract and an equipment purchase contract are executed with the same entity at the same time
Both contracts are for the same amount, and
Sale contract will allow company to meet its earnings for the quarter which in turn will entail employees to receive a significant bonus (see video)
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5. WHAT RULES APPLY? Rule 205 State ethical rules
Appearing and Practicing before the SEC
Not appearing and practicing before the SEC

6. WHAT RULES APPLY? (Cont’d)
Appearing and practicing before the SEC
Rule 205
Transacting business with the Commission, incl. comm. in any form;
Representing issuer in:
SEC admin. proceeding
SEC investigation, inquiry, info request, or subpoena;
Advising issuer as to documents to be submitted to SEC
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7. DUTY TO REPORT UP THE LADDER
When?
ABA Model Rule 1.13 (b) Comment 3
Rule 205
Report
Actual Knowledge
Violation of obligation to organization or law
Related to Representation
Likely substantial harm to organization
Report
Evidence of Material Violation
In NY reporting up the ladder is one of the measures suggested by Rule 1.13
Unless reasonably believes not in the best interest of the organization

8. DUTY TO REPORT UP THE LADDER (Cont’d)
Level of awareness
Rule 205 “Aware of evidence of material violation” Credible evidence based upon which it would be unreasonable for a prudent and competent lawyer, under the circumstances, not to conclude that a material violation is reasonably likely…
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9. DUTY TO REPORT UP THE LADDER (Cont’d)
Gravity of the Wrongdoing
Rule 205
Material
Violation of state or U.S. securities laws
Violation of any state or U.S. law
Breach of fiduciary duty
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10. DUTY TO REPORT UP THE LADDER
What action should the lawyer take?
Rule 205
Notify reporting lawyer
No violation
Reasonable Inquiry
Supervisory attorney
CLO or CLO & CEO
Appropriate response
Violation
QLCC
Notify reporting lawyer

11. DUTY TO REPORT UP THE LADDER
What action should the lawyer take?
Reasonably believes futile to report to CLO/CEO
Rule 205
Audit committee
Attorney
Committee of disinterested persons
No appropriate response – reasonable time
Board of Directors
Appropriate response:
No material violation
Appropriate remedial measures
Retained attorney and implemented recommendations
Retained attorney – reasonable defense
must
Explain Reasons CLO/CEO/Directors

12. DUTY TO REPORT UP THE LADDER
No SEC decisions on violation of Rule However…
CFO and Controller inflated profits by eliminating vested employee benefits
Memorandum for auditors: no legal obligation to report benefits
GC received legal opinion correcting misperception
GC was the cause of company’s violation of SEC rules
In re John E. Isselmann JR., Securities Act Release (Sep. 2004)
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13. PERMISSIVE REPORTING OUT
Rule 1.6 (NY)
Exceptions to confidentiality…
Lawyer reasonably believes necessary to
Prevent death or subst. bodily harm
Prevent a crime
Rule (d)(2)
Exceptions to confidentiality…
Prevent perjury or fraud
Prevent material violation likely to cause subst. injury to fin. and prop.
Rectify consequences of material violation to fin. and prop. in which attorney’s services have been used

14. PERMISSIVE REPORTING OUT
Preemption of State Ethical Rules
Rule Where the standards of a US jurisdiction where an attorney is admitted or practices conflict with this part, this part shall govern.
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15. PERMISSIVE REPORTING OUT
Safe Harbor
Rule (c) An attorney who complies in good faith with the provisions of this part shall not be subject to discipline or otherwise liable under rules of the jurisdiction where the attorney is admitted or practices.
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16. PERMISSIVE REPORTING OUT
State Bar Reactions
In the absence of case law, a lawyer should not disclose confidences unless authorized by the RPC
WSBA: 2003 Interim Formal Opinion – withdrawn in 2006
CA State Bar: Letter to SEC (Aug. 2003); Ethics Alert (Mar ); Law review (Dec. 2004)
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17. PERMISSIVE REPORTING OUT
State Bar Reactions (Cont’d)
CA State Bar law review article (Dec. 2004)
Attorney disclosing confidences needs to believe strongly that:
He is a lawyer appearing and practicing before the SEC
Disclosure is reasonably necessary
He has the ability to demonstrate “good faith” reliance on safe harbor
Reliance on Rule 205 preemptive effect would be upheld by a court
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18. PERMISSIVE REPORTING OUT
State Bar Reactions (Cont’d)
NYCLA Comm. Prof. Ethics Formal Opinion 746 (Oct. 2013)
RPC 1.6(b)(2) allows disclosure to prevent a crime
Rule 205 allows disclosure of “material violation”
Rule 205 is broader and inconsistent with RPC
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19. PERMISSIVE REPORTING OUT
SEC Interpretation
Letter in response to WSBA (2003)
Speech in response to CA State Bar Corp. Comm. (2004)
SEC authority to implement rules of conduct that supersede state law
Disciplinary proceedings may thwart purposes of SEC rules
Support to lawyers relying on preemptive effect of SEC rules
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20. PERMISSIVE REPORTING OUT
SEC Interpretation (Cont’d)
Amicus curiae brief filed in Liu Meng-Lin v. Siemens AG
Attorneys are not required to make reports to the Commission and, indeed, may often be precluded from doing so as a result of their ethical obligations to their clients
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Brief of the Securities and Exchange Commission, Amicus Curiae in Support of the Appellant, 2014 WL (C.A.2, Feb. 20, 2014) Liu MENG-LIN, Plaintiff-Appellant, v. Siemens AG, Defendant-Appellee
Liu Meng-Lin v. Siemens AG, WL (C.A.2 N.Y. August 14, 2014)

21. PERMISSIVE REPORTING OUT
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Award eligibility
original information, and
successful SEC enforcement actions
Not original information if obtained:
Through privileged communication
In connection with legal representation,
In connection with process to identify, report and address violations of law…
17 CFR § F-2 (a)(2) Award eligibility 17 CFR § F-4 (b)(1)(i) Original information SEC Release No (Aug. 2011) “No prospect of financial benefit for submitting information in violation of an attorney’s ethical obligations.”

22. PERMISSIVE REPORTING OUT
NYCLA Comm. on Pro. Ethics
Formal Opinion 746, Oct. 2013
Two ethical issues:
Confidentiality (RPC 1.6 )
Conflict of Interest (RPC 1.7)
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23. PERMISSIVE REPORTING OUT
NYCLA Comm. on Pro. Ethics
Formal Opinion 746, Oct. 2013
Disclosure of confidential information MUST
Fit within an exception to RPC 1.6, or
Be necessary to correct a fraud, crime or false evidence before a tribunal (RPC 3.3)
Note: even when disclosure is permitted disclosure must be limited to “reasonably necessary information”
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24. PERMISSIVE REPORTING OUT
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NYCLA Comm. on Pro. Ethics
Formal Opinion 746, Oct. 2013
Conflict of interest (RPC 1.7)
Risk that the lawyer’s professional judgment on behalf of the client will be adversely affected
Note 1: in rare situations in which report is mandatory (Model Rule 3.3(b)) the financial incentive could be less of a factor in determining the existence of conflict
Note 2: former lawyers may not reveal information that could not have been revealed in the course of the representation

25. United States ex rel. FLPA v. Quest Diagnostics & Unilab Corp. 734 F
United States ex rel. FLPA v. Quest Diagnostics & Unilab Corp F.3d 154 (2d Cir. Oct. 25, 2013)
Relevant issues: (i) whether FCA preempt state ethical rules; (ii) whether former Unilab’s counsel violated N.Y. Rule 1.9(c)
Conclusion:
FCA does not preempt state attorney confidentiality rules
Citing Bates v. Dow Agrosciences LLC, 544 U.S. 431 (U.S. 2005)
Counsel reasonably could have believed that defendants intended to commit a crime but his disclosure was beyond what was necessary

26. PRACTICAL LESSONS Remember who your client is (Rule 1.13)
Take into account state rules of professional conduct and bar opinions
Prevent wrongdoing by developing and implementing an effective compliance and training program
Ensure there is a clear and effective internal policy regarding up-the-ladder reporting for lawyers
IRS Examples of General Fraud Investigations, Fiscal Year 2014:
Recent FCPA enforcement activities:
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27. Association of Corporate Counsel
THANK YOU!
Association of Corporate Counsel