Mr. Jonathan G. Katz
December 17, 2002
Re: Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys (File No. 33-8150.wp)
Dear Mr. Katz:
We are pleased to have this opportunity to comment on the proposed Part 205 (the Proposed Rule), which would establish standards of professional conduct for attorneys who appear and practice before the Commission. The proposal appears in Release No. 33-8150 (the Proposing Release).
This letter is being submitted on behalf of the law firms named above. We are all international law firms that have established US securities law practices. All of us have US attorneys as partners and associates and four of us have offices in the United States. However, the majority of our attorneys are admitted to practice law in jurisdictions other than the United States and are not US-qualified. Our firms represent a number of companies, both domestic and foreign, that are registered under the Securities Exchange Act of 1934 (the Exchange Act), on matters of both US and foreign law.
We are responding to the Commission's specific request for views on how the Proposed Rule will affect multi-jurisdictional law firms and foreign lawyers. We also share, however, many of the concerns expressed by US domestic law firms.
I. Deferral of coverage of non-US attorneys and "noisy withdrawal" pending further consultation
Since the Proposed Rule raises many serious and complicated issues with respect to its application to non-US attorneys, we request that the Commission exclude non-US attorneys from the application of the Proposed Rule pending further consultation in order to allow more time to consider and resolve these issues satisfactorily. We note that the Commission has previously granted a temporary exemption from the effect of new regulation for foreign issuers, pending further study and consultation by the Commission. See SEC Release Nos. 33-4725 and 34-7425 (September 29, 1964). In addition, because many of these issues arise out of the requirement for a "noisy withdrawal" and disaffirmation of Commission filings or submissions, and such a requirement is not contemplated by Section 307 of the Sarbanes-Oxley Act of 2002 (the Act) or its legislative history, we further request that the "noisy withdrawal" and disaffirmation provisions not be implemented pending further consultation and discussion.
II. Exclusion of non-US attorneys
We note that a number of commentators, particularly commentators outside of the United States including non-US law societies and bar associations, have objected to the application of the Proposed Rule to non-US attorneys because of concerns relating to, among other issues, comity and conflicts between the Proposed Rule and the rules governing non-US attorneys in their jurisdictions of qualification,1 and we share many of the same concerns. We believe that it would not be inappropriate, as a number of commentators have suggested, to exclude non-US attorneys from the coverage of the Proposed Rule. In this regard, we note that such non-US attorneys would remain subject to the requirements of Rules 102(e) and (f) of the Commission's Rules of Practice to the extent that such non-US attorneys are "practicing before the Commission" (as defined in Rule 102(f)).
III. Application of Proposed Rule to non-US attorneys
If the Commission determines that the Proposed Rule should apply to non-US attorneys, the rules, as proposed, give rise to serious conflict issues for non-US attorneys. Therefore, we have provided comments in this letter as to how we believe the Proposed Rule could be revised in order to minimize conflicts with the rules applicable to non-US attorneys in their jurisdictions of qualification.2 We note, however, that due to the complex and difficult nature of the problems raised by the Proposed Rule and the short time available for its consideration, the commentary set forth in this letter is not necessarily complete.
As discussed in more detail below, we believe that the objectives of Section 307 of the Act would be satisfied, and the burden on non-US attorneys reduced, by addressing the following issues raised by the Proposed Rule in the manner described:
A. Potential conflicts between the Proposed Rule and local regulations
1. Exclusion of non-US attorneys from the Proposed Rule to extent of conflict
Non-US attorneys are already licensed and regulated by authorities in their jurisdictions of qualification. Portions of the Proposed Rule potentially conflict with attorneys' legal or professional obligations under the laws of a number of these foreign jurisdictions. A summary of some of the principal requirements of the Proposed Rule, and how those requirements might be analysed under, and in some cases may conflict with, the ethical rules and other regulations in a number of major commercial foreign jurisdictions, is attached as Annex A.
Section 205.1 indicates that the Proposed Rule will pre-empt conflicting state regulation in the United States. As the Commission lacks the power to pre-empt foreign law, an alternative solution would be required for conflicts facing non-US attorneys. We therefore propose that the Commission consider adopting an exemption or safe harbor relieving non-US attorneys from the application of Part 205 to the extent that it conflicts with legal or professional conduct or similar rules or regulations in those attorneys' respective jurisdictions of qualification.
2. Request for exemption from "noisy withdrawal" and disaffirmation requirement
If the Commission determines not to exempt non-US attorneys to the extent there are conflicts with local regulations (as discussed in A.1 above), we request that the Commission exempt non-US attorneys from the "noisy withdrawal" and disaffirmation obligations.
As noted in Annex A, a noisy withdrawal will potentially conflict with the rules of attorney conduct governing an attorney's duty to protect privileged client information or the general duty of confidentiality in a number of jurisdictions, exposing the attorney to civil liability. In some cases, a noisy withdrawal could result in criminal liability. Similar problems under foreign laws may arise when non-US attorneys disaffirm filings or documents under Section 205.3(d). There are also particular problems for attorneys who may be subject to the Proposed Rule but whose professional obligations are owed to an affiliate of the issuer rather than to the issuer itself.
For the foregoing reasons, we request that the Commission consider a specific exemption for non-US attorneys from the noisy withdrawal and disaffirmation requirements of Section 205.3(d).3
3. Request for conflict of law clause
If the Commission declines to adopt the exclusions for non-US attorneys discussed above, we suggest that the inclusion of a conflict of law clause to Part 205 could alleviate the problem of conflicts somewhat while achieving the objectives of the Act. Such an approach would also be more consistent with principles of international comity.
The American Bar Association recently adopted amendments to its Model Rules of Professional Conduct, including changes to the choice of law provisions in Model Rule 8.5. The revised rule now specifies that it applies to lawyers in trans-national practices, unless international law, treaties or other agreements between regulatory authorities in the affected jurisdictions provide otherwise. A change to Model Rule 8.5(a) in 2002 specifically contemplates that a lawyer not admitted to practice in one jurisdiction is nevertheless subject to the disciplinary authority of that jurisdiction if the lawyer provides or offers to provide any legal services in the jurisdiction. A change to Model Rule 8.5(b)(2) states that the relevant disciplinary rules to be applied are those of the jurisdiction in which the conduct occurred, or, if the "predominant effect" is in a different jurisdiction, the laws of that jurisdiction shall be applied. Also under Rule 8.5(b)(2), a lawyer is not subject to discipline if he acts reasonably in the face of uncertainty about which jurisdiction's rules apply.
In our view the objectives of Section 307 of the Act would be satisfied and compliance improved by including a conflict of law rule similar to that which now appears in ABA Model Rule 8.5, to limit the application of Part 205 to circumstances in which the work of both US and non-US attorneys has its "predominant effect" in the United States.
B. Proposed safe harbor for non-US attorneys
In addition to the problem of conflicts with foreign law discussed above, we believe that a critical flaw in the Proposed Rule as applied to non-US attorneys is that such attorneys, not being qualified or experienced US lawyers, will be unable to recognize evidence of a material violation with sufficient certainty to act appropriately under Section 205.3. Non-US attorneys should be permitted to satisfy their Section 205.3 obligations by reporting to an appropriate US attorney. We propose that the Commission consider adopting a safe harbor to proposed Section 205.3's reporting obligations, modelled on Section 205.5.
C. Definition of "appearing and practicing"
The definition of "appearing and practicing" before the Commission in the Proposed Rule has an unduly broad scope, with potentially significant consequences for non-US attorneys. It would, for example, cover non-US attorneys who participate in the drafting of documents for transactions that are entirely foreign and are governed by foreign law, if the document is included as an exhibit to a Commission filing. We strongly believe that attorneys whose only role in Commission matters is purely tangential or incidental should not be covered by the Proposed Rule. We request the Commission exclude activities such as (i) the preparation and negotiation of contracts that are required to be filed as exhibits to Commission filings, (ii) participation in the preparation of press releases and other documents subsequently furnished to the Commission under cover of Form 6-K, (iii) the preparation of other documents required by foreign law that are subsequently furnished to the Commission and (iv) other activities which could be considered tangential or incidental to the activities described under the definition of "appearing and practicing." In this regard, we note that even if such tangential or incidental activities were excluded from the definition of "appearing and practicing," non-US attorneys would still be subject to Commission regulation to the extent their activities constituted "practicing before the Commission" as defined in Rule 102(f).
D. Safe harbor from third party litigation
Attorneys may face a significant risk of civil litigation from third parties based on the contents of reports or other disclosures to the Commission made pursuant to the Proposed Rule. For example, an attorney who makes a "noisy withdrawal" and disaffirmation could be subject to claims of defamation by the issuer. We therefore request, in response to the Commission's request for comment, that the Commission include a safe harbor for an attorney who follows the provisions of the Proposed Rule, similar to the safe harbor for auditors under Section 10A(c) of the Exchange Act.
It is worth noting, however, that even if this kind of safe harbor were established, it would not protect an attorney (including a US attorney) who makes a "noisy withdrawal" and disaffirmation under the Proposed Rule and subsequently faces civil liability in jurisdictions outside of the United States.
E. General comments on definitions
1. Definition of "evidence of a material violation"
"Evidence of a material violation" is defined in the Proposed Rule to mean information that "would lead an attorney reasonably to believe" that a material violation has occurred, is occurring or is about to occur. In response to the Commission's request for comment as to whether the standard should be subjective rather than objective, we believe that an objective standard is inappropriate in the context of a rule on professional ethics that has such potentially serious consequences for the attorney covered by the rule. We believe that it would be inappropriate to hold an attorney responsible for not reporting evidence of a material violation in circumstances where that attorney did not actually believe that a material violation had occurred, was occurring or was about to occur. The decision whether to report should not arise unless the attorney actually believes that there has been a material violation, and it should not constitute a material violation when an attorney reaches a conclusion as to a matter (such as disclosure) about which reasonable minds can differ.
We therefore request that the Commission adopt a subjective standard based on whether an attorney becomes aware of evidence that causes that attorney to believe that a material violation has occurred, is occurring or is about to occur. We believe that revising the rule to incorporate a subjective standard is supported by the Commission's statement in the Proposing Release that "the attorney's reporting obligation is not triggered until the attorney can be sure that the officer or employee will actually pursue an illegal course of action." This standard is lower than the "actual knowledge" standard rejected by the Commission in the Proposing Release on the basis that it would not do enough to protect the public interest and investors, but high enough to avoid the potentially unjust outcome of a lawyer being disciplined under a professional ethics rule for getting a judgment call wrong.
2. Definition of "issuer"
The definition of "issuer" in the Proposed Rule on its face could include foreign governments that have securities registered in the United States. However, foreign governments are unlikely to have the same corporate organization as publicly held companies, making adherence to the "up the ladder" reporting obligations difficult, if not impossible, for reporting attorneys. We therefore request, in response to the Commission's request for comment, that the Commission amend the definition of issuer in Section 205.2(g) to include a statement that foreign governments will not be considered "issuers" by the rule or, alternatively, amend the Proposed Rule to provide attorneys with guidance on how to comply with their reporting obligations when representing foreign government issuers.
3. Definitions of "material violation" and "breach of fiduciary duty"
It is unclear whether the definitions of "material violation" and "breach of fiduciary duty" in the Proposed Rule include foreign laws within their scope, although the Commission in the Proposing Release indicates that the term "violation of securities law" covers violations of US federal and state securities laws. We therefore request that the Commission clarify that the definitions of "material violation" and "breach of fiduciary duty" are limited to violations of US law.
4. Definitions of "reasonable" and "reasonably"
Because "reasonable" and "reasonably" color the application of the Proposed Rule in many Sections, we request that the Commission amend the definition in Section 205.2(k) to specifically state what the Proposing Release indicates, namely that an attorney's training, experience, position and seniority will be considered when determining whether his or her actions were "reasonable." We further request that the jurisdiction of the attorney's qualification also be considered together with the aforementioned factors.
F. General comments on other provisions
1. Attribution of knowledge
We request that the Commission revise Section 205.3 to clarify that the knowledge of a material violation of one attorney within a firm will not be attributed to all other attorneys at the firm. For purposes of US rules governing professional conduct, the knowledge of attorneys who are not working on a client matter is generally not attributed to others who are. See American Law Institute, Restatement of the Law, Third, The Law Governing Lawyers, Section 123, comment a (1998). Only if the facts of the situation warrant such a conclusion (for example, if the attorneys are working together on a project or if an attorney is regularly consulted about a matter) may the knowledge of one attorney be attributed to others. See id. at Section 94, comment g. The Commission should make clear in the Proposed Rule that these same standards apply, with respect to both partners and associates within firms.
2. Reliance of non-US chief legal officer on US attorneys
In addition to the reporting obligations to which other non-US attorneys who appear and practice before the Commission would be subject under the Proposed Rule, the CLO of a foreign issuer would have a duty under Section 205.3(b)(3) to investigate reports of any material violations and impose remedial measures on the issuer, tasks for which a CLO who is not a US attorney may be poorly equipped. As a result, we believe that CLOs who are not US attorneys should be explicitly entitled to rely on the advice of US attorneys in fulfilling their investigating and other duties under Section 205.3(b)(3).
3. Availability of qualified legal compliance committee to all foreign issuers
The creation of a qualified legal compliance committee (QLCC) complying with the requirements of the Proposed Rule would not be possible for foreign issuers who do not have an audit committee, as Section 205.2(j)(1) requires that the QLCC be composed of "at least one member of the issuer's audit committee." We request that the Proposed Rule be modified to reflect that the QLCC may be comprised solely of independent directors and the alternative reporting procedure can be used even if the issuer has no audit committee, in which case the audit committee member's place could be taken by another independent director.
In the context of foreign issuers that have a management board and a separate supervisory board, such as in Germany and the Netherlands, we request that the Commission clarify how the QLCC provisions should be applied to such issuers.
4. Supervisory and subordinate attorneys
The proposed definitions of "supervisory attorney" and "subordinate attorney" in Sections 205.4 and 205.5, respectively, create a risk that senior attorneys could be held responsible for the acts of junior attorneys with respect to matters of which the senior attorneys have no knowledge. The Commission indicates in the Proposing Release that the use of the words "directing" and "supervisory authority" in Section 205.4(a) was to "clarify that individuals who may exercise authority over subordinate attorneys for a particular matter, but who do not routinely supervise that attorney, are supervisory attorneys." We therefore request that the Commission revise Sections 205.4 and 205.5 to clarify that these sections only cover attorneys who are working together on a particular matter, in order to more clearly reflect the intent of the rule.
Section 205.4(d) currently requires a supervisory attorney who reasonably believes that the information reported to him or her by a subordinate attorney is not evidence of a material violation to document the basis for his or her belief. We believe that this provision, as drafted, overreaches by encouraging supervisory attorneys to document ordinary discussions with subordinate attorneys in order to avoid violating the rules and could lead to an undesirable chilling effect on communications between supervisory and subordinate attorneys. We therefore request that the Commission consider revising the provision to avoid such an outcome.
5. No private right of action
Although the Commission noted in the Proposing Release that none of the obligations under the Proposed Rule was meant to create a private right of action against attorneys, the Proposed Rule does not explicitly state this. We request the Commission make it clear that no such private right of action is created by Part 205.
The Proposed Rule raises many serious and complicated issues with respect to the regulation of attorneys. We expect that the Commission will receive an abundance of comments from practitioners and professional organizations concerning just the application of the Proposed Rule within the United States. However, as the Commission acknowledges in the Proposing Release, many additional problems arise from the application of the Proposed Rule to non-US attorneys and attorneys practicing in multi-jurisdictional law firms. In fact, many of the potential problems for non-US attorneys stem from the "noisy withdrawal" and disaffirmation requirements. Although we have proposed a number of possible solutions to help mitigate the effects of these problems, we believe that it will not be possible to fully resolve all of these issues by the statutory deadline for adoption of the final rules. Therefore, we reiterate our request that the Commission defer coverage of non-US attorneys from the application of the Proposed Rule and the implementation of the proposed "noisy withdrawal" and disaffirmation provisions, pending further consultation, in order to allow the Commission and all interested parties to have more time to resolve these problems satisfactorily.
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We appreciate this opportunity to comment on the Commission's proposal, and we would be happy to discuss any questions the Commission or its staff may have with respect to this letter. Questions may be addressed to any of the following:
This survey provides an overview of the laws of certain non-US jurisdictions as they relate to the obligations that would be imposed on non-US attorneys by the Proposed Rule, specifically, the obligation to report "up the ladder" and to undertake a "noisy withdrawal." This survey also summarizes certain exceptions to non-US attorneys' duty to keep client confidences secret (which for the sake of convenience should be read to include exceptions to attorney-client privilege, where applicable).
This survey assumes that the non-US attorney is retained by a corporate client and is not separately representing (with or without, where permissible, informed consent) any stakeholder in that corporate client (e.g., shareholders or directors). Furthermore, this survey assumes that all references to the "client" or the "company" are references to the corporate entity which is the client of the non-US attorney for this purpose and would not necessarily include affiliated or group companies such as a parent company, unless those companies are also clearly the client of the non-US attorney for the purposes of the retainer.
Any reference to "noisy withdrawal" in this annex includes all three requirements contemplated by the Proposed Rule, including (1) the obligation on an outside attorney to withdraw from representing his client; (2) the requirement to notify the Commission of that withdrawal and (3) the requirement to disaffirm a former client's filings with the Commission as materially false or misleading.