American Corporate Counsel Association

1025 connecticut avenue, nw
suite 200
washington, dc 20036-5425
p 202.293.4103
f 202.293.4701

The in-house bar associationSM

April 7, 2003

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Submitted Electronically:

Re: File Number S7-45-02

On behalf of the American Corporate Counsel Association1 (ACCA), we respectfully respond to the Commission's request to offer both our perspectives regarding the final rule regulating attorney conduct (promulgated under 17 CFR Part 205), as well as the Commission's ongoing and additional proposals regarding noisy withdrawal and alternative 8-K reporting, all flowing from Section 307 of the Sarbanes-Oxley Act of 2002.2

Executive Summary of This Letter's Comments

Noisy withdrawal and alternative 8K reporting proposals:

1. We urge the Commission to forego both the noisy withdrawal and alternative 8-K proposals. These proposals will damage lawyer-client relationships and discourage clients from seeking legal counsel. While no rule can make lawyers more ethical or prevent clients who possess a criminal bent from doing wrong, these proposals may cause currently healthy lawyer-client relationships irreparable harm or discourage clients from consulting either honestly or at all with lawyers. Clients will be wary of welcoming lawyers into their businesses if the lawyer's exposure to almost any "credible" (even if unlikely) allegation could trigger a complicated process of mandated internal investigations leading to a possibly unwarranted report to the Commission. The resulting damage to the lawyer-client relationship (or its elimination) benefits no one - including the corporate entity, the company's stakeholders, or the public - and will likely preclude the very kind of preventive compliance initiatives that the Sarbanes-Oxley Act seeks to advance.

2. Alternatively, if the Commission nonetheless proceeds with either the noisy withdrawal or 8-K proposal, it should consider making them more appropriate and effective. In the case of noisy withdrawal, these amendments should include better defined triggering language, a reassessment of the roles of supervisory, subordinate and reporting attorneys, and safeguards that a company might put in place to protect itself against a lawyer determined to report an unfounded allegation, or blackmail or retaliation against the company or supervisors in the law department. In the case of the alternative 8-K proposals, we request a longer period before required reporting (including a period during which the company could consult offline with the Commission prior to any filing requirements) and the option of obtaining a second opinion from an independent counsel which could obviate the requirement to report at all in the event that the independent second opinion affirms that the allegation is unfounded or does not trigger this rule's application.

Clarifications and reconsiderations to Part 205 as promulgated in the final rule:

1. The Commission should narrow and clarify the triggers that activate the rule's application: the language in several places is far too broad, confusing in its lack of definition, and places the Commission in the position of regulating attorney behaviors completely unrelated to securities violations. We recognize that much of this language is drawn from Section 307 of the Act, but for an attorney conduct rule to be effective and appropriate in its guidance, lawyers have to be able to understand how to apply the rule. As written, the rule can be triggered by virtually any and all allegations, which is not a proportionate or appropriate guideline to focus lawyers' attention on the most serious matters facing the client. We also request the Commission to additionally clarify some appropriate up-the-ladder reporting issues.

2. The rules regulating reporting and subordinate attorney responsibilities should be revised to provide a clear-cut end to junior attorneys' responsibilities under the rule after they report and receive confirmation of a supervisory attorney's (or CLO's) actions taken in response. Subordinate or reporting attorneys may not be vested with the full knowledge or capacity required to evaluate the supervisory attorney's or CLO's decisions. It is appropriate to focus the rule's attention on the judgment and responsibility of the CLO and other supervisory attorneys in addressing the report, but not to force the subordinate or reporting attorney into a showdown over whose judgment should prevail if a difference of opinion between the CLO and the reporting or subordinate attorney ensues. Of course, ACCA supports the creation of a limited exception to this provision if there is an allegation that the CLO or supervisory attorney is complicit in the alleged fraud or wrongdoing.

3. We propose suggestions to improve the function of the QLCC to promote a more cooperative and less adversarial relationship between the QLCC and the CLO. Additionally, we urge the Commission to drop the requirement that the QLCC pre-exist the onset of a problem that may be reported to it.

I. Introduction / Overview

We compliment the Commission for its careful consideration of the concerns presented to it in the promulgation of the final rule constituting Part 205. We appreciate the Commission's considerable efforts and success in addressing a number of matters raised by the bars and others. The final rule is a far better rule than was the initial proposal. We also appreciate the opportunity to address not only the proposals yet to be decided, but our ongoing concerns in the final rule so that any issues or questions can be resolved before the rule goes into effect in August of 2003. Those concerns that we wish to bring before the Commission on behalf of the in-house bar are offered below.


Corporate counsel are uniquely positioned to promote their corporate clients' culture of responsibility and compliance initiatives. They are acutely aware of the need for the in-house lawyer to carefully navigate the dual roles of independent professional counselor and member of the executive business team.

This is true for in-house counsel who work in both public and private corporations. While the Commission and these rules focus on certain lawyers working for issuers, lawyers for issuers who are not "appearing and practicing before the Commission," as well as lawyers working in private companies are watching this process and its results very closely. They know that their work is just a short step removed from the work of lawyers governed by these regulations: perhaps their next job will subject them to the Commission's regulation, or maybe they will handle a difficult matter that involves an issuer, exposing them to the application of these rules in a practical setting. They also know that for purposes of future professional rules adopted by the state bars, these rules will likely have an influence in directing the regulation of all lawyers working for any kind of corporate client.

Some suggest that the passage of these rules merely re-codifies already existing regulation common to a majority of states' bars; we do not agree. We believe that the promulgation of these rules represents a significant sea change. Accordingly, we need to examine the Commission's proposals with an equivalent scrutiny on their practical impact. Existing rules regulating lawyer conduct at the state level give the lawyer guidance in the exercise of professional behavior; in addition to removing the discretion exercised by the lawyer in the state rules, the Commission's final and proposed rules move us into new waters by assigning lawyers the professional responsibility for regulating not just their own behavior, but the behavior of their clients.

We believe that lawyers should play the role of learned and ethical counselors who exercise professional discretion and judgment, and that clients are ultimately vested with the power to choose to accept or reject their lawyer's advice. We do not support promulgating professional rules making lawyers responsible (and liable) for coercing clients to accept legal advice. The vast majority of the states' ethics rules mandate only that the lawyer withdraw in the face of continued client intransigence and malfeasance; this embodies an understanding that the better part of a lawyer's professionalism lies in the knowledge that he is not the client, but rather the client's counselor and legal confidante. In the end, while lawyers are responsible for doing their best to convince clients of what is right, the client must decide to do the right thing, or our system of professional legal representation fails. If we move toward regulations that turn lawyers into cops on the beat, we will be making a decision to fundamentally change the lawyer-client relationship from one based on trust and advice, to one inclined toward prosecutorial responsibilities.

ACCA believes that recent events require lawyers to play a significant and heightened role in preventing future corporate misconduct and helping clients create a culture of corporate responsibility. Indeed, we agree with those commentators at the Commission and within our membership who argue that that the bar risks missing the lessons of the entire Sarbanes-Oxley exercise if it continues to object to all efforts to heighten the responsibility of lawyers in the post-Enron world, especially if it does not have viable and preferable alternatives to suggest.

A number of critics even maintain that the exercise of the bars' concerns in letters such as these somehow indicates that the bars "just don't get it." ACCA's effort to embrace the larger issue of corporate governance reforms and aggressively look for a heightened role for corporate lawyers does not mean that we will support any reform proposed. Our duty is to assess whether the Commission's proposals help to fulfill the goals of offering practical, effective and professional guidance for lawyers who want to work more effectively with their clients in pursuit of their client's better corporate legal health and culture; where we are concerned that the Commission's proposals fall short of preparing our members to meet that goal, our letter will offer our suggestions for improvement.

II. The Commission's Noisy Withdrawal and

Alternate 8-K Reporting Proposals

A. The Commission's ongoing noisy withdrawal proposal

We incorporate by reference our previous comments on the initial proposal. In summary, our concerns are:

  1. Sometimes lawyers need to be reminded that clients do not have to hire or consult lawyers at all if they are unsure of the value that lawyers add or are wary of the headaches that working with lawyers may entail. If the effect of this rule is to suggest to some clients that their lives will be much easier if they simply forego legal counseling, then the purpose of encouraging more aggressive lawyer involvement under the Act is completely frustrated.

  2. Complex frauds perpetrated on the company by rogue managers will never be prevented by this rule or others. Such frauds are less likely to be discovered and remedied by a corporate counsel shut out of the client's inner circle because the client perceives him to be a reporter or policeman for the government.

  3. The majority of state bar ethics rules already provide for discretionary or permissive disclosure of certain kinds of financial frauds. Further, it is likely that the American Bar Association will push for the amendment of Model Rule 1.6 to encourage permissive disclosure in those jurisdictions that have not adopted it. Permissive disclosure through existing and future state bar rules offers the lawyer both a carrot and stick approach in working to resolve matters with a reticent client. Mandatory disclosure requirements remove the valuable tool of the carrot, and leave the lawyer little or no discretion in how to address a situation. The lone presence of the stick also sends a perverse message to the client: even if the client wants to correct its behavior, the lawyer may nonetheless be obligated to report a matter to the authorities, thus providing the client with a stronger incentive to cover up problems in the future, rather than risk working with lawyers to correct or prevent them. The Commission's mandatory disclosure approach is thus not a better or more effective replacement for the state bar's rules.

  4. Further, the creation of a Commission-mandated noisy withdrawal requirement that trumps state regulation may discourage the minority of states without a permissive "reporting out" rule from joining the majority of jurisdictions in creating a consistent standard of permissive disclosure that regulates and improves the standards applicable to the behavior of all attorneys, and not just those appearing and practicing before the Commission.

  5. An additional standard of mandatory reporting by the Commission adds yet another layer of confusion to the current patchwork by regulating only certain lawyers for certain kinds of corporate clients who are engaged in certain kinds of work at any given time. If ethics experts who have spent many hours studying these rules in detail are confused about how the rules should be interpreted, how can we expect the average overworked and time-pressured lawyer to successfully navigate the complexities of their competing obligations in multiple states and under the occasional regulation of the Commission's rules? The result may well be a focus on "C.Y.A." activity by lawyers who want to prove in 20/20 hindsight that their efforts complied with the uncertain standards of the rule, rather than reporting activity intended to encourage clients to right their wrongs and prevent costly problems and future corporate failures.

  6. Sarbanes-Oxley seeks to define and promote more appropriate roles for management and the board in safeguarding the company and its stakeholders from illegal actions of senior management. Lawyers (and especially in-house lawyers) should be empowered by the Act and the rules to do the job that only they can do and that Congress explicitly mandated for them within the provisions of Section 307. The legislative record of the Act shows us that Congress did not intend Section 307 to diminish the attorney-client privilege. Indeed, the legislative history specifically points to the importance of supporting the lawyer-client relationship. Lawyers play a crucial role in contributing to corporate compliance as confidential counselors. Lawyers can improve their performance in that role. But improvements to corporate compliance efforts led by lawyers will be possible only where a strong foundation of a trusting and confidential lawyer-client relationship exists.

If the Commission nonetheless adopts a noisy withdrawal rule, it should consider:

  • limiting such withdrawal to matters that involve a material violation of the securities law (as opposed to the wider definition of triggering violations);

  • adopting a higher standard of certainty on the part of the lawyer that the violation was material and ongoing or about to occur before a noisy withdrawal is required;

  • limiting the application of the rule regarding noisy withdrawal only to those matters in which the attorney's services would be used in the commission of the fraud; and

  • extending the artificially short time periods in which the noisy withdrawal must be tendered (so as to allow the threat of withdrawal to provide one last meaningful sanity check opportunity for the reticent client).

B. The Commission's Alternative 8-K Proposal

The alternative proposal suffers from the same core deficiencies of the original noisy withdrawal proposal. We therefore oppose it. Admittedly, the alternative proposal provides a device by which a lawyer can avoid directly reporting a client's intransigence to remedy an allegation of fraud, and purportedly removes concerns about the lawyer thereby unilaterally breaching the client's confidences. But while the lawyer may not be the one who physically files the 8-K report, it is nonetheless the lawyer's action that triggers the board's responsibility for filing.

Clients will see this for what it is: a distinction without a difference. They will have the same concerns they would under the original noisy withdrawal proposal. Indeed, clients may have an even stronger negative reaction, for two reasons. First, the alternative proposal distorts the proper balance between the company's directors and the company's lawyers in deciding which group is appropriately responsible for making decisions about the company's reports to the SEC. Second, the 48-hour 8-K reporting requirement of the alternative proposal denies the board any meaningful opportunity to assess and address the withdrawal with the Commission prior to the notice of the lawyer's withdrawal being widely publicized (as it will shortly after the posting of the 8-K hits the Internet and markets). Clients may need more time to meet with the Commission in order to discuss the reasons the board may have declined to take the lawyer's advice, including possible plans to pursue a colorable defense. It is not inconceivable that a board that refuses to take a lawyer's advice (knowing the significant consequences involved in that decision), could have a very important reason for choosing to accept the lawyer's departure rather than conform to the lawyer's demands, including the possibility that the lawyer involved was somehow inappropriately blackmailing the company as a result of personal grievances or dissatisfactions. Given the high likelihood of unproductive public speculation about the withdrawal, and the extreme potential impact of the 8-K report of a lawyer withdrawal on the company's stock and even its future viability, it seems only prudent to protect shareholders and other stakeholders from this kind of misdirected result.

If the Commission decides to proceed with the alternative proposal, then - in addition to the requests made of the Commission above regarding noisy withdrawal - the Commission should amend the provision to allow a board in receipt of a lawyer's withdrawal to have:

  • more time to assess the lawyer's withdrawal (since the board may not have all the facts at their disposal) or the option of reporting privately to the Commission first if they wish to convince the Commission that a material violation has not actually occurred as reported by the withdrawing attorney; or

  • an alternative option of obtaining a second opinion by an independent counsel (to determine if the withdrawing lawyer's assertion of a material breach has merit and if the lawyer has meaningfully pursued up-the-ladder remedies that might have adequately attended to the problem).

A company flagrantly ignoring good advice from its lawyers will not likely bother with another opinion; it will either comply with the Commission's requirements or ignore the requirements of the law at the risk of its directors' and senior managers' liability. If they are pursuing a colorable defense, presumably that case will be presented to the public and shareholders in the form of notice of a litigation pending. But if the company is truly in the grip of a rogue or inept lawyer or has not had time to meaningfully explore the lawyer's allegations, it will not be forced into a corner of reporting an unjustified withdrawal to the extreme and irreversible prejudice of the company's (and thus, the shareholders') interests.

We request that Commission forego both the noisy withdrawal and alternative proposals. These proposals do not facilitate the kind of lawyer-client relationships that encourage clients to seek legal counsel in an open and honest fashion, and indeed, may cause currently healthy relationships irreparable harm. The results of this damage will not benefit corporations, their stakeholders, or the public interest, and may have the impact of precluding the very kind of preventive compliance initiatives that the Sarbanes-Oxley Act seeks to advance.

III. Clarifications Requested to Part 205:

A. Requested Changes to the Triggering Language and Definitions

Part 205.2(i) defines a material violation triggering the rule as one that involves a material violation of a state or US securities law, a material breach of fiduciary duty arising under a US or state law, or a similar material violation of any US federal or state law. Sarbanes-Oxley was clearly created to propose regulations to limit fraudulent financial activities. It was not intended to grant the Commission oversight of the lawyer's behavior in matters unrelated to the Commission's general authority. Under the language of the rule as currently written, the Commission's rules would trigger a lawyer's response for matters that are not related to financial fraud, securities law or even fiduciary duty.

Combined with language appearing elsewhere in the Rule - for instance, the definition of credible evidence in Part 205.2(e) - such a broad categorization of covered activities creates a trigger for nearly any kind of allegation brought to a lawyer's attention, even those that are improbable, but from a marginally credible source. While we all agree that illegal behavior is always an appropriate focus for a lawyer, not all matters brought to the attention of a lawyer should be investigated and pursued with the same level of priority and to the same standards of mandated behavior as this rule requires.

We request a corresponding amendment to Part 205.3(b)(1) to limit reporting responsibility to reports of evidence of a material violation that is based on information relating to the lawyer's representation. This means that tax lawyers aren't formally responsible for assessing the likelihood of a potential material violation stemming from a conversation overheard at the water cooler regarding a patent claim.3 A good lawyer will always take the troubling conversation overheard at the cooler down the hall to an IP colleague or the CLO, but such an amendment of the rule appropriately limits the lawyers' responsibility for formally pursuing matters totally outside of his expertise or authority.

We join the American Bar Association in suggesting that a company be allowed to choose who will be in charge of matters relating to the reporting up-the-ladder requirements of this rule. This provides additional options for departments to designate a resident expert - who may not be the CLO - who is responsible for handling and ensuring the department's compliance with the complex technicalities of this rule's reporting requirements. Likewise, the Commission should allow the department the flexibility of designating additional representatives as supervisory attorneys if such is helpful to shaping a larger compliance initiative that builds-in the capacity to facilitate lawyer reporting consistent with the Commission's rules.

B. Supervising/Subordinate/Reporting Attorney Issues

The Commission's rule designates certain attorneys as "subordinate," others as "supervisory" and still others as "reporting." Each designation carries with it certain responsibilities, some of which are not yet fully explored or understood. Clearly, we all agree with the general concept that subordinate and reporting attorneys should be offered a pathway to insure that supervisory counsel and the CLO (as well as potentially others) hear and then address the subordinate or reporting attorney's concerns. Our interests lie in discerning how more junior subordinate or reporting attorneys will know when they have fulfilled their professional obligations and when they can presume that those who have been vested with greater seniority are appropriately responsible for making any further decisions about the merits of the report and how to proceed.

We recognize that Section 307 requires the Commission to create a rule governing all lawyers practicing before the Commission which instructs those lawyers to follow an up-the-ladder pathway of reporting that leads all the way to the board of directors, if necessary. The Commission chose to pursue this mandate by creating distinct roles for a variety of attorneys working in the corporate legal chain of command, rather than simply creating a single rule that applies equally to all lawyers who come across a triggering allegation. By writing a rule that creates separate roles for attorneys, however, the Commission has created some practical problems that we wish to address.

ACCA supports the permissive and discretionary reporting required of all attorneys under ABA Model Rules 1.13 and 1.6 (including the financial reporting permissions present in the majority of the states' rules, but not in Model Rule 1.6). We do not support the Commission's decision to invest junior attorneys with a mandate to assess and contest the CLO's final decisions. Giving such discretion to the role of a junior attorney does not further the operation of the rule as intended (to make sure that responsible lawyers take a matter to its proper level of attention within management and the board) while having a deleterious effect on the structure and smooth operation of law departments in general, and larger law departments specifically.

In smaller law departments,4 issues sufficiently "material" to trigger reporting under this provision will probably be shared knowledge within the department. In-house counsel in smaller departments will more likely engage in consensus-building around a commonly-agreed-upon-course of action, internal investigation procedures, and any necessary "up-the-ladder" plans. It is likely in the smallest departments that either only the CLO will be considered a supervisory attorney, or that everyone will be considered a supervisory attorney. Clearly, no matter how designated, there is less likelihood that divisions will exist between "decision-making supervisors" and those whose primary function should be the report of credible evidence to a supervisory attorney or the CLO.

Small department practitioners may not like that Part 205 will create differing standards of appropriate behaviors based on one's rank within the department; it contradicts and frustrates the creation of a department unified by common principles and standards. But the impact of the rule's disparate application between attorneys in small departments may not have as profound an impact on the way that these lawyers ultimately continue to relate to each other: these lawyers' relationships will continue to be founded upon the daily trust and communication that springs naturally from working closely together, all day, every day.

In larger departments, however, (or de-centralized departments where counsel are geographically dispersed) there is greater likelihood for the supervisory/subordinate/reporting attorney distinctions to have what we believe are unintended and deleterious effects on the department's efficient and effective operation in pursuit of the highest standards of client service.

First, while we agree that the CLO should report back to the reporting or subordinate attorney so that they will be aware that the matter is on track for resolution, it is not realistic to mandate that the CLO should report back the result with the requirement that the junior lawyer be allowed to judge whether the CLO's decisions and actions are appropriate. (In the case of a reporting attorney, a dissatisfied lawyer must report over the CLO's head to the board or its committees under Part 205.3(b)(3); in the case of a dissatisfied subordinate attorney, the subordinate attorney is permitted to not only question the response of the supervisory attorney to whom she reported, but to report over the CLO's head, if she believes it appropriate and necessary. The subordinate attorney's permissive right is authorized under the rule in Part 205.5(d).

The CLO of a larger department may have responsibility for a legion of attorneys (including outside counsel), many of whom do not regularly interact with the CLO or even with her direct reports. Many of these attorneys likewise serve a role of supervising attorneys under the rule. The information possessed by the CLO or other supervisory attorneys about the investigation of a reported allegations, the persons and processes included in that investigation, the superior experience and judgment which makes the CLO the Chief Legal Officer (and makes the reporting or subordinate attorney her junior), and the executive hierarchy necessary to facilitate making decisions on behalf of a large team, all combine to make reporting over the head of supervisory attorneys quite a potentially divisive and ill-considered event in the internal operation of a law department.

The CLO or supervisory attorney should provide a subordinate or reporting attorney with a report that the allegation was without merit, was appropriately remedied, is the subject of a continuing and significant investigation, or is the subject of the corporation's decision to pursue a colorable defense. We believe that the subordinate or reporting attorney's obligations and discretion under the Rule should be fully satisfied at this point in the process. It is illogical to acknowledge that seniority matters, but then insert a permissive or mandatory "override" function for a junior subordinate or reporting attorney to disagrees with the adequacy of the CLO's or supervisory attorney's actions. In addition to being disruptive to a chain of command that the Commission infers is appropriately in place, such a rule is not logically connected to a presumption that superior legal judgment is being exercised when the junior is allowed to override the senior to whom she reports. It is a common necessity of practice for senior lawyers direct the behavior junior lawyers; such is part of the learning curve and apprenticeship we all serve at the bar. This supervision of behavior and executive control of the client's work is presumed acceptable so long as the senior lawyer accepts responsibility for what he directs the junior to do, and does not ask the junior lawyer to violate the laws or rules of professional responsibility.

Model Rule 1.13, already governs the behavior of all lawyers, allowing them to report up-the-ladder in whatever fashion they believe is necessary in order to remedy client wrong-doing.5 It is therefore unnecessary for the Commission to codify this rule again, but to do so in a fashion that is inefficient, inappropriate, and confusing to subordinate and reporting attorneys and the often-superior wisdom of their supervisors. The Commission's rule inappropriately burdens junior lawyers by encouraging or forcing them to question the results of an investigation (the facts of which they may not know) or the judgment of a supervisory attorney (which they may not be sufficiently expert to do).

A prudent CLO or other supervisory lawyer who reports her decision and actions to a subordinate or reporting attorney may correctly wish to limit the report to only general information. The rule - in that it presumes that subordinate or reporting attorneys must be convinced of the appropriateness of the handling of a matter - may in some situations work in contradiction to other legal obligations to the client. For example, to convince a skeptical reporting or subordinate attorney, the CLO may have to divulge details, for instance, on the termination or censure of an employee. If the reporting attorney is considered an uninvolved third party to the employee's evaluation process, employment law would create an additional and unnecessary exposure for the company, by opening it to claims of "excessive publication" by the disgruntled employee. In-house lawyers are trained to exercise extreme discretion in parsing out information about ongoing and even settled legal matters to anyone outside of the "need to know" management team or control group. This rule thus puts the CLO or supervisory attorney in the tight spot of trying to balance which obligation is more important.

An exception appropriately may be made when the CLO is suspected of complicity in the alleged violation. Obviously, in such a circumstance, a reporting lawyer should go over the CLO's head to the CEO, the board, or the QLCC with her report. But the Commission should not create a general rule that elevates in the institutional knowledge, legal acumen or professional discretion of junior attorneys over that of the CLO or supervisory attorneys when the issue rotates around a disagreement over the proper legal course to pursue or the correct interpretation of company activities or corrective actions. By definition, the CLO or a supervisory are charged to make the executive decisions that move the department out of discussion and into action. Likewise, those same actors should be fully accountable for the exercise of proper discretion, legal judgment, and leadership decisions made in execution of their responsibilities.

We respectfully request the Commission to accordingly amend the reporting and subordinate attorneys' obligations currently articulated in 205.3(b)(3) and 205.5(d).

C. Regarding the Operation of the QLCC

When the Commission first introduced the QLCC concept, a number of corporate counsel initially responded with pleasure that an alternative reporting mechanism might be available to them. As the in-house community discussed the concept in greater detail, however, amazingly similar concerns have been repeatedly voiced.

First, quite a few general counsel worry that should they ask the board to designate a QLCC, the board may presume that the QLCC creates (at the CLO's request) an alternative route for reporting and investigating matters that completely bypasses the CLO's office. Thus, rather than presuming that the committee's work will be premised on a cooperative relationship with the CLO, the QLCC may presume that their first course of response should be to hire their own outside counsel to conduct investigations and make recommendations.6

Because board members assigned to the QLCC can only focus on legal matters intermittently and will need to rely extensively on someone for assistance in sifting reports, investigating facts, proposing remedial actions, and so on, in-house counsel inclined to suggest a QLCC to their board would welcome some suggestion in the rules that that "someone" might appropriately include the CLO and the company's legal staff. Otherwise, many CLOs will be reticent to support the creation of a QLCC as it is currently outlined; they will not want to appear to be abdicating their responsibilities. In those cases that should be conducted by an outside firm, the CLO may prefer to hire and supervise his own choice of counsel, rather than simply sending it to the QLCC so that they can hire their own.

Indeed, CLO's regularly voice their concern that outside counsel hired by the QLCC might have little guidance or commitment to working sensitively and productively with managers to uncover and remedy allegations. Such firms can mistakenly believe that their retention by a group of directors indicates a presumed hostility to any cooperation with or presumption of good faith behavior on the part of management. In the pursuit of their mission to uncover evidence of the reported allegations, they may employ scorched-earth investigation tactics that could unnecessarily degrade employee morale and dignity, inappropriately disrupt the ongoing business of the organization, or permanently burn bridges to any future relationship between "surviving" managers and lawyers who seek to work cooperatively with them.

When sensitive matters are on the table, unless there is an assertion that the CLO is complicit in an alleged wrongdoing or the board or QLCC believes that the CLO is inept or not properly expert to handle the matter, the in-house CLO and his team is almost always better equipped to sift the merits of an allegation, conduct an investigation, propose and enact appropriate remedies, or supervise the conduct of an inquiry into the matter by an outside firm. The CLO has a fiduciary duty, a professional responsibility, and the same ethical mandates to the corporate client as any other member of the bar to provide independent, on-point, and superior legal advice. Yet, as it stands, the implicit assumption one would make of the QLCC as described by the Commission's rule is that it exists to bypass (rather than further employ) the services of the Office of the General Counsel in the furtherance of the client's legal representation.

Indeed, those CLOs we know who are ready to support the creation of a QLCC premised their support on the creation of some operational guidelines for the committee, including strategies for properly deploying the CLO's services in the conduct of the committee's work. Those committees that do not do so may suffer unintended and unpleasant consequences. For instance, in companies where the nature of the business includes sophisticated compliance efforts such as employee hotlines or other formal reporting mechanisms, there are correspondingly large numbers of complaints or allegations from the company's employees, suppliers, and others for someone to sift through and handle - often in the thousands every year. The unwary QLCC in such a company might find itself the recipient of an overwhelming number of reports (covering everything from trivial gripes to allegations of entity-threatening frauds), all made by folks who would much rather report their concerns directly to the top than to a tip line.

Since the rules allow anyone to report directly to the QLCC, this is not an unlikely result, and may seriously detract from the QLCC's ability to function and the willingness of board members to place themselves in the middle of such an arduous and time-consuming process. It is not unreasonable to assume that even a QLCC in a company without a history of soliciting employee reports could easily receive 25-50 complaints every year . . . for a board committee meeting only a few times each year, even this could be an extraordinary oppressive workload that the committee is unprepared to meet.

For these reasons and more, the QLCC would be well served to work cooperatively with the general counsel to create guidelines that suggest the proper paths and processes for the resolution of matters brought before them, including, for instance, the creation of a preferred outside counsel list (offering a pre-screened group of independent firms that would not be used by the company for any other general matters, guidance on the types of matters that the in-house legal department will be presumed best situated to pursue, pre-arranged law firm retention terms (regarding billing/fees/disbursements, the establishment of reporting structures, staffing, investigation procedures), document and communications standards for maintaining attorney-client privilege, a "triage" process that allows the QLCC to determine which matters it will consider in what order and with what level of attention, and so on.

Board members meeting only intermittently may not have the time, interest or expertise to develop these guidelines, cull through reports sent to the Committee's attention, and supervise law firms operating under the Committee's retention. Especially when it comes to law firms working for the QLCC in an uncoordinated and unsupervised fashion, CLOs fear firms that may behave much like the proverbial bull in the china shop. An invasion of unsupervised and uncoordinated law firms conducting investigations can be more than cost-inefficient and disruptive; it can be totally counterproductive to the purpose of discovering fraudulent behavior and remedying improper management activities.

It is not our intention to suggest any guidelines which would serve to preclude the QLCC from addressing situations that require extraordinary measures or that they would prefer to conduct without the participation of the CLO. Indeed, on any given matter wherein the QLCC or an outside firm wished to override a pre-approved guideline, the full discretion to do so would reside with the QLCC.

While it is certainly possible for the QLCC and the CLO to establish such a relationship on their own without mandates from the Commission or the rule, the very act of creating a QLCC might suggest to some that it is necessary or appropriate policy to by-pass to the company's regular in-house counsel. The likelihood of that misperception arising could be minimized by the Commission's attempt to suggest means by which a natural cooperation between the CLO and the QLCC can develop.

Accordingly, we encourage the Commission to consider amending the QLCC portions of Part 205 to:

  • offer commentary to the rules regarding the establishment of operational standards that suggest that the QLCC may wish to enlist the CLO in creating the committee's guidelines and resources.

  • limit those who may make a report directly to the QLCC to the CLO, those whom the CLO or CEO recommend to it, or those whose allegations include a claim that the CLO is complicit in the alleged fraud reported. This will encourage those with "normal" legal concerns to make the CLO's offices the offices of first resort, encourage a cooperative relationship between the CLO and the QLCC which suggests that the CLO is a helpful resource to the QLCC's regular work, and preserve the time, resources, and attention of this board-level committee for those matters that either have been vetted by the CLO or may involve inappropriate activity amongst the company's top legal leaders. Given the additional pressures that many directors face in the post-Enron world, we believe that such an option not only serves the interests of the CLO, but also will be viewed as an incredibly important service to directors. If such a service is not performed, it is not hard to imagine the QLCC being swamped with issues that effectively negate its ability to provide any meaningful service.

  • remove the "pre-existing" requirement in the rules that mandates that the QLCC must be in place prior to the report of an allegation that would be made to it. There is no reason to assume that the pre-existence of the QLCC does anything to change the appropriateness or ability of a board committee to perform a legal auditing role of this kind. To require that the QLCC be created prior to any experience with the kinds of problems and issues that this committee is intended to cover, means that some CLOs will be less likely to support the adoption of a QLCC without a clear sense of its need or the practicalities of its operation. And for the reasons set out above, most CLOs are unwilling to "casually" suggest that an existing (qualified) committee of the board be designated as a QLCC should a matter arise in the future that needs board attention. To do so would forego the kind of preparation and support that the QLCC will need. Should everyone (including, obviously, the board) decide that a matter has arisen is most properly handled by a QLCC, what is the harm in creating one at that time and supporting its work in a fashion that is consistent with the needs of the matter at hand? The point of the QLCC is to ensure board consideration of serious legal matters and to create more flexibility in how the report will reach the board. Removing the pre-existing requirement does no harm to the efficacy of the rule or the committee's function, and offers even more flexibility to those struggling to assess the practical issues involved in navigating the unexplored territory covered by this rule.

IV. Conclusion

We thank the Commission for the opportunity to comment on these proposed regulations and the final rule. We stand ready to assist the Commission to ensure that the final rules are both practical and useful, and understood by corporate counsel who need to apply them to their practices. Please feel free to contact us to discuss any of these issues further.

On Behalf of the Board of Directors of the American Corporate Counsel Association:

Submitted by,

Barry Nagler
Chairman of the Advocacy Committee of ACCA's Board of Directors
Senior Vice President and General Counsel
Hasbro, Inc.

M. Elizabeth Wall
Chair, ACCA's Board of Directors
General Counsel
The European Lawyer

ACCA Staff Contacts:
Frederick J. Krebs, President and Chief Operating Officer (
Susan Hackett, Senior Vice President and General Counsel (
American Corporate Counsel Association
1025 Connecticut Avenue, NW, Suite 200
Washington, DC 20036

cc: The Honorable William H. Donaldson
Chairman, Securities and Exchange Commission

The Honorable Paul S. Atkins

The Honorable Roel C. Campos

The Honorable Cynthia A. Glassman

The Honorable Harvey J. Goldschmid

Giovanni P. Prezioso
General Counsel

Alan L. Beller
Director, Division of Corporate Finance

1 The American Corporate Counsel Association ("ACCA") is a bar association for lawyers who are employed by corporations as in-house counsel. With 14,000 individual members in 40 countries, ACCA members represent over 6,500 organizations worldwide. ACCA members' employers include the Fortune 1000, as well as small and mid-sized businesses and non-profits engaged in every conceivable industry. According to ACCA's 2001 census of the in-house legal profession, approximately 40% of in-house lawyers work in law departments of fewer than 5 people; within the ACCA membership, while the largest single segment of our members "by title" is constituted by those who serve as their company's chief legal officer, the majority of our members work in positions that report to the CLO. We have worked carefully to insure that the information and perspectives we bring to the Commission with this submission fairly represent the opinions and concerns of in-house lawyers at all levels of the law department.
2 ACCA's comments to the Commission on the Commission's initial proposal can be found at We reaffirm those salient portions our previous comments regarding noisy withdrawal to avoid repeating them in detail in this letter.
3 This example has been widely discussed at several recent programs and was formulated by Professor Thomas Morgan of the National Law Center at George Washington University.
4 Indeed, a surprisingly large number of legal departments in the United States are one-person shops; the next largest category is departments with 5 or fewer lawyers. It is unlikely that such tightly knit smaller departments (unless perhaps the few members are geographically dispersed) will be interested or practically able to seal off information of a report or its investigation.
5 Note that these up-the-ladder reporting responsibilities will likely become even more specific and meaningful in regulating an attorney's response under the proposed reforms to Model Rule 1.13 as suggested by the report of the ABA Corporate Responsibility Task Force; the Task Force's has only recently issued its final report.
6 In light of current events, boards are more likely than ever to forego additional consultation with company executives and staff, including existing company lawyers, in favor of retaining independent advisors to consult on virtually every aspect of the company's governance and compliance agenda. While in many cases, hiring outside advisors is most prudent, the practice has become almost mandatory even when no suspicion of executive incompetence or malfeasance exists: in today's climate, retaining outside advisors is considered necessary "cover" for directors concerned with their own liabilities and possible hindsight judgments made by shareholders and other stakeholders.