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Published: Fri, 02 Feb 2018
Lawyers as gatekeepers
It has been argued for a long time on the role of the gatekeepers by researchers. As John Coffee states: “all boards of directors are prisoners of their gatekepers”, the failure of gatekeeper has played an important role in facilitating corporate failure and corporate collapse. Recent corporate scandals from Enron to WorldCom have focused people’s attention on corporate governance-especially the effect of failure by corporate gatekeers. With a substantial interest in improving corporate governance to prevent future scandals and losses, sholars of corporate governance have set researchs on the performence and the liability on of the professional advisers of the board and the shareholder-corporate lawyers, independent directors, auditors, rating agencies, financial advisers, and government regulators. It has been pointed out that to promote accountability, transparency, and compliance, corporate governance systems rely heavily on “gatekeepers”, Had the gatekeepers of those corporates, for example, the auditors of Enron-Arthur Andersen, been more effective, shareholders would not have suffered the huge losses they did.
Meanwhile, Congress passed the Sarbanes-Oxley Act of 2002 (SOX). Notwithstanding whether it has reduced America’s international competitive edge against foreign financial service providers, the direct corporate governance provisions of the Act, such as the mandating of extensive internal controls, may be more costly than beneficial., and the Act’s gatekeeper-related provisions may not go far enough.
In order to demostrate the effect of the gatekeepers, this essay will first difine the concept of the gatekeeper to know who are the gatekeepers in corporates and show some differences among gatekeepers. Then I would refer to focus on one type of the gatekeepers-the lawyers in order to show its diffferent effect of failure in depth. Futher, there would be an argument about the modern reforms. Finally, the future of gakekeepers would be dicussed and some suggestions will be provided.
Who Are Gatekeepers?
Starting in December 2001, a string of major corporate scandals exposed that devastated many investors. Quickly after the collapse of Enron, a wave of highly publicized scandals-Tyco, Adelphia, and Global Crossing came in light. Then, in July 2002, WorldCom (later MCI and now Verizon Business) disclosed as it had been discovered substantial accounting irregularities, which eventually would result in adjustments to its financial statements totaling more than $11 billion and the largest bankruptcy filing ever.
Although these scandals involved different factors and circumstances, a common theme of the investors was the breakdown of corporate governance—that is, the policies and practices that determine how a corporation is operated and governed. By promoting accountability, transparency, and compliance, corporate governance systems protect the interests of shareholders. Corporate directors, securities analysts, and internal and external auditors design and enforce a corporation’s system. Collectively, these groups serve as “gatekeepers.” It has been argued the gatekeeper is an independent professioanl who has one of two distinct roles, which tend to overlap in practice. One role the gatekeeper plays is the ‘private police’ or ‘watch dog’, and another one is described as a reputational intermediary. The first role of the gatekeeper means who is “positioned at a critical point in the flow of events” where approval is needed before a transaction can close. So that it can guard the entrance of the capital markets by withholding necessary consent. The later and more distinct one means that it watch the door by providing certification or verification services to investors, leading the investors to invest capitals with its reputational capitalism which should be gained for a long time.
Also, many gatekeepers perform an advisory role with respect to structural or regulatory issues regarding a transaction without necessarily providing verification, certification, or approval. Such advisors are gatekeepers too because we expect them to advise a client to avoid illegal conduct.
In this paper, taking these considerations into account, the concept of gatekeeper could be defined as a person or firm that provides verification or certification services or that engages in monitoring activities to shackle illegal or inappropriate conduct in the capital markets.
The Role Of The Lawyers
The financial crisis from 1990s to 2000s and a wave of financial restatements strongly suggest that auditors became compromised during the 1990s and acquiesced in risky and questionable accounting policies favored by corporate managements. But auditors were neither the only profession that dealt with financial disclosures nor that seemed to have become compromised during the 1990s. Sarbanes-Oxley Act sought to restore the independence of all gatekeepers by different strategies. In the case of auditors, Congress decreed a divorce, separating the consultant role from the auditing role. In the case of analysts, it authorized the SEC to engage in broad rule-making designed to “address conflicts of interest that can arise when securities analysts recommend equity securities … in order to improve the objectivity of research.” This leaves the attorney as the lone remaining agent with responsibilities for the disclosure process who has not yet been subjected to prophylactic rules affecting its professional structure or independence.
Not considering the following functions: (a) an advocate; (b) a transaction cost engineer, the role of the lawyers as gatekeeper has been argued for a long time. The organized bar who prefers to view the attorney as an adcocate does not accept the role of the corporate atterney as gatekeeper. Some researchers also chanllenge the notion that lawyers should act as gatekeepers.
In the corporate governance context, the role of the lawyers are complex: lawyers are not only meant to be impartial. An attorney is also required to “advance the client’s lawful objectives and interests.” Every lawyer knows about the duty of zealous advocacy or zealous representation of the client. As Geoffrey Hazard has written, “A lawyer’s service consists of guiding affairs for the client’s private and often selfish purposes, with an eye to legal requirements that have been designed for the very purpose of limiting or regulating selfish purposes.”
The relationship between client and lawyer is like an “informal partnership.” They work together toward a common goal, although the client, not the lawyer, ultimately calls the shots. This is particularly true of in-house lawyers because of their long-term role as employees or subor-dinates of the client. In describing the lawyer’s role, it is useful to contrast it with the role of the judge. The traditional figure of justice—blindfolded—represents the court or the judge, not the lawyer. The lawyer, particularly in litigation, seeks to achieve success for his or her client to the disadvan-tage of the opposing client; the judge interposes herself between the two positions, seeking justice. So the judge’s ethical norm is impartiality; the lawyer’s is loyalty.
Reseachers and commentators have recognized the tension between the lawyer’s fidelity to his client on the one hand, and his role as gatekeeper on the other—and lawyers are at the center of the corporate governance debate.
Can The Lawyers Be Good Gatekeepers?
Opponents of a gatekeeper role for attorneys have long argued that: (a) such a role conflicts with the traditional responsibilities of loyalty that the attorney owe their clients; and (b)imposing gatekeeping obligations on attorneys will chill attorney/client communications and thereby reduce law compliance.
Thus, they have resisted a pending SEC proposal that would require an attorney to make a “noisy withdrawal” when the attorney is unable to stop or prevent certain ongoing material violations of law by the corporate client.
These questions will be argued next. Firstly, everyone will agree that lawyers are clients’ agents and that lawyers’ traditional role in the adversary system is to help clients pursue lawful goals through those lawful means that are available. But that is quite different from saying that lawyers should do whatever clients want, or assist clients in achieving illegal pursuits.
A famous lawyer, among his other accomplishments, Elihu Root says: “half of the practice of a decent lawyer consists in telling would-be clients that they are damn fools and should stop.” And in one famous case, Root and his co-counsel were nearly held in contempt for representing a corrupt politician, and were lectured by the presiding judge as follows:
I ask you young gentlemen, to remember that good faith to a client never can justify or require bad faith to your own consciences, and that however good a thing it may be, to be known as successful and great lawyers, it is even a better thing, to be known as an honest man.
Thomas Shaffer and others have also written that lawyers have both a right and an obligation to engage in a moral dialogue with their clients. At a minimum, if lawyers owe clients information, including information that suggests that the client’s proposed or completed conduct is criminal (or wrongful in other respects), what should the lawyers do? Unsurprisingly, it has long been the law that an attorney who files a false disclosure document with the SEC can be held liable by that agency as an “aider and abetter” of the primary violation by the corporate client. Thus, some obligations which conform the lawyers play a gatekeeper role already exists. (this will be shown at next part-recent regulations of reforms) .
Secondly, as for the communication of the attorneys and the client, the most important argument against imposing “gatekeeper” obligations on attorneys is that attorneys may be less able to communicate freely with their clients if such obligations – – and, in particular, a “noisy withdrawal” requirement – – were imposed. In response to this claim, it is first necessary to recognize that the ultimate goal of the law is to achieve law compliance, not to maximize uninhibited communications between the attorney and the client.Client confidentiality is a means to an end, not an end in itself. Thus, the law has long placed some limitations on attorney/client communications (such as the crime/fraud exception).
Still, even with this concession, it remains true that lawyers can counsel most effectively when there is open, relatively unconstrained communication between their clients and themselves. Hence, the practical issue becomes whether gatekeeper obligations would necessary chill desirable attorney and client communications. The stress here should be on the word “desirable.” What would be the likely impact of the SEC’s proposed “noisy withdrawal” standards on such communications? A starting point for this analysis should be the recognition that the client knows little law and will almost always want to know if contemplated action is illegal. From this premise, it follows that the corporate official contemplating prospective action will still inquire of counsel whether the course of action under consideration is lawful. Indeed, the more the government pursues white-collar criminal prosecutions and punitive regulatory actions in the contemporary post-Enron environment, the more, in turn, that corporate officers are likely to inquire before they act. When then will communications be most likely to be chilled? The logical answer is that the officer who has already acted may fear inquiring of an attorney if the officer’s conduct was lawful – – precisely because the officer fears that the attorney may be under an obligation to report unlawful actions to higher authorities or, indirectly, to the SEC. In short, it is the “ex post” inquiry by the client of the attorney that is most likely to be chilled. In a well-known article, Professors Kaplow and Shavell have argued that the case for protecting ex ante communications between attorneys and clients is far stronger than the case for protecting ex post communications.
Recent Rugulations Of Reforms
Three recent legislative and regulatory proposals seek to enlist lawyers in thwarting crime:
The American Bar Association (ABA) recently adopted an amendment to its model rule on confidentiality that would allow lawyers to disclose information “to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer’s services.” The ABA also adopted a parallel provision allowing lawyers to disclose to “prevent, mitigate or rectify substantial injury” caused by the prohibited conduct in the past.
In 2002, Congress required the Securities and Exchange Commission (SEC) to promulgate some regulations governing securities lawyers. It states that: “The Commission shall issue rules . . . setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission.” In response, the SEC adopted rules that require securities lawyers who become aware of “credible evidence” that a client is violating a federal or state securities law or is materially breaching a fiduciary duty arising under federal or state law to report the matter to the chief legal officer, the chief executive, or to a legal compliance committee, and ultimately to take further steps. The SEC proposed, but held in abeyance pending further comment, a rule that would require attorneys who have gone up the ladder within a corporation and who still “believe that the reported material violation is ongoing or is about to occur and is likely to result in substantial injury to the financial interest of the issuer or of investors . . . to withdraw from the representation, notify the Commission of their withdrawal, and disaffirm any submission to the Commission that they have participated in preparing which is tainted by the violation.”
The ABA’s most recent revisions to the Model Rules includes a revised Model Rule 1.13, that parallels the adopted and proposed SEC regulations. Revised Model Rule 1.13(c) is a permissive provision that would allow organizational lawyers who have gone up the ladder to disclose information, but only when disclosure is necessary to prevent “‘substantial injury’ to the organization.”
It is a good thing for lawyers to screen client misconduct. It keeps lawyers, themselves, honest. It serves societal interests in preventing harm. It enhances judicial administration. And it makes lawyers think about the morality and legality of clients’ conduct as well as their own, thus encouraging them to help clients recognize and pursue appropriate behavior. All of these are valid functions for lawyers, and they have always been understood to play a part in the lawyer’s everyday dealings with clients. The recent reform proposals simply address some regulators’ perceptions that lawyers’ own understanding and implementation of these functions has not been adequate in recent times.
Elihu Root was an aggressive, ultrapartisan lawyer. Yet he warned us that the lawyer’s job consists as much of standing in the way of misguided client pursuits as of implementing client desires. No one except misguided practitioners and cynical criminal clients truly envision the lawyer’s role as assisting wrongful ends. We are gatekeepers, and we should never forget it.
But gatekeeping is only one part, and a relatively small part, of the lawyer’s role. If lawyers are to put the role of gatekeeper into effect—maybe at the cost of their economic benefits—regulation must balance lawyers’ mutiple roles. That is, the conditions of disclosing of the corporate by the lawyers should be taken seriously into consideration.
All in all, Gatekeepers are critical in protecting the interests of shareholders. As for the complexity of the role of the lawyers in particular, we need more designed proposals to improve and perfect our corporate governance systems.
1. John C.Coffee Gatekeepers: The Professions and Corporate Governance, Oxford University Press, Oxford 2006
2. John C. Coffee, “Understanding Enron: It’s About the Gatekeepers, Stupid,” Business Law 1403 (2002)
3. John C. Coffee, “The Attorney as Gatekeeper: An Agenda for the SEC”, Columbia Law and Economic Working Paper No. 221
4.Kirkbride J.and Letza S “Corporate Governance and Gatekeeper Liability: the lessons from public authorities” Corporate Governance, Volume 11, Number 3, July 2003, 192-280
5. David J. Beck, “The Legal Profession at the Crossroads: Who Will Write the Future Rules Governing the Conduct of Lawyers Representing Public Corporations?”, 34 ST. Mary’S L.J. (2003)
6. Arthur B. L, “Differentiating Gatekeepers”, Brooklyn Journal of Corporate, Financial & Commercial Law, (2006)
7. Howard Stock’s “Lawyer Rule May Chill Information Flow”, Investor Rel. Business., Aug. 18, (2003)
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