Conflicting Currents: The Obligation to Maintain Inviolate Client Confidences and the New SEC Attorney Conduct Rules

Abstract

In January 2003, the Securities and Exchange Commission (the "SEC") adopted new rules governing the conduct of attorneys appearing and practicing before it.' Those rules require attorneys to report "up-the-ladder" within the client organization, and purport to immunize attorneys who disclose client confidences to the SEC in certain circumstances. The SEC has also proposed rules that would mandate reporting of client confidences outside the client to the SEC. The provisions of the rules, both as proposed and as adopted, raise important issues regarding traditional, state law obligations of attorney-client confidentiality.

California attorneys have an obligation to maintain their clients' secrets. This obligation springs from several independent sources: the State Bar Act, the California Evidence Code, and the California Rules of Professional Conduct as approved by the California Supreme Court. The State Bar Act requires attorneys "[t]o maintain inviolate the confidence[s], and at every peril... to preserve the secrets, of his or her client[s]." Similarly, the Evidence Code requires an attorney to assert the attorney-client privilege whenever a party seeks disclosure of a privileged communication. The obligation to maintain client confidences and preserve client secrets embedded in these statutes reflects the long-standing recognition that society benefits when clients receive advice informed by full and frank communication with their legal counsel. The obligation also reflects a policy that attorneys should avoid conflicts of interest with their clients.

The Corporations Committee of the Business Law Section of the California State Bar (the "Corporations Committee") has prepared this article to examine the existing legal conflicts between a California attorney's statutory obligations to maintain client confidences and the SEC's new attorney conduct rules. Part I of this article discusses the background of the SEC's attorney conduct rules, Part II reviews the statutory and fiduciary duties of California attorneys to maintain client confidences, and Part III analyzes the SEC's authority to adopt its new attorney conduct rules and to give them preemptive effect.