North Carolina Ethics Opinion Finds SEC Rule 205 Preempts State Rule

A recent North Carolina Ethics Opinion concluded that SEC Rule 205 preempts the state rules of professional responsibility. SEC Rule 205, enacted under Section 307 of SOX, permits a lawyer who represents a publically traded company and who appears and practices before the SEC to reveal to the SEC, without the client’s consent, confidential information under certain circumstances. Generally, that information can be revealed to prevent the issuer from committing perjury or otherwise perpetuating a fraud on the SEC, or to correct the consequences of a material violation that caused or may cause substantial financial injury to the issuer or investors where the lawyers services were used. The Rule provides that it preempts state ethics rules which are in conflict. The North Carolina panel found that state rules in conflict with the SEC rule were preempted.

Previously, the Washington State bar ethics committee concluded that a state rule bared disclosures authorized by the SEC Rule. Although the SEC has disputed this interpretation, Washington State has cautioned attorneys to wait for court rulings. Two California bar committees took similar positions.

SLUSA Pre-Emption Clause Not Delimited By Blue Chip Stamps

The Supreme Court reversed a Second Circuit decision which held that the pre-emption provision of the Securities Litigation Uniform Standards Act of 1998 only encompassed those actions in which the purchaser-seller requirement of Blue Chip Stamps is met. The court noted that the Blue Chip Stamps purchaser-seller requirement was not based on the statutory language of Section 10(b) and Rule 10b-5 but rather on policy considerations. Accordingly, the case does not represent a construction of the “in connection with” language of the Section and Rule. That statutory language, consistent with Superintendent of Ins. of N.Y v. Bankers Life & Casualty, 404 U.S. 6 (1971) and SEC v. Zandford, 535 U.S. 813 (2002), makes it clear that the Section and rule prohibit any fraud alleged to “coincide” with a securities transaction whether by the plaintiff or by someone else. The plaintiff’s state law securities class action was pre-empted by the SLUSA. Merrill Lynch, Pierce, Fenner & Smith, Inc., v. Dabit, No. 04-1371 (March 21, 2006).