Blowing It: Lawyers into whistleblowers.

By Jeremy Kahn

How much does it cost to turn a lawyer into a whistleblower? That may sound like the setup to a bad joke, but it's a question that a lot of companies will have to start answering on Aug. 5, when a new SEC rule, mandated by Congress as part of the Sarbanes-Oxley Act, goes into effect. The rule says corporate lawyers have to report potential securities law violations to the company's chief legal officer or CEO, who must then investigate. If the chiefs don't adequately look into matters, the lawyer is supposed to take the issue to the board (in legal circles it's referred to as "up-the-ladder reporting.")

To comply with the new rule, Michael Caccese, a lawyer with Kirkpatrick & Lockhart, says that some companies may place an outside legal or accounting firm on retainer just to conduct investigations, while others are designating an in-house lawyer to serve as a kind of "inspector general." Some are even setting up board-level groups to oversee the investigative process. All of which could be expensive. "To me it is one of the stealth costs of Sarbanes-Oxley," Caccese says.

Another concern is that the standard for what must be "reported up" is fairly low. Stanley Keller, a lawyer with Palmer & Dodge in Boston and chairman of the American Bar Association's federal securities regulation committee, fears that the offices of general counsels will be flooded with complaints, and that important issues could even get lost in the deluge. As usual, watch out for the law of unintended consequences.