IMPLEMENTATION OF STANDARDS OF PROFESSIONAL
Submissions of the New Zealand Law Society to the United States Securities and Exchange Commission on the Proposed Rules 205.3(d) and 205.3(e) (Following Section 307 of the Sarbanes-Oxley Act 2002)
1. The New Zealand Law Society (NZLS) represents all 8,700 lawyers practicing in New Zealand.
2. The NZLS has previously made submissions on proposed Rule 205, and is pleased by the extent to which the Rules as introduced have been considerably lessened in their extra-territorial effect, the negative implications of which formed part of its earlier submissions.
3. The NZLS would now like to take the opportunity offered by an extension in the comment period, to make further submissions on Proposed Rule 205.3(d) and 205.3(e).
Proposed Rules 205.3(d) and 205.3(e)
4. The NZLS repeats its earlier submissions concerning the previously Proposed Rule 205.3(d), and in particular the extent to which it would conflict with the ethical obligations and Rules of Professional Conduct for New Zealand lawyers as administered by it.
5. The recent alternative proposal in 205.3(d) and 205.3(e) (the Alternative Proposal) would require an issuer to report to the Commission an attorney's written notice of withdrawal or failure to receive an appropriate response to an internal report of a material violation.
6. The NZLS does not consider that the Alternative Proposal materially avoids the potential conflict with the professional obligations of New Zealand lawyers. While the obligation on the issuer rather than the lawyer to report a withdrawal to the Commission reduces the potential conflict with a lawyer's obligations of confidence, the Alternative Proposal is still flawed. In particular:
(a) A lawyer who is faced with an inappropriate response by a client issuer to an internal report would still be required to withdraw from representing that issuer. This potentially conflicts with the right of a client to instruct and retain the lawyer of his or her choice.
(b) The Alternative Proposal still requires lawyers to give in-ordinate weight to the interests of a company's shareholders, rather than the client company concerned. Given that a shareholder's interests are largely economic, this requires a lawyer to exercise commercial rather than legal judgement. Yet it is difficult to see how an obligation to withdraw serves either the interests of shareholders or the company. An obligation to withdraw casts the lawyer's duty to the wider market, while denying the client company the opportunity to respond appropriately to a report of material violation by retaining a lawyer's services.
Suggested Reporting Requirements
7. The NZLS understands that higher reporting standards are an important goal for the Commission in introducing Rules under s.307 of the Sarbanes-Oxley Act. The NZLS feels that this goal could be achieved without significant conflict with the professional and ethical obligations of lawyers by making certain amendments to the Alternative Proposal for Rules 205.3(d) and (e).
8. Specifically, any obligation for a lawyer to withdraw when faced with an inappropriate response to an internal report of substantial evidence of material violation should not be introduced. Lawyers should only be required to satisfy the internal reporting requirements contemplated by the Alternative Proposal. Similarly, there should be no requirement for a lawyer to disaffirm documents supplied to the Commission.
9. Proposed Rule 205.3(e) should accordingly be modified to require an issuer to report to the Commission the lawyer's written notice of failure to receive an appropriate response to a report of material violation within a reasonable time. There should be no obligation on the lawyer to withdraw, and the relevant reporting function should fall to the issuer concerned in respect of the report.
10. The Committee notes that such a reporting obligation, without the need for withdrawal, would satisfy the requirements for the Commission set out in sections 307(1) and 307(2) of the Sarbanes-Oxley Act 2002. Sections 307(1) and 307(2) do not specifically require the Commission to introduce rules requiring a lawyer to withdraw.