“Lawyers Are Warned on Mutual Fund Roles“: the New York Times is reporting. According to the article, the SEC is saying that regulators may soon open a new front in their investigation of possible wrongdoing at mutual funds, focusing on the role of lawyers who represent them. This focus on lawyers was revealed in a speech by SEC Commissioner Harvey J. Goldschmid, entitled “Mutual Fund Regulation: A Time for Healing and Reform,” before the ICI 2003 Securities Law Developments Conference on December 4, 2003. Here are some of his remarks:

Fund lawyers, under SEC rules that became effective August 5, 2003, have a similar “reporting up” duty. The SEC’s attorney conduct rules apply to any attorney employed by an investment manager who prepares, or assists in preparing, materials for a fund that the attorney has reason to believe will be submitted to or filed with the Commission by or on behalf of a fund.

Under these rules, an attorney who is aware of credible evidence of a material violation of the securities laws, or a material breach of fiduciary duty, must report this evidence up the chain-of-command or ladder to the fund’s chief legal officer, and ultimately, to the independent members of the mutual fund board.

This “reporting up” requirement should significantly enhance the flow of key legal information (involving “reasonably likely” material violations) to independent members of the fund board. “Reporting up” also empowers lawyers. The requirement will allow dispassionate, independent fund directors