SEC Commissioner Signals Renewed Vigor For Up-The-Ladder Rule And Corporate Attorney Regulation

• Published date: 23 March 2022
• Subject Matter: Accounting and Audit, Corporate/Commercial Law, Audit, Corporate and Company Law, Directors and Officers, Securities
• Law Firm: Holland & Knight
• Author: Mr Danny Athenour, Catherine Rowsey and Scott Mascianica

Now, nearly 20 years after Congress passed the Sarbanes-Oxley Act, the congressional mandate to promulgate and enforce rules for corporate attorneys has gone largely unfulfilled. But all that may change. A recent speech by SEC Commissioner Allison Herren Lee brought corporate-attorney regulation back into the spotlight. Still, regulating attorneys and, in particular, the attorney-client relationship, raises difficult questions of policy and regulatory incentives. This post dives into the rule addressing reporting responsibilities of corporate lawyers ' the "Up-the-Ladder Rule" ' and revisits the 2002 debate surrounding the Rule's adoption. With that background, we look to Commissioner Lee's speech and recent proposals to understand where regulation in this space may be headed and where the sticking points likely still lie.

Inward, Upward and Outward: The "Up-the-Ladder Rule" Explained

The Sarbanes-Oxley Act was passed in the wake of several corporate accounting scandals that occurred in the early 2000s.¹ The Act established rules for public companies regarding disclosure, governance, auditing, reporting and risk management. Among those rules, Congress mandated the SEC, under Section 307, to "adopt minimum standards of professional conduct for attorneys appearing and practicing before the Commission in the representation of issuers."²

In response to that mandate, the SEC passed the so-called "Up-the-Ladder Rule," which requires an attorney to immediately report to the company's chief legal counsel (CLO) or chief executive officer (CEO) evidence that a material violation of securities laws, a breach of fiduciary duty ' or a similar violation by the company or any agent thereof ' has occurred, is occurring or is about to occur.³ If the attorney believes reporting to the company's CEO and/or CLO would be futile, the attorney may report to the company's audit committee, independent committee or board.⁴ If, within a reasonable time, the reporting attorney does not reasonably believe that the CLO or CEO has provided an appropriate response, the attorney must report the evidence of a material violation to the company's audit committee, independent committee or board, depending on the internal structure of the issuer.⁵ If, within a reasonable time, the reporting attorney still does not reasonably believe the issuer has made an appropriate response, the attorney must explain the reasons for this belief to the CLO, CEO and the directors to whom the attorney reported...