Loyalty and Disclosure in Legal Ethics

As fiduciaries, lawyers owe duties of loyalty to their clients, and such duties are widely understood to entail strong duties of confidentiality. This article addresses the question of whether loyalty-based duties of confidentiality preclude the legal system from imposing on lawyers duties to disclose that their clients have been engaging in financial fraud. It distinguishes two possible bases for such duties of disclosure: alleged duties of care to investors who will suffer financial harm if these frauds are not revealed, and legislative mandates requiring lawyers to report evidence of legal violations to a government institution. The latter—driven by a “gatekeeping” rationale, and illustrated here by a (failed) proposal of the United States Securities and Exchange Commission—is different in substance and structure from the former, “duty-of-care” rationale. The article argues that, while there may be good arguments based on a lawyer’s role-based duty of loyalty to a reject a duty-of-care based rationale for disclosure duties, these arguments do not defeat the gatekeeping, legislative-mandate rationales for disclosure duties. While a stringent duty of loyalty to a client may indeed conflict with the structure of duties of care to third parties, it need not conflict with a positive mandate to report legal violations.