Brussels, 13.12.02 7608
Jonathan G. Katz
Dear Mr. Katz,
Subject: File No. S7-45-02
We thank you for the opportunity to comment on the proposed rules for implementation of standards of professional conduct for lawyers, part of the implementation of the Sarbanes-Oxley Act. We make the following comments as part of a constructive regulatory dialogue between the United States and the European Union because the Act also has considerable effects on EU lawyers.
The adoption of the Sarbanes-Oxley Act is a US reaction to US financial reporting scandals. The Act aims at restoring investor confidence in US capital markets. The European Commission and Member States share these concerns.
However, from a European perspective we have specific comments on the proposed part 205 which will be added to Title 17, Chapter II of the Code of Federal Regulations establishing standards of professional conduct for attorneys:
1. Noisy withdrawal
An extension to section 205.3 (d), the duty of lawyers to report to the SEC in case of material violations of the securities laws ("noisy withdrawal"), would be incompatible with the professional secrecy rules/professional privilege rules existing in all Member States. These professional secrecy rules/professional privilege rules are a cornerstone of our justice systems with their origins in our Member States' constitutions, criminal laws or statutes. These rules are of paramount importance because they are the basis of the confidential client-lawyer relationship and serve the public interest. Indeed, in several Member States' jurisdictions professional privilege cannot be waived under any circumstances and in others it can be waived by the client only.
The assertion in section 205.3 (d) (3) that "The notification to the Commission prescribed by [...] paragraph (d) does not breach the attorney-client privilege" can only be valid for the United States because it cannot overrule Member States' laws. Therefore, European lawyers are exposed to a conflicting situation. They will inevitably face sanctions: either they will be sanctioned by the SEC if they do not report to the SEC or they will face sanctions from their home courts or bars for breaching client confidentiality if they do report to the SEC. In some Member States they will even face criminal prosecution.
According to information we have received to date, we are aware that there are some Member States where in-house counsel are also subject to the professional secrecy rules which apply to European lawyers. This means that they are subject to the same conflicts of duties when they have to report any material violation of US securities laws to the SEC.
From a practical point of view this reporting duty will result in fewer companies seeking legal advice for fear that confidential information will be reported to the SEC. Accordingly, lawyers themselves will become overly cautious and will disclose any information to minimise the risk of personal liability and offences. Overall, this will lead to a reduction in legal advice which will consequently harm the interests of investors and creditors.
We, therefore strongly believe that all European lawyers including in-house counsel should be exempt from the above reporting duty resulting from the Sarbanes-Oxley Act. In practice, the SEC could restrict the definition of "attorneys" only to those who are qualified to practice in the United States or licensed to practice in the United States as foreign lawyers.
Additionally, the "noisy withdrawal" should have been intended and authorised expressly by the Sarbanes-Oxley Act, above all where the effect is being sought from lawyers outside the jurisdiction. This is because we believe that the "noisy withdrawal" constitutes a major breach of an important element in the administration of justice.
2. Reporting up the ladder
Section 205.3 (b) obliges lawyers to report evidence of a material violation of securities laws to the company's chief legal officer or chief executive officer. We believe that the extension of this rule to European lawyers represents a disproportionate burden.
Firstly, European lawyers have a general duty to report up-the-ladder in relation to their corporate clients. This duty results from ethics, codes of conduct and contracts which require European lawyers to give the best possible and safe advice to their clients, including reporting wrongdoings up the ladder of a corporate client. Therefore, the principles existing in Member States concerning the reporting up-the ladder should be regarded as substantially equivalent to the ones proposed by the SEC even though the reporting duties are triggered by different requirements. It should also be noted in this context that every Member State has procedures for disciplining European lawyers in the case of misconduct.
Furthermore, it must be noted that according to section 205.3 (b) all European lawyers, even though they are not qualified to practice in the United States, have a duty to report when they reasonably believe that a material violation has occurred, is occurring or is about to occur. From an EU perspective it seems inappropriate to expect European lawyers to have the same level of expertise as US lawyers when making judgements as to whether US registrants have committed a material violation under US securities laws. They cannot be expected to be knowledgeable about the rules and court decisions addressing US standards of "materiality".
Furthermore, such a duty would impose on European lawyers a high degree of legal uncertainty about the extent of required knowledge and factual reporting duties under US securities laws.
This difficulty is another reason, why the SEC should restrict the definition of "attorneys" in the rules only to those who are qualified to practice in the United States or licensed to practice in the United States as foreign lawyers.
We trust that our comments will help the definition of SEC rules to be in the best interest of the US companies, and the EU companies, and its lawyers with transatlantic business links.