The Sarbanes-Oxley Act, enacted by Congress on July 30, 2002, required the Securities and Exchange Commission (SEC) to establish standards of conduct for attorneys. The SEC implemented that mandate in 2003, when new rules went into effect for attorneys who represent public companies.
The rules dramatically alter the relationship between attorneys and their corporate clients, making the lawyer at the same time a zealous client advocate (under state bar principles) as well as a scrupulous auditor and police officer (under the new SEC rules).
The new rules now apply only to lawyers representing public companies, that is, generally for-profit companies with over 500 stockholders. However, it is easy to imagine the SEC standards being applied to lawyers giving fraud and abuse advice to any hospital or doctor. Such an expansion could be ordered by the courts or Congress, mandated by amendments to state rules governing lawyers, or simply by evolving lawyer conduct.
Accordingly, it is important for all health care clients and their attorneys to understand the new SEC rules, since they will likely have a profound impact on their future relationship.
A. Outside Counsel
The SEC rules reaffirm existing law by making it clear that an attorney giving advice to a corporation represents the corporate organization and not the officers, directors or employees of the organization. Professional responsibilities and ethical duties therefore flow to the corporate entity, and not to the individuals who run the corporation.
Further, if the attorney becomes aware of evidence of a material violation of law by a publicly traded client, or by any of that company's officers, directors, employees or agents, the attorney must report the evidence either to the client's chief legal officer (CLO), or to both the CLO and the chief executive officer (CEO), or to a qualified legal compliance committee (QLCC), if the company has one.
B. In-House Counsel
Once reported to the CLO, the CLO is required to launch an inquiry, and adopt an appropriate response in light of such inquiry. In addition, the CLO must notify and advise the reporting outside attorney of the results of the inquiry. In lieu of initiating an inquiry, the CLO may refer the report from the outside counsel to a QLCC.
C. Up the Ladder Reporting
If the reporting outside counsel reasonably believes that the CLO has provided an "appropriate response within a reasonable time," the matter ends there. If not, the outside attorney must explain why the response is not adequate to the CLO, the CEO and the directors to whom the evidence was reported.
In that situation, the reporting attorney must also report the evidence of the material violation of law to: the audit committee; another committee of the board consisting solely of independent directors; or the board of directors. If the attorney reasonably believes that it will be futile to report the evidence to the CLO or the CEO, the attorney may report directly to the audit committee, the independent board committee or the board of directors itself.
If the outside counsel reports directly to the QLCC, the outside attorney will have satisfied his or her legal obligation to report, and is not required to assess the corporation's response.
Similarly, the CLO may refer any report of a material violation that was made to the CLO to the QLCC. The duty of the CLO is then to inform the reporting attorney that the report was referred to the QLCC, and, thereafter, the QLCC bears the responsibility for responding to the evidence.
Inasmuch as reporting to a QLCC contains and streamlines the reporting process, and takes the matter out of the hands of the outside attorney, it is especially prudent for regulated companies to consider creating a QLCC. Large, non-regulated companies should also consider establishing a QLCC to be prepared for the possible future expansion of these rules.
E. Treatment of Confidential Information
The SEC rules also provide that an attorney may reveal confidential information to the SEC, without his or her client's consent, to the extent the attorney reasonably believes that the disclosure is necessary: to prevent the company from committing a material violation of law that is likely to cause substantial injury to the company; to prevent the company from committing perjury in regard to the SEC; or to rectify the consequences of a material violation of law arising out of or relating to the services rendered by the outside attorney, which violation has caused or may cause substantial injury to the company.
F. Expansion Beyond the SEC
These new rules could easily be applied outside the SEC, especially to fraud and abuse violations. Accordingly, in all likelihood these landmark SEC rules will eventually have an impact on the relationship between all health care companies and their attorneys.