(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

SEC General Counsel Says Attorney Conduct Rules Preempt State Regulation

According to the SEC's general counsel, federal law will determine if attorneys have complied with the SEC's attorney reporting rules adopted pursuant to the Sarbanes-Oxley Act. In a letter to the Washington State Bar Association, Giovanni P. Prezioso noted that SEC rules provide a safe harbor from discipline and liability under inconsistent state law conduct rules if the attorney complies in good faith with the SEC's attorney reporting rules.

The rules impose an "up-the-ladder" reporting requirement when attorneys appearing and practicing before the SEC become aware of evidence of a material violation of securities laws or breach of fiduciary duty by the company or its officers, directors, or employees. An attorney must report such evidence to the company's chief legal officer or to both the chief legal officer and the chief executive officer. Because the issue of whether an attorney has acted in good faith requires an interpretation of a Commission rule, emphasized the general counsel, states must defer to the SEC's construction. The purposes of the Commission's good faith provision would be frustrated, he concluded, by a state-based definition of good faith that is inconsistent with the Commission's interpretation.

Thus, a conflicting state definition of good faith would be preempted. In this, he cited the U.S. Supreme Court's 2000 opinion in U.S. v. Locke, which held that a federal agency acting within the scope of its delegated authority may preempt state regulation.

The Commission's rules would also be frustrated, he stated, if a state bar association initiated a disciplinary proceeding against an attorney who, in complying in good faith with the Commission's rules, did not comply with a conflicting rule of professional conduct. Even if the state bar proceeding exonerated the attorney, reasoned the general counsel, the proceeding itself would thwart the purposes of the SEC's rules by subjecting attorneys to disciplinary proceedings for attempting in good faith to comply with a Commission rule that conflicts with a rule of professional conduct.