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June 01, 2011

SEC Whistleblower Rules Recognize Importance of Attorney-Client Privilege

ABA calls confidential relationship “sacred”

The Securities and Exchange Commission (SEC) – in response to concerns raised by the ABA, the U.S. Chamber of Commerce and numerous other legal and business organizations – recognized the importance of protecting the attorney-client privilege and the confidential lawyer-client relationship in its final whistleblower rules issued May 25.

The whistleblower program is mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted last year to establish broad financial regulatory reforms and protect consumers and investors. 

The final rules provide that whistleblowers who voluntarily provide the SEC with original information regarding violations of federal securities law may be entitled to receive substantial cash awards. To be considered for an award, the information must lead to successful SEC enforcement of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million. Lawyers, however, will not be eligible to receive awards if the information they divulge is privileged or confidential information they obtained from clients during the course of their professional representation and is divulged in violation of a lawyer’s ethical obligations.

ABA President Stephen N. Zack commended the SEC for acknowledging the vital importance of the attorney-client privilege and the lawyer’s duty to maintain client confidentiality. Zack also pointed out that the expectation of confidentiality encourages clients to seek out and obtain informed guidance regarding compliance with the law, which benefits not just the clients but also the investing public and society at large.

“Incentivizing lawyers to use confidential client information for the lawyer’s own personal benefit would undermine the lawyer-client relationship and the effectiveness of the privilege, deny the client’s right to effective counsel, and reduce – not increase – compliance with the law,” Zack said.

Specifically, the final SEC rules:

preserve the principle that lawyers will only be eligible for whistleblower awards to the extent that their disclosures to the SEC are consistent with their ethical obligations and SEC Rule 205.3;

clarify that the attorney exclusion also will apply to non-attorneys who provide information learned through a confidential attorney-client relationship; and

clarify that the attorney exclusion applies to both in-house attorneys and outside counsel.

In earlier comments submitted May 20 to SEC Chairman Mary L. Shapiro on the draft rules, Zack emphasized that the “confidential relationship between the client and the lawyer is sacred” and that lawyers are ethically bound to maintain all confidential client information, not just information that is privileged or protected by the work product doctrine.

He added that court rulings allowing the government to obtain and use non-privileged information from whistleblowers do so in the context of information not arising from the confidential lawyer-client relationship. The lawyer, he explained, is never allowed to be the source of confidential client information except in very narrow circumstances.

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