Hot Topics in Lawyers Professional Liability: The Increasing Obligations on Lawyers

1. Adam Sharaf AXIS PRO Marian C. Rice L'Abbate, Balkan, Colavita & Contini LLP William Redington American Re-Insurance Company Ken Gross Skadden, Arps, Slate, Meagher & Flom LLP Hot Topics in Lawyers Professional Liability: The Increasing Obligations on Lawyers

2. Tax Shelter Litigation and the Legislative Response:American Jobs Creation Act of 2004 and Circular 230Marian C. RiceL’Abbate, Balkan, Colavita & Contini, LLP Philadelphia ~ May 16 & 17, 2006

3. American Jobs Creation Act of 2004 • Requires every “material advisor” to timely file an information return with respect to any “reportable transaction” • Requires a “material advisor” to maintain a list of the identity of every investor and to make it available to IRS upon request • Expands authority of the IRS and Treasury to impose standards for written advice and to impose monetary penalties against practitioners not in compliance

4. Circular 230 Subpart B – Duties and Restrictions • Aspirational “best practices” • Written communications • Covered opinions • Other written advice

5. Circular 230Aspirational “Best Practices” • Compliance with all other Circular 230 provisions • Communicate clearly with the client regarding the terms of the engagement • Evaluation of facts and law • Cannot rely blindly on client’s representations or assumptions • Must advise the client of the import of the conclusions reached • Extent to which client can rely on opinion to avoid accuracy-related penalties • Must act with fairness and integrity

6. Circular 230“Best Practices” Concerns • Just one more set of rules • Although not mandatory in nature, failure to comply will eventually become an issue in civil cases • Imposes an obligation upon the tax practitioner who oversees the firm’s practice to take reasonable steps to ensure that all firm employees comply with best practices • Places a heavy burden of due diligence on practitioner

7. Circular 230Written Communications • Must follow the standards for a “covered opinion” or • Insert the appropriate opt-out disclosure statement (but not if Listed or Principal Purpose)

8. Circular 230“Covered Opinions” • Any Reliance Opinion, Marketed Opinion, opinion subject to confidentiality or contractual protection that concerns one or more federal tax issue arising from • A “listed” transaction • A partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, • the principal purpose of which is the avoidance or evasion of any tax (Principal Purpose Transaction); • a significant purpose of which is the avoidance or evasion of tax (Significant Purpose Transaction)

9. Circular 230“Covered Opinion” Standards • All factual matters; • The relationship of the law to the facts; • An evaluation of significant federal tax issues; • An overall conclusion; and • A disclosure of any limitation on the scope of the written advice and explicit disclosure if the opinion does not reach a “more likely than not” confidence level for success in the event of challenge by the IRS.

10. Circular 230“Other Written Communications” With respect to a federal tax issue, a tax professional may not • base written advice on unreasonable factual or legal assumptions, including assumptions as to future events • unreasonably rely on representations, statements, findings, or agreements of the taxpayer or any other person • fail to consider all relevant facts the practitioner knows or should know; or in evaluating a federal tax issue • take into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or, if raised, that the issue will be settled

11. Circular 230“Written Communication” Concerns • Client’s perception of • Increased cost of preparing Covered Opinion • Advice with warning client cannot rely on content • Scope of application to attorneys dealing tangentially with tax issues • Concern more advice will be transmitted orally – documents are key to presenting a defense in al legal malpractice case

12. Circular 230“Written Communication” Concerns • Significant v. Principal – judgment call with serious consequences • Responsibility of tax department head • For using reasonable effort to ensure compliance with best practices • For ensuring that “covered opinion” standards are met – buttressed by possible sanctions • IRS’s assurance that it will apply the regulations to non-tax shelter areas with “common sense” of little comfort

13. Risk Management • Circular 230 compliance committee • Firm management • Uniformity • Client education • Implementation of Circular 230 disclaimers • “Marketed opinion” disclaimers • Fee structure • No contractual protection • No minimum fee

14. Risk Management • Familiarity with “listed transactions” • Firm policy prohibiting “promotion” of tax shelters • Circular 230 cheat sheet • “Covered opinion” review • Second opinions on applicability and compliance • Client statement of principal purpose • Conflicts

15. Lawyers Professional Liability Underwriting in the Post Sarbanes-Oxley Era and the Bankruptcy Abuse Consumer Protection Act of 2005William C. Redington, SVPAmerican Re-Insurance Company Philadelphia ~ May 16 & 17, 2006

16. Sarbanes–Oxley Act • Passed into Law July 30th, 2002. • Primarily deals with responsibilities and actions of Corporate Officers, Directors and Independent Accountants. • However, it affects the underwriting of Lawyers Professional Liability.

17. Underwriting Questions to Consider in the Evaluation of Areas of Practice Sample Financial Reporting Questions • Does the firm provide professional services relating to periodic financial reporting as required by Sarbanes-Oxley such as the certification of financial reports, Audit Committee disclosures, and Off-Balance Sheet Transactions?1 • The underwriter should look for potential exposures arising from legal services associated with the various reporting provisions of the Act such as Section 302 and 906 certifications. 1. Sections 302, 906, 301, and 401 of the Act.

18. Underwriting Questions to Consider in the Evaluation of Areas of Practice Sample Corporate Governance & Accounting Questions • Does the firm assist in the selection and evaluation of outside Directors? • The underwriter should look for potential exposures arising from legal services associated with the selection of Directors. The Act requires a certain makeup and qualification of the issuer’s Audit Committee members.2 2. Section 301 of the Act.

19. Underwriting Questions to Consider in the Evaluation of Areas of Practice Sample Corporate Governance & Accounting Questions • Does the firm provide professional services relating to compliance with the various provisions of the Sarbanes-Oxley Act (particularly regarding Section 404 addressing “Control on Financial Reporting”)?3 • The underwriter should look for potential exposures arising from legal services associated with Section 404 requirements for “Control on Financial Reporting”. 3. Section 404 of the Act.

20. Underwriting Questions to Consider in the Evaluation of Areas of Practice Sample Control on Financial Reporting Questions • Are the firms practitioners familiar with Control on Financial Reporting requirements4 and the principles and concepts of “The Committee of Sponsoring Organizations of the Treadway Commission (COSO) such as the Enterprise Risk Management framework’s • Objective Setting • Event Assessment • Risk Assessment • Risk Response 4. Section 404 of the Act and www.coso.org.

21. Underwriting Questions to Consider in the Evaluation of Areas of Practice Sample Control on Financial Reporting Questions • Control Activities • Information and Communication • Monitoring

22. Underwriting Questions to Consider in the Evaluation of Areas of Practice Sample Response to Independent Auditors Questions • Does the firm reply to outside auditors regarding contingent liabilities?5 • Are the firm practitioners familiar with the following information? • The American Institute of Certified Public Accountants “Statement of Financial Accounting Standards (FAS No. 5) Accounting for Contingencies”. • Statement on Auditing Standards (SAS No. 12). • The American Bar Association, Statement of Policy Regarding Lawyer’s Response to Auditor’s Requests for Information. 5. Section 303 (a) of the Act.

23. Underwriting Questions to Consider in the Evaluation of Areas of Practice The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 • Passed into law April 20, 2005 Exposures arising from the following practices by a Law firm • Certification of debtor’s schedules and list of assets. • Requirement to make an investigation into the circumstances leading to the petition for bankruptcy. • Certification of the debtor’s ability to make payments in the reaffirmation of debt. • Other requirements.

24. Underwriting Questions to Consider in the Evaluation of Areas of Practice Sample Bankruptcy Abuse Prevention and Consumer Protection Questions • Are the firms practitioners familiar with the provisions of the Act and the required duties of attorneys?

25. Political Contributions, Ethics, and Lobbying Kenneth A. Gross Skadden, Arps, Slate, Meagher & Flom LLP kgross@skadden.com May 16, 2006

26. Areas of Risk Current climate • Federal and state government relations scandals • Many changes to federal and state regulation of government affairs activities Every corporation should have a compliance program that addresses government affairs compliance • Political contributions • Gifts and gratuities • Lobby disclosure • Conflicts of interest

27. Implications of Non-Compliance • Fines • Reputational damage • Loss of business – pay-to-play rules

28. Pay-to-Play Rules • Emergence of RFPs asking if in compliance with applicable lobbying and pay-to-play laws • If not in compliance, deal may be jeopardized • Prohibit a company from doing business or entering into a contract with a governmental entity if the company or its employees make political contributions • MSRB Rule G-37, model of pay-to-play rules, carries severe SEC and NASD penalties • New Jersey recently implemented a replica of G-37 for investment management professionals and broader rules for state contractors that have contracts in excess of $17,500

29. Pay-to-Play Rules (Cont.) • We are aware of pay-to-play laws in the following state and local jurisdictions, and the list is growing: • California, Connecticut, Florida, Hawaii, Illinois, Kentucky, Missouri, New Jersey, Ohio, South Carolina, Vermont, and West Virginia • In California: All California Counties, Los Angeles City, L.A. County MTA, Oakland, San Francisco, and Culver City • Houston, Philadelphia, and numerous localities in New Jersey

30. Pay-to-Play Rules (Cont.) • Connecticut (effective December 31, 2006) • Prohibits officers and employees of state contractors, their spouses and dependent children, and PACs established by them or on their behalf from making or soliciting contributions to state candidates and parties • Prohibits lobbyists, their spouses and dependent children, and PACs they established or control from making or soliciting contributions to state candidates and parties

31. Compliance with Lobbying Laws:New DevelopmentsProcurement Lobbying Beyond “traditional” lobbying (attempting to influence legislation or rulemakings), trend toward regulation of Category 3 lobbying (including financial arrangements and contracts) • Idaho and New Hampshire (effective this summer) • Pennsylvania (effective March 31, 2006) • New York (effective January 1, 2006) • Indiana (effective January 1, 2006) • Georgia (codifies Executive Order effective January 9, 2006) • New Jersey (must spend 20+ hours per year lobbying) • Ohio (which was already a Category 3 state) created separate filing requirements if a company is seeking business from State Pension Funds

32. Arizona (regarding underwriting business only) Arkansas Chicago Connecticut Cook County Delaware Dade County Florida Georgia Idaho (effective July 1, 2006) Illinois Indiana (effective January 1, 2006) Kansas Kentucky Los Angeles City Los Angeles County Louisiana Maryland Massachusetts Michigan Minnesota (as to official action of metropolitan governmental unit) Mississippi Missouri New Hampshire (effective June 2, 2006) New Jersey New York (effective January 1, 2006) New York City Ohio Oklahoma Pennsylvania (effective March 31, 2006) Tennessee (effective October 1, 2006, registration is not required but certain lobbyist restrictions apply) Texas States and Major Local Jurisdictions Requiring Registration and Reporting for Legislative Lobbying and Executive Branch Lobbyingwhichincludes efforts to influence all non-ministerial official actions of the executive branch, including approval of financial arrangements on behalf of the jurisdiction:

33. BCRA SENTENCING GUIDELINES (§2C1.8)