The "up-the-ladder" reporting rules have only been effective for one week, and already there are issues.

The problem? The rules encourage lawyers to inform regulators if they suspect their clients are committing fraud, but some state bar rules prevent lawyers from revealing client confidences.

For example, last week the Washington State Bar published an opinion that stated that the SEC rule does not impact Washington lawyers, who "should not reveal such confidences and secrets unless authorized to do so" under the state's Rules of Professional Conduct.

Prezioso

SEC General Counsel Giovanni Prezioso disagrees, stating that federal law prevails over state rules, and the Supreme Court would likely uphold that federal authority.

In a preemptive letter to the WSBA, Prezioso wrote that "where conflict arises because a state rule prohibits an attorney from exercising the discretion provided by a federal regulation, the federal regulation will take priority."

In its opinion, the WSBA acknowledged that it was possibly preempting Washington law.

So how will it all play out? According to law analyst and frequent Compliance Week contributor James Hamilton, "I believe that the ABA and state bars will adopt strong voluntary standards that will complement the SEC's attorney up-the-ladder reporting rules.

In turn, this will obviate the need for the SEC to adopt its noisy withdrawal proposal."

At Monday's ABA annual meeting, the organization did just that, approving looser confidentiality rules and allowing lawyers to report on clients commiting crimes or fraud.

Both the WSBA's opinion and Prezioso's letter are above, right.

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