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





Challenges for in-house counsel
Conflicts
Mandatory and prohibited conduct
Reporting up-the-ladder
Managing risk
 Recognizing and addressing your organization’s
greatest risks

Securities regulatory reporting &
discretionary disclosure
 IIROC reporting
 OSC Credit for Co-operation
 Internal investigations
2
Key Themes

Unique challenges for in-house counsel
 Increasing involvement in the business
 Traditional functions vs. emerging functions

Characteristics 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
Multiple Roles of In-House
Counsel

In-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 inhouse 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” function
4
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
LSUC Obligations

Obligations from LSUC include:
 Honesty and candour
 Avoiding conflicts of interest
 Avoiding knowing assistance
 Avoiding negligent assistance
 Up-the-ladder reporting
6
Honesty and Candour

Rule 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
Representing the Organization

In-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 Conduct
8
9
Conflicts of Interest

When 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
Conflicts of Interest cont’d

Challenges 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 shareholders
 Dual roles as counsel and officer or director

Recent 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 behalf
11
Joint Retainers

Rule 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
13
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
No Knowing Assistance



Rule 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
No Negligent Assistance
Rule 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
Scope of Knowing or Negligent
Assistance



Broader 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
Up-the-ladder Reporting





Rule 3.2-8
Added in March 2004
Applicable to lawyers “employed or retained” by
an organization
Trigger: 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
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
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
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
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.”
22
Confidentiality

General rule – R 3.3-1
 Very broad and subject to limited exceptions

Justified or permitted disclosure – R 3.2-1.1
and 3.3
 Required 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
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
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
Key Sources of Risk


As Enron and other corporate scandals
illustrate, corruption can originate at the top
and create widespread culture of noncompliance 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
Risks Arising From Employees

The firm that employs a fraudster may
be
 Victimized directly, and/or
 Sued for losses of third parties
○ Contract
○ Negligence
○ Vicarious liability – apparent authority

How do you respond when evidence of
employee fraud surfaces?
27
28
The Dishonest Employee - Example



An 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
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
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
Where In-house Counsel Are
Implicated



So far we have discussed the organization’s
liability but there are situations in which inhouse 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 plaintiff
32
Potential Regulatory Liability



An area of increasing risk in Canada and the US
Law societies’ discipline jurisdiction does not
oust the power of regulators to regulate lawyers’
conduct that is otherwise subject to the
regulatory scheme
Sally 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
her
33
34
Potential Regulatory Liability
cont’d

Allegations by Canadian and U.S. securities
regulators against lawyers have included
 Making filings containing misleading or untrue





statements of fact
Failing to make sufficient inquiries
Authorizing, permitting or acquiescing in a failure
to disclose
Causing the company to make materially false
and misleading public statements
Failing to provide material information to the
audit committee, auditors and board
Risk of criminal liability is more prominent
in the U.S.
35
Reporting Duties
 IIROC – Complaints and Settlement
Reporting System (COMSET) and Rule
3100
 COMSET Reporting Obligations:
○ Customer Complaints
○ Civil Claims
○ Criminal Charges
○ Denials of Registration or Approval
○ Internal or External Disciplinary Actions
○ Internal Investigations
36
Reporting Duties cont’d
 IIROC – COMSET and Rule 3100
○ Deadlines for reporting
 Member Regulation Notice 0162
 Most items – 5 business days
 Customer complaints – 20 business days
○ Required documents
 Set out in May 2, 2011 Administrative Notice
 When to provide more?
 Similar requirements for MFDA – see
MFDA Policy No. 6
37
Discretionary Disclosure

OSC Credit for Cooperation
 Self-police, self-report, self-correct
 Expectation of prompt and full self-reporting
 Incentives
 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
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
Waiver of Privilege
Regulators 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
waiver
 Waiver is not necessarily all or nothing

○ Confined to subject matter
○ Selective or limited waiver to the regulator
only may be arguable
40
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 advice
Limit circulation of truly privileged
communications
41
Privilege

Multiple 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