COMMITTEE ON PROFESSIONAL
180 HOWARD STREET
April 4, 2002
VIA E-MAIL: email@example.com
Jonathan G. Katz, Secretary
Re: File No. S7-45-02
Dear Mr. Katz:
The State Bar of California's Committee on Professional Responsibility and Conduct ("COPRAC") hereby submits its comments on both the proposed Standards of Professional conduct for attorneys under section 307 of the Sarbanes-Oxley Act [File No. S7-45-02, Release No. 33-8186] ["Proposed Rules"] and the Final Rules for Implementation of Standards of Professional Conduct for Attorneys that were originally released in November 2002 [File No. S7-45-02, Release No. 33-8185] ["Final Rules"].1 COPRAC will limit its comments to the "noisy withdrawal" and "alternative proposal to noisy withdrawal" ["alternative proposal"] provisions in the Proposed Rules (proposed rules 205.3(d)-(f)), and those provisions in the Final Rules that would permit a lawyer's disclosure of confidential information outside of the corporate client (205.3(d)2).
Confidentiality plays an essential role in maintaining the attorney-client relationship. By subverting that trust relationship between client and lawyer, each of the provisions addressed - "noisy withdrawal" and the "alternative" to noisy withdrawal, as well as the rule permitting extra-corporate disclosure of confidential client information - will inevitably reduce the flow of information from client to lawyer that is crucial to effective legal representation and compliance with the law. The Commission should not overturn the settled area of confidentiality when there is dearth of evidence that such a change would have avoided the recent corporate scandals.
COPRAC recognizes that much time has been invested in reviewing the voluminous comment submitted in response to the proposed rules issued last November. The Final Rules, in particular the definition sections, demonstrate that the Commission heeded many of the concerns voiced by members of the legal profession both here and abroad and, in the Final Rules, appropriately narrowed their reach.
Further, COPRAC wishes to state its position that the provisions requiring up-the-ladder reporting to the highest authority within a corporate client are appropriate and consistent with Congress's concerns as expressed in section 307. Those provisions provide lawyers with a means to ensure that those responsible for directing the conduct of their corporate clients receive the information necessary to comply with the law.
COPRAC submits, however, that the proposed rules that would require a lawyer's "noisy withdrawal" from representing a client or, as in the alternative proposal, would require the client to announce the lawyer's withdrawal, are both inappropriate and would do more harm than good. The same is true of the provision in the final rule that, when it becomes effective on August 5, 2003, would permit a lawyer's disclosure of confidential information outside of the corporate client. All of these rules, unlike the up-the-ladder proposals, are a radical departure from settled law and, if they go into effect,3 will irrevocably alter the relationship between lawyer and client. Either alone or in combination, they would transform the lawyer from a trusted advisor of the client into an informant against the client. When the lawyer notifies the client of this new role, and explains that the client's secrets will be subject to disclosure, the attorney-client relationship that is founded on trust and confidence will be irrevocably altered. The new dynamic will decrease the likelihood that the lawyer will be kept fully informed by the client, frustrating the purpose of the attorney-client relationship, which can be fulfilled only if the lawyer gets full information from the client.
We first discuss briefly the essential role of confidentiality in effective legal representation and in promoting the public interest in compliance with the law. We then explain why each of the aforementioned proposed or final rules is destructive of the attorney client relationship and contrary to the public interest.
The Duty of Confidentiality and the Attorney-client Relationship
Over a century ago, the Supreme Court of the United States pointed out that the assistance of attorneys "can only be safely and readily availed of when free from the consequences or the apprehension of disclosure." Upjohn Company v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 682 (1981), quotingHunt v. Blackburn, 128 U.S. 464, 470, 9 S.Ct. 125, 127 (1888). The Court in Upjohn recognized the centrality of confidentiality to our legal system when it observed that the purpose of the attorney-client privilege "is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice." 449 U.S. at 389, 101 S.Ct. at 682. (Emphasis added).
Put another way, a lawyer, however skilled, can fulfill his or her role only by having full access to the facts pertinent to the representation, and can get the facts only if the client has confidence that the lawyer will not reveal or use the client's confidential information to the disadvantage of the client. Confidentiality begets trust, which in turn enables effective representation. Regulations that seek to alter that dynamic will necessarily interfere with the achievement of the "broader public interests in the observance of law and administration of justice."Upjohn, 449 U.S. at 389, 101 S.Ct. at 682.
The Commission itself, in making its proposals, has taken note of the importance of not impairing "zealous advocacy" or discouraging issuers "from seeking and obtaining appropriate and effective legal advice." (Proposed Rule, Part III, Introductory paragraph). The Commission rules requiring or permitting disclosure of corporate secrets outside the corporate structure, however, will necessarily subvert and turn on its head the relationship of trust between client and lawyer. Unlike the up-the-ladder provisions that Congress contemplated in section 307, final rule 205.3(d), which would allow extra-corporate disclosure of confidential client information, would frustrate the lawyer's ability to acquire the information necessary to ensure compliance with the law, as would the "noisy withdrawal" provision and the alternative proposal.
Final rule 205.3(d): Disclosing confidential information outside the client
We are greatly concerned with the inevitable weakening of the attorney-client relationship as a result of the disclosure provisions set forth in final rule 205.3(d), to become effective on August 5, 2002. In final rule 205.3(d), the Commission has carved out an exception to the lawyer's duty of confidentiality that would allow a lawyer to disclose an issuer client's confidential information to prevent a material violation likely to result in injury to the financial interests of the issuer or investors, or to rectify the consequences of a material violation that has caused, or may cause, a similar injury.
Final rule 205.3(d) is virtually identical to a confidentiality exception that the ABA House of Delegates has rejected on three separate occasions in the last 20 years. Rule 205.3(d) does not comport with the fact, pointed out so forcefully by the Supreme Court in Upjohn, that preservation of attorney-client confidences promotes the public interest in the observance of law.
Final rule 205.3(d) imposes on the client the "apprehension of disclosure" at the discretion of the lawyer by providing that the client's trusted confidante, upon whom the client will rely to help it chart its way through complex legal thickets, could in the future turn on the client. Nothing, we submit, could be more destructive of the attorney-client relationship. For the Commission to decree by rule that an issuer's trusted legal adviser may or must reveal the client's confidential information is tantamount to saying that an issuer may not have a trusted legal adviser.
Speculation and assumptions about lawyer misconduct in recent scandals is no basis for destroying attorney-client confidentiality, a foundation of our legal system. Any lawyers who may have facilitated crimes or frauds violated existing ethical strictures such as ABA Model Rule 1.2(d), a rule the Commission could easily adopt as its own. It is hard to see how such lawyers, who have already by definition chosen to act not only in violation of their professional ethics but in violation of criminal law, would honor an obligation to blow the whistle on themselves and their clients. Destruction of attorney-client confidentiality based on speculation about widespread misconduct serves no legitimate purpose and would be contrary to recent United States Supreme Court precedent. In declining to alter the rule that the attorney-client privilege survives the death of the client, the Court pointed that the arguments against the survival of the privilege
Swidler & Berlin v. United States, 524 U.S. 399, 410, 118 S.Ct. 2081, 2088 (1998). The Court's reasoning in Swidler & Berlin is equally applicable to the current challenge to the duty of the confidentiality in the wake of the corporate scandals. The Commission should be hesitant to overturn a long-standing paradigm without a firm basis for doing so.
We urge the Commission to rethink its support of final rule 205.3(d). It goes beyond any corrective measures Congress contemplated in passing section 307, does not comport with the realities of practice, will interfere with the dynamic of trust inherent in the attorney-client relationship, and ultimately will thwart precisely what Congress sought to achieve with section 307: compliance with the law.
The proposed "noisy withdrawal" provision and alternative to the "noisy withdrawal" provision
The Commission has favorably responded to numerous requests to extend the comment period for the "noisy withdrawal" provision proposed in the November 21, 2002 release, and has also proposed an alternative to its original "noisy withdrawal" provision ["alternative proposal"]. This latter proposal apparently seeks to address the many concerns raised about the deleterious effect the original provision would have had on the attorney-client relationship and the ability of lawyers effectively to represent their corporate clients. COPRAC appreciates the opportunity to provide comments on these two provisions. COPRAC remains convinced, however, that despite the Commission's efforts to circumvent the fatal defects in the original "noisy withdrawal" proposal, both provisions will undermine the fundamental attorney-client relationship and with it, the ability of an issuer's lawyer to effectively represent his or her client.
The "noisy withdrawal" provision
Under the "noisy withdrawal" provision the Commission proposed in November 2002 and which is included largely intact in the January 29, 2003 proposing release, a lawyer is required to withdraw from representing an issuer and notify the Commission in writing of his or her withdrawal if the issuer has either made no response or has not made an appropriate response to the lawyer's reported evidence of a material violation. In addition, a lawyer must disaffirm some documents the lawyer may have filed with the Commission. The rule applies to both outside and in-house lawyers, and is triggered regardless of whether the conduct comprising the alleged material violation is ongoing or about to occur.
Though the "noisy withdrawal" provision, rule 205.3(d), does not purport to require the lawyer to divulge confidential communications, it will have the same effect on the attorney's ability to obtain information from the client. A lawyer's report to the Commission that he or she has withdrawn from representation of the client in a particular matter "based on professional considerations" is like raising a flag-a signal that publicly discloses the lawyer's ultimate judgment that the client has violated or is violating the law. Such a judgment by the issuer's lawyer is protected by the rules of confidentiality. Faced with the possibility that its own lawyer may raise the flag signaling that the client has committed or is committing a wrong, the issuer or its management is more likely to screen the lawyer from full access to company information, in effect not availing itself of the skilled legal assistance that could help it conform its conduct to the law. Upjohn, 449 U.S. at 389, 101 S.Ct. at 682.
The Commission should not assume that the "noisy withdrawal" provision, rule 205.3(d), is only a de minimis breach of confidentiality. Under the structure of the proposed rules, a lawyer's noisy withdrawal is an unmistakable and unambiguous revelation of the lawyer's conclusion that the client is engaging in a material violation of law. There could hardly be a more significant breach of trust and confidence. As a result, requiring a noisy withdrawal has the same effect on the attorney's ability to obtain information from the client as requiring the lawyer to reveal directly to the Commission confidential client communications verbatim.
We urge the Commission not to go forward with the proposed rule on "noisy withdrawal." As with final rule 205.3(d), which purports to permit a lawyer to disclose confidential client information, it goes beyond any corrective measures Congress contemplated in passing section 307, will interfere with the element of trust inherent in the attorney-client relationship, and ultimately will frustrate what Congress sought to achieve with section 307: compliance with the law.
The alternative proposal to "noisy withdrawal"
Unlike the "noisy withdrawal" provision, the alternative proposal contained in the January 29, 2003 proposing release is not triggered unless the material violation is ongoing or about to occur, and is likely to cause substantial injury to the issuer. The lawyer is still required to withdraw, but the lawyer is not required to make a "noisy withdrawal," i.e., give written notice to the Commission, or to disaffirm any documents. Rather, the alternative proposal (205.3(e)) requires the issuer to report to the Commission that the attorney has withdrawn, and also disclose that fact publicly.
The alternative proposal does not solve the problem of lost confidentiality that is inherent in the "noisy withdrawal" procedure. If adopted, the provision will have the same effect as would the lawyer's giving written notice to the Commission: a flag or signal that the issuer's lawyer has reached a certain judgment. The flag or signal will have the same result as a "noisy withdrawal" by the lawyer and the rule will have the same undermining effect on the attorney-client relationship and reduced ability to comply with the law as the provision for "noisy withdrawal." In the case of a "noisy withdrawal," after the client has decided not to follow its lawyer's advice, the lawyer directly informs on the client. Although the lawyer is not the direct agent of disclosure under the alternative proposal, it is the lawyer's advice, in particular the product of the lawyer's judgment, that triggers the client's obligation to report to the Commission. Regardless of who informs the Commission of the attorney's judgment that he or she must withdraw for "professional reasons," the effect of the alternative proposal is the same as "noisy withdrawal": the client will know that its lawyer's withdrawal may be disclosed. Inevitably, this will result in some lawyers' not receiving the kind of information required to give appropriate and effective advice.
We again urge the Commission not to go beyond the Congressional mandate contained in section 307 and withdraw the "alternative proposal."
Some advocates of these proposals would justify them on the basis that they give lawyers "a lot of power" over clients.4 Presumably this means that the rules would provide the lawyer with "leverage" over the client through an express or implied threat that lawyer will become a whistle-blower adverse to the client. We find this troubling because lawyers are not supposed to exercise "leverage" and "power" over clients by threatening to disclose client secrets. Instead, by providing advice based on an expertise in the law and an intimate knowledge of the client's situation, lawyers empower the clients to make appropriate, well-informed decisions. Accountants, on the other hand, may properly exercise a form of leverage because it is their job to analyze the corporate books, ask questions, and - with a keen skepticism - provide a report for the benefit of the public. Attorneys do not provide public analyses and should not exercise power under the threat of violating attorney-client confidentiality. While the attorney may recommend a particular course, it is the client's right to make the final decision regarding matters that affect its substantive rights. Blanton v. Womancare, Inc., 38 Cal.3d 396, 410, 696 P.2d 645, 654, 212 Cal.Rptr. 151, 160 (1985). See alsoJones v. Barnes, 463 U.S. 745 (1983) (It is the defendant's right to make decisions about fundamental matters, including whether to plead guilty, waive the Constitutional right to a jury, etc.).
The Commission's "up-the-ladder" proposal respects client autonomy without jeopardizing attorney-client confidentiality to achieve Congress's goal of furthering corporate legal compliance.
We do not believe lawyers can be effective advocates or advisors for their clients if they are placed in a role where they are in effect government watchdogs over their clients. Far from imposing "Standards of Professional Conduct," the rules we have addressed would impose a radical change in the nature and scope of an attorney's engagement, a change from independent advisor to an enforcer of duties under the Exchange Act or the common law. Instead of being the clients' advisor with the obligation to preserve the client's secrets, the lawyer would become an enforcer, with obligations, or at least discretion, to disclose the client's secrets. The substantial and deleterious effect the extra-corporate reporting rules will have on client trust and the attorney-client relationship that is so crucial to the effectiveness of our legal system warrants the Commission's rethinking of its proposal. The rules we have addressed jeopardize the client-lawyer trust relationship by effectively shutting off communication between lawyer and client and rendering the lawyer ineffective in helping to achieve the client's compliance with the law. The Commission should not overturn the settled area of confidentiality when there is dearth of evidence that such a change would have avoided the recent corporate scandals.
Yours very truly,
/s/ Kevin E. Mohr
Kevin E. Mohr