Professional & Ethical Obligations of In-House Counsel in the Securities Industry

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Andrew Fleming, Norton Rose Fulbright Canada LLP. Marlo Kravetsky, TD Bank Group. Andrew Matheson, McCarthy Tétrault LLP. Sarah Shody, Torys LLP. 1. Overview. Professional &. . Ethical . Obligations. ID: 702125 Download Presentation

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Professional & Ethical Obligations of In-House Counsel in the Securities Industry




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Presentations text content in Professional & Ethical Obligations of In-House Counsel in the Securities Industry

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Professional & Ethical Obligations of In-House Counsel in the Securities Industry

Andrew Fleming, Norton Rose Fulbright Canada LLPMarlo Kravetsky, TD Bank GroupAndrew Matheson, McCarthy Tétrault LLPSarah Shody, Torys LLP

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OverviewProfessional & Ethical

ObligationsChallenges for in-house counselConflictsMandatory and prohibited conduct Reporting up-the-ladder Managing riskRecognizing and addressing your organization’s greatest risks Securities regulatory reporting & discretionary disclosure IIROC reportingOSC Credit for Co-operation Internal investigations 2

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Key ThemesUnique challenges for in-house counsel Increasing involvement in the business

Traditional functions vs. emerging functionsCharacteristics of the securities industry Complexity, extensive regulation, financial stakes In-house counsel are subject to the same ethical and legal obligations as other counsel, even though they may apply differently and present different challenges 3

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Multiple Roles of In-House CounselIn-house counsel have many roles – including those that go beyond traditional lawyer roles:Legal roles: dealing with corporate governance, transactions, litigation, regulators, internal investigations, internal education, etc.

Quasi-legal roles: compliance, ethics officer, etc.Management and business roles: managing other in-house and outside counsel, corporate officer/director, strategic planning, crisis management, risk management, etc.2012 In-House Counsel Survey: 25% of time spent on business side“Gatekeeper” function4

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Same Obligations “[In-house counsel] are regarded by the law as in every respect in the same position as those who practice on their own account. The only difference is that they act for one client only, and not for several

clients … They are subject to the same duties to their clients and to the court. They must respect the same confidences. They and their clients have the same privileges.” (Crompton v. Commissioners of Customs and Excise, [1972] 2 All E.R. 354 (Q.B.), cited in R. v. Campbell, [1999] 1 S.C.R. 565)5

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LSUC ObligationsObligations from LSUC include:Honesty and candour

Avoiding conflicts of interestAvoiding knowing assistanceAvoiding negligent assistanceUp-the-ladder reporting6

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Honesty and CandourRule 3.2-2 “When advising clients, a lawyer shall be honest and candid.”

“The advice must be open and undisguised and must clearly disclose what the lawyer honestly thinks about the merits and probable results.” (Commentary to R. 3.2-2)Candour is an aspect of the duty of loyalty (R. v. Neil, 2002 SCC 70) (Commentary to R. 3.2-2) What does honesty and candour mean for in-house counsel?7

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Representing the OrganizationIn-house counsel owe professional obligations to the organization, not to any individual or constituent part“Notwithstanding

that the instructions may be received from an officer, employee, agent, or representative, when a lawyer is employed or retained by an organization, including a corporation, in exercising his or her duties and in providing professional services, the lawyer shall act for the organization.” (LSUC Rules of Professional Conduct, R. 3.2-3, added in 2004)Why was the LSUC motivated to make this seemingly obvious statement?Similar Rule in CBA Code of Professional Conduct8

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Conflicts of InterestWhen is there is a conflict?A conflict arises

where there is “a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s own interest or by the lawyer’s duties to another current client, a former client, or a third person.” (R. v. Neil, 2002 SCC 70)Rule 1.1 recently amended (as of Oct. 1, 2014) defining “conflict of interest” as “the existence of a substantial risk that a lawyer’s loyalty to or representation of a client would be materially and adversely affected…a genuine, serious risk to the duty of loyalty or to client representation” 10

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Conflicts of Interest cont’dChallenges for In-House Counsel:Advising multiple companies within a corporate group, especially where there are minority interests

Advising not only the organization, but also individual employees, officers, directors or shareholdersDual roles as counsel and officer or directorRecent amendment of Rule 1.1 expands the definition of “client” to include a person on whose behalf the lawyer renders or agrees to render legal services or who reasonably concludes that the lawyer has agreed to render legal services on their behalf11

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Joint RetainersRule 2.4-5: The lawyer must advise both clients that The lawyer has been asked to act for both or all of them

There is no confidentiality between clients and If a conflict develops that cannot be resolved, the lawyer cannot continue to act for both or all of them and may have to withdraw completely What are best practices? E.g. An in-house lawyer represents his employer, a broker, as well as an employee, in a lawsuit in which both are named. The broker wishes to settle and the individual doesn’t. 12

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Consent Rule 3.4-2: A lawyer shall not act where there is a conflict of interest unless there is express or implied consent and it is reasonable for the lawyer to conclude that he or she is able to represent each client without material adverse effect upon the representation of or loyalty to the clients

Actual material impairment of representation or loyalty may not be waived Disclosure is essential 14

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No Knowing AssistanceRule 3.2-7:

A lawyer shall not knowingly assist in or encourage any dishonesty, fraud, crime, or illegal conduct or instruct a client or any other person on how to violate the law and avoid punishment. Not limited to a client’s misconduct“knowingly” – held to require proof of actual knowledge, recklessness, or willful blindness, which is a high level of culpability 15

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No Negligent AssistanceRule 3.2-7.1

: A lawyer shall not act or do anything or omit to do anything in circumstances where he or she ought to know that, by acting, doing the thing or omitting to do the thing, he or she is being used by a client, by a person associated with a client or by any other person to facilitate dishonesty, fraud, crime or illegal conduct. Not limited to being used by a client – could be any other person Negligence standard Why was this prohibition added in 2012? 16

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Scope of Knowing or Negligent AssistanceBroader than “crime” and “fraud”Includes “dishonesty” and “illegality”

Where is the line?E.g. You determine that the most financially sensible option for your company is to breach a contract. Is this a violation of the prohibitions on negligent and knowing assistance?17

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Up-the-ladder Reporting Rule 3.2-8 Added in March 2004

Applicable to lawyers “employed or retained” by an organizationTrigger: the lawyer “knows” that the organization intends to act, has acted or is acting “dishonestly, fraudulently, criminally, or illegally” – same scope as the prohibitions against assistance Commentary: “…includes acts of omission…” “…conduct likely to result in substantial harm to the organization, as opposed to genuinely trivial conduct…” 18

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First Step on the Ladder Rule 3.2-8(a) - If the trigger is met (i.e. knowledge), the lawyer must

“advise the person from whom the lawyer takes instructions and the chief legal officer, or both the chief legal officer and the chief executive officer, that the conduct is, was or would be dishonest, fraudulent, criminal, or illegal and should be stopped” 19

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Further Up…the Short Ladder Rule 3.2-8(b):

“if necessary because the person from whom the lawyer takes instructions, the chief legal officer, or the chief executive officer refuses to cause the conduct to be stopped, advise progressively the next highest persons or groups, including ultimately, the board of directors, the board of trustees, or the appropriate committee of the board, that the conduct was, is or would be dishonest, fraudulent, criminal, or illegal and should be stopped” 20

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The Ladder Ends - Withdrawal Rule 3.2-8(c): “if the organization, despite the lawyer’s advice, continues with or intends to pursue the wrongful conduct,

withdraw from acting in the matter in accordance with rules in Section 3.7”Meaning what? Commentary: “In some but not all cases, withdrawal would mean resigning from his or her position or relationship with the organization and not simply withdrawing from acting in the particular matter.” Other guidance from the Commentary: “In determining their responsibilities under this rule, a lawyer should consider whether it is feasible and appropriate to give any advice in writing.” 21

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Policy – Public Interest Commentary to the reporting up-the-ladder

“…in the organizations’ and the public’s interest that organizations do not violate the law…” “….not only about the technicalities of the law but about the public relations and public policy concerns...” “… lawyers for organizations, particularly in-house counsel, may guide organizations to act in ways that are legal, ethical, reputable, and consistent with the organization’s responsibilities to its constituents and to the public.”

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Confidentiality General rule – R 3.3-1 Very broad and subject to limited exceptions

Justified or permitted disclosure – R 3.2-1.1 and 3.3Required by law or by order of a tribunal of competent jurisdiction Imminent risk to an identifiable person or group of death or serious bodily harm, disclosure allowed, pursuant to a judicial order where practicable No “whistle-blower” exception where an organization acting dishonestly, fraudulently, criminally May consult with other counsel for advice 23

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Multi-jurisdictional Practice Different provincial standards Appearing and practicing before the SEC

“Evidence” of a “material violation” Reporting up the ladder Disclosure of confidential information permitted to prevent substantial injury to the financial interests or property of the client or investors, prevent perjury, or rectify a material violation – different than LSUC position 24

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Managing Risk While LSUC Rules represent minimum required standards, internal policies aspire to achieve best practices and avoid harm

Potential harms include damage to reputation, financial loss and legal liability Avoidance of harm involves Identifying key risk areas Recognizing potential, unfolding or past misconduct Delivering honest and candid advice Considering how to document advice appropriately 25

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Key Sources of Risk As Enron and other corporate scandals illustrate, corruption can originate at the top and create widespread culture of non-compliance and dishonesty

For most organizations, however, the greatest risks come from Dishonest employees Corrupt customers The organization’s involvement with other third parties Novel or loosely regulated products also present risk 26

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Risks Arising From Employees The firm that employs a fraudster may be Victimized directly, and/or

Sued for losses of third parties ContractNegligence Vicarious liability – apparent authority How do you respond when evidence of employee fraud surfaces? 27

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The Dishonest Employee - ExampleAn elderly customer complains to your dealer client that she has been unable to reach her longstanding investment advisor. Her advisor recommended an investment in a company (XYZ) you have never heard of. She invested $300,000, which was most of her savings. She would like to clarify the status of the investment.

It is apparent that she does not hold this investment with the dealer, although there are slide presentations promoting XYZ on the investment advisor’s computer. What do you do?29

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Risks Arising From the Organization’s Customers

With many customers, an organization is faced with the danger that some will attempt to use the organization to advance their illegal or criminal conduct, such as fraud, money laundering, corruption or tax evasion Frequently, the organization is targeted by third parties as a deep pocket defendant Negligence Knowing receipt Aiding and abetting 30

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The Corrupt Customer – Example A new customer who appears to be sophisticated and wealthy opens an investment account. He trades at high volumes, and some of his high volume trading is offshore and involves penny stocks.

He has applied for a margin account and the business is supportive of his application. You are asked for approval from a “compliance perspective”. What do you do?31

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Where In-house Counsel Are Implicated So far we have discussed the organization’s liability but there are situations in which in-house counsel themselves may be liable

Kerr v. LPIC (1995), 128 D.L.R. (4th) 269 (Ont. C.A.) – failure to provide legal advice to board Martin v. Goldfarb, 1997 CanLII 12430 (Ont. S.C.) - failure to disclose their client’s fraudulent activities to the plaintiff32

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Potential Regulatory Liability An area of increasing

risk in Canada and the USLaw societies’ discipline jurisdiction does not oust the power of regulators to regulate lawyers’ conduct that is otherwise subject to the regulatory schemeSally Daub, Re (2004), 30 O.S.C.B. 860 - OSC alleged a failure to inquire by GC, despite her good faith reliance on information provided to her33

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Potential Regulatory Liability cont’d Allegations

by Canadian and U.S. securities regulators against lawyers have includedMaking filings containing misleading or untrue statements of factFailing to make sufficient inquiriesAuthorizing, permitting or acquiescing in a failure to discloseCausing the company to make materially false and misleading public statements Failing to provide material information to the audit committee, auditors and boardRisk of criminal liability is more prominent in the U.S. 35

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Reporting Duties IIROC – Complaints and Settlement Reporting System (COMSET) and Rule 3100 COMSET Reporting Obligations:

Customer ComplaintsCivil ClaimsCriminal ChargesDenials of Registration or ApprovalInternal or External Disciplinary ActionsInternal Investigations36

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Reporting Duties cont’d IIROC – COMSET and Rule 3100Deadlines for reportingMember Regulation Notice 0162

Most items – 5 business daysCustomer complaints – 20 business daysRequired documentsSet out in May 2, 2011 Administrative NoticeWhen to provide more?Similar requirements for MFDA – see MFDA Policy No. 637

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Discretionary Disclosure OSC Credit for CooperationSelf-police, self-report, self-correct

Expectation of prompt and full self-reportingIncentives Risks Methods of disclosure Initiating a complaint to law enforcement Responding to a request from law enforcement (as opposed to court order), potentially raising customer privacy issues 38

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Cloaking an Internal Investigation in Privilege Counsel direct and define the investigation Internal

circulation of communications is limited and there is no disclosure to third parties Timing and communication of findings is controlled Reporting to committees and the Board is carefully considered Who reports? How do they report? How is the report recorded? Balancing interests of privilege, debate and decision-making 39

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Waiver of PrivilegeRegulators cannot require waiver of privilege, absent express authority The dangers of waiver include use in other proceedings, such as class actions

Chronologies, roadmaps do not amount to waiverWaiver is not necessarily all or nothing Confined to subject matter Selective or limited waiver to the regulator only may be arguable 40

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Waiver of Privilege cont’d Preserve

flexibility to disclose facts, without disclosing legal advice, opinion or work product Deciding whether to waive privilege is sensitive and fact-driven Make your decision about waiver, rather than letting waiver impact your decisions Inadvertent waiver Implicit waiver Distinguish between legal and business adviceLimit circulation of truly privileged communications 41

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PrivilegeMultiple roles of in-house counsel can create privilege and waiver issues if not thought through carefully

When communicating with regulators and law enforcement, remember settlement privilege, as well as solicitor-client privilege and work product privilege Consider when and how to invoke “without prejudice” protection 42

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