Carter Ledyard & Milburn LLP
April 7, 2003
BY E-MAIL (email@example.com.)
U.S. Securities and Exchange Commission
Re: Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys; File No. S7-45-02
Mr. Chairman and Honorable Commissioners:
We write to comment on the Commission's proposed alternative noisy withdrawal provisions included in Release Nos. 33-8186, 34-47282 and IC-25920 published by the Commission on January 29, 2003 (the "Proposed Rules") under Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act").
In accordance with the Commission's proposed alternative noisy withdrawal provisions, an attorney who has reported up the ladder to the issuer's board, and did not receive an appropriate timely response, and who reasonably concludes that there is substantial evidence of misconduct either ongoing or about to occur which is likely to cause substantial injury to the issuer or investors, must withdraw from representing the issuer and notify the issuer in writing that the withdrawal is out of professional considerations.
Two business days after receiving such notification, the issuer must report such notice of withdrawal and the circumstances surrounding it to the SEC on a current report on Form 8-K or, in the case of a non-U.S. public company, on a Form 20-F or Form 40-F.
In the event that the issuer does not so report to the Commission, the withdrawing attorney may, but is not obligated to inform the Commission of the withdrawal.
By placing the responsibility of reporting on the issuer rather than the attorney, we believe that the Commission might be of the view that the alternative proposal somehow alleviates the client-attorney privilege concerns that were raised in comment letters filed with the Commission in response to the Commission's original proposed rules establishing standards of professional conduct for attorneys under the Act.
For the reasons set forth below, we believe that the same concerns of attorney client privilege that we raised in our comment letter of December 18, 2002 to the Commission prevail even under the proposed alternative noisy withdrawal provisions.
We believe that the possibility of eventual possible disclosure by the attorney of client confidences to the Commission will continue to have a chilling effect on communications between attorneys and clients, whether such disclosure is made directly by the attorney (as proposed in the original noisy withdrawal proposals) or indirectly, as contemplated by the proposed alternative noisy withdrawal provisions. The client will surely understand that the notice of withdrawal to the company for professional considerations is in effect the trigger that will oblige the company to report the matter to the Commission. It does not really matter who makes the call to the Commission. What matters is who has set the ball rolling irrevocably in that direction.
We believe that the criminal sanctions embedded in the Act, the absorption of the Act and its stern provisions into the consciousness of corporate America, and the virtually daily perp walks of executives alleged to have violated the Act, all have gone a long way to put people on notice that corporate governance is a very serious matter.
We believe that turning the attorney into a government informant adds a level of angst that would be counterproductive to the purpose of the Act.
There must be a trusted, competent source left that executives who want to do the right thing and do not want to court disaster by violating the law should be able to turn to for advice in confidence. If executives cannot, in confidence, learn how to do right, then the chances increase dramatically of their inadvertently, or even intentionally, doing wrong.
Lawyers still have the opportunity to educate their clients in a friendly, consensual manner by listening to them and making them understand that corporate governance is good business, and that it doesn't pay to cut corners.
It may be that a particular client will never understand the message, in which case the attorney can always voluntarily withdraw. But the timing of the withdrawal is crucial. The attorney should be allowed the time and space to persuade and coax the client to do the right thing and not be removed from the scene by the drastic step of turning him or her instantly into an actual or prospective informant.
We believe that most people want to do the right thing. We also believe that instilling too much fear can often achieve the wrong results. Much of the law is a process of education and lawyers often see themselves as teachers of the law.
We believe that the friendly educators should be allowed to do their job until they feel they can do no more.
We believe that the mechanism for making the company notify the SEC instead of the attorney is already in place with the establishment of a qualified legal compliance committee ("QLCC"). If an attorney reports a material violation of law to the QLCC, he or she is no longer required to ultimately notify the Commission of his or her withdrawal. This concept does not need to be duplicated, as it would be if the proposed alternative noisy withdrawal provisions are adopted.
The essence of the relationship between the lawyer and the client is the open line of confidential communication. Please do not impair that relationship.