Richman Greer Weil Brumbaugh Mirabito & Christensen, P.A.
Miami and West Palm Beach
William N. Shepherd
VIA ELECTRONIC MAIL
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: File No. S7-40-02
Disclosure Required by Sections 404,406
And 407 of the Sarbanes-Oxley Act of 2002
Dear Mr. Katz:
I am a lawyer in private practice representing individuals and corporations who are in the midst of complex civil litigation or government enforcement actions. I have served as a Miami prosecutor and also as a Fellow at the University of Maryland Robert H. Smith School of Business, Center for Executive Education where I was the co-academic director of an executive ethics training program.
I appreciate the opportunity to submit comments in response to the Commission’s request in Release Nos. 33-8138; 34-46701; IC-25775 about the proposed code of ethics (the “code”) under Section 406 of the Sarbanes-Oxley Act of 2002 (the ”Act”). Specifically, I am concerned that the Commission’s proposed expanded application of the code to corporate officers beyond the CFO and the expanded definition of the code to include “prompt internal reporting” and “accountability for adherence to the code” will have the unintended consequence of weakening the code’s practical application and have a chilling effect on the attorney-client relationship as well as the ability of corporations to effectively participate in government self-disclosure programs.
Corporate ethics programs from top to bottom throughout any organization are strong tools. Codes that are self-imposed are the most effective, particularly when they are used proactively rather than reactively. A code of ethics is most powerful when it is developed by an organization to operate and serve as a source of self-regulation and allow ethically inclined members of the organization to point to the code for support when they feel internal pressure to push beyond the good sense of a mere competitive advantage into an area that broaches questionable conduct.
The Act’s code for CFO’s will have much of this same impact, but the Commission’s proposed mandatory reporting element of the code turns it into a law enforcement tool and weakens an organization’s ability to use the new code of ethics as a proactive internal mechanism. This concern will be amplified within organizations given the proposed changes in Section 307 of the Act which will now call for “up the ladder” reporting of violations which are not “known” but merely “reasonably believed”. The Commission’s actions on the code will be viewed in tandem with this new proposed standard in Section 307 for legal counsel.
The result may be that instead of organizations working to maintain high ethical standards within the framework of the code, efforts will be made to minimize reporting. If the code is extended to the General Counsel, as the Commission suggests in the Comments, that lawyer will be in the difficult position of zealously representing his client as required by universal legal ethics standards and at the same time being bound to report ethics code violations. That contemplated extension to General Counsel may force organizations to take their General Counsel out of discussions on many tough issues in which the corporation, and the individual investor, could benefit from senior legal advice.
If an ethics code is put in place to require self-policing, then it will be effective and set the right tone at the top of the corporate ladder. However, if this expanded code contemplated by the Commission is put in place with the unspoken goal of enhancing the Commission’s ability to develop real-time enforcement, then it may leave the Commission with the unintended consequence of a code that is minimized instead of embraced by those within organizations who would like to see a change in tone.
This change may also have an impact on a company’s ability to have an effective compliance program with meaningful self-reporting. Clearly there are advantages to corporations for openly working within the framework of the Commission’s 21(a) Report of Investigation and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions. That spirit of self-reporting has been growing in enforcement agencies since the Department of Justice Holder Memo and the other voluntary reporting programs throughout government in which corporations identify serious wrongdoing, investigate the allegations and then, if warranted, approach the regulatory enforcement authority. However, the Commission’s expansion of the code beyond the language of the Act may be viewed to require piecemeal reporting before an organization understands the full picture of the issues involved. If that is the case, and the Commission eventually cites corporations for failing to promptly adhere to their code with internal reporting, then the shift may be away from the new ethics codes. Companies will be put in a position that is the opposite of what the Commission seeks to accomplish through the promulgation of these rules.
In conclusion, the Commission’s attempt to develop strong ethics codes may have the unintended consequences of diluting the practical effect of the code, removing counsel from critical decision-making steps, and weakening the incentive for complete self-reporting. Thus, I urge the Commission to direct the focus of the code solely at the CFO as intended by Congress and allow the Division of Enforcement’s existing policies of self-reporting and cooperation to continue unhindered by corporation’s concerns about reporting ethics code changes and violations.
William N. Shepherd