A Virginia lawyer who learns a client is about to shoot someone must tell the police, the idea being that preventing physical harm is more important than honoring the hallowed notion that what a client tells his attorney is confidential.

Now the legal community is battling a plan that would require that same lawyer to alert regulators if a corporate client is about to inflict financial harm, such as inflating profit.

Under current ethics rules, lawyers would not be obligated to blow the whistle on their business clients. But the Securities and Exchange Commission could change that, under a proposed rule that would require lawyers to tell the SEC about problems that companies refuse to fix.

"Why shouldn't lawyers have to report that to the SEC? Because lawyers aren't policemen," said Susan Hackett, general counsel for the Corporate Counsel Association, the trade association for full-time, in-house company attorneys.

"Clients have to feel free to bring dirty laundry or problems or questions to their lawyer," Hackett said. "When a client doesn't know if the lawyer might take something to a regulator, the client is not likely to tell the lawyer anything significant."

The SEC, which regulates the nation's securities markets and publicly traded companies, proposed the rule last fall. It must issue a final rule by Jan. 26 to comply with anti-fraud legislation Congress passed in July in response to a string of recent corporate scandals.

In the legislation, the Sarbanes-Oxley Act of 2002, Congress told the SEC to set standards of professional conduct for in-house and outside attorneys who advise public companies. The law says the standards must at least require lawyers to report problems all the way up an organization, to the board of directors if need be, until the problem is corrected.

This "up-the-ladder" reporting requirement suffices to fulfill the mandate set by Congress, business and lawyer groups have argued in letters to the SEC. These groups include the American Bar Association; the Securities Industry Association; the Business Roundtable, which represents chief executives at the largest U.S. companies; financial services firm J.P. Morgan Chase & Co.; and mutual funds and investment companies.

If a company fails to take corrective action, then an attorney should stop representing the company, they say. But they argue that lawyers shouldn't be forced to take two additional steps that the SEC's proposal would require. Those steps would be for lawyers to notify the SEC that they no longer represent the company and to make clear which documents filed with the SEC -- such as an annual report -- they believe are "tainted" or no longer accurate.

These two steps amount to what the business community calls a "noisy withdrawal." In theory it raises a red flag without forcing lawyers to give authorities specifics about what their clients divulged in confidence, law professors say. Critics of the SEC's proposed rule, however, say its practical effect would be to turn lawyers into police who, by raising an alert, would be betraying their clients. That's because alerting the SEC to a problem usually leads to an investigation by the agency, they say.

The legal community argues that this will make clients unwilling to speak freely. That, in turn, will make it hard for lawyers to advise clients on how to comply with securities law, because they might not be given all the facts.

Hackett and others argue that even if a lawyer learns that a company's annual report contains misleading statements, the lawyer's obligation is to alert the company, not the SEC.

Critics also object to a federal agency imposing national conduct codes on states, which traditionally have set professional standards for lawyers based on model codes attorneys write for themselves. Hackett describes it as the "nose under the camel's tent" that could lead to more agencies seeking to turn lawyers into spies.

State laws generally say lawyers can't disclose what a client says in confidence. Doing so can lead to professional sanctions, including being disbarred. States generally allow an exception to prevent someone from suffering physical harm. A handful of states, including Virginia, require a lawyer to speak up in such instances; Maryland and the District do not.

Forty-one states also allow -- but don't require -- an exception for lawyers to go to regulators with a noisy withdrawal if they think a client's actions will inflict economic harm on investors or others.

In its proposal, the SEC noted that "existing state ethical rules have not proven to be an effective deterrent to attorney misconduct."

Supporters of the new rule say that is a good argument for change. "Client confidentiality is important, but why should we protect confidences of a client who is a cheater?" said Stephen Gillers, a professor of legal ethics at the New York University School of Law.

David Becker, a former SEC general counsel now in private practice, said there would be one certain outcome of the new rule. "There will be more lawyers hired," he said. "Everyone will want someone else's opinion as to whether their opinion is reasonable as they go up the ladder."

Susan Hackett, general counsel for the Corporate Counsel Association, is a critic of the Securities and Exchange Commission's proposed rule to compel lawyers to inform on their business clients. "Lawyers aren't policemen," Hackett argues.