March 31, 2003

Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attention: Jonathan G. Katz, Secretary

Re: Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys

Release Nos. 33-8186; 34-47282; IC-25920
File No. S7-45-02

Dear Mr. Katz:

We are submitting this letter in response to Release Nos. 33-8186; 34-47282 and IC-25920, dated January 29, 2003 (the "Proposing Release"), in which the Securities and Exchange Commission has requested comments regarding its proposed rule implementing Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act").

The Commission issued the Proposing Release on the same day on which it issued a release, Release Nos. 33-8185; 34-47276 and IC-25929 (the "Adopting Release"), adopting a final rule implementing Section 307 of the Act, 17 CFR Part 205 ("Rule 205").

We commend the Commission and its Staff for Rule 205, which, in our view, ably carries out the mandate of Section 307 in a way intended to protect investors, and which addresses and corrects many of the problems associated with the draft rule initially proposed in Release Nos. 33-8150; 34-46868 and IC-25829, dated November 21, 2002. We appreciate the consideration the Commission gave to the numerous comments it received on the draft rule, including our comment letter dated December 18, 2003.

We also commend the Commission for taking additional time to consider whether Rule 205 should require an attorney who encounters evidence of a material violation by an issuer not only to go "up the ladder" to higher authority within the issuer, but also to effect a "noisy withdrawal" if an appropriate response is not forthcoming - by telling the Commission that the attorney is withdrawing from representing the issuer for "professional considerations." There was no need for the Commission to rush to adopt a requirement that was not required by Congress in the Act, that was so controversial, and that went so far beyond the requirements contemplated by section 307.

We continue to believe that noisy withdrawal should not be required under rule 205. A noisy withdrawal requirement would be inconsistent with Congressional intent in adopting section 307 of the Act, and would harm rather than protect investors by making issuers significantly less likely to consult counsel on important questions, including questions of compliance with disclosure and other securities law compliance.

The Proposing Release proposes an alternative approach, under which the issuer, not the attorney, would be required to notify the Commission if the attorney has withdrawn following lack of appropriate response to the attorney's report of evidence of a material violation. As discussed below, we believe that this alternative approach is subject to the same fundamental flaws as a requirement for noisy withdrawal by the attorney. The alternative would equally be viewed as turning attorneys into the Commission's eyes and ears, and would cause the same harm to investors by making issuers less likely to consult attorneys on important questions.

We are aware that an issuer is required to report a change in the issuer's outside auditing firm. We do not believe that is analogous to a requirement to report an attorney's withdrawal. The law encourages confidential communications with attorneys, by means of the attorney-client privilege. There is no auditor-client privilege.

1. Noisy Withdrawal by an Attorney. As we stated in our December 18, 2002 comment letter, to require a withdrawing attorney to notify the Commission of the withdrawal would be inconsistent with Congressional intent and would harm rather than protect investors.

Consistent with note 25 of the Proposing Release, we understand that the Commission will review earlier comment letters. Accordingly, we will not repeat the comments made in our earlier letter. In a nutshell, we pointed out:

Noisy withdrawal is inconsistent with Congressional intent. The only professional standard rule contemplated in Section 307 is a rule that would require an attorney to go "up the ladder" within a corporate client if in the representation an attorney is confronted with evidence of, for example, a material violation of securities law and if the CLO or CEO does not respond appropriately.

The Senators who proposed Section 307 were clear that this was what they contemplated would happen. They made no mention, in any of their discussions, of a requirement that an attorney not only go "up the ladder" within the client, but also in essence make disclosure to the Commission through a "noisy withdrawal." Indeed, Senator Enzi expressly stated in the floor debates over Section 307 that the amendment "would not require the attorneys to report violations to the SEC, only to corporate legal counsel or the CEO, and ultimately, to the board of directors."1

A noisy withdrawal requirement would harm investors because it would deter issuers from seeking advice of counsel. Attorneys for issuers play a vital role in protecting investors because of the advice they give issuers as to disclosure questions and other questions of compliance with securities laws.

It is entirely foreseeable that issuers will be significantly less likely to consult attorneys with key securities law questions if the issuers perceive that the attorneys are in essence acting as the Commission's eyes and ears. In our view, a noisy withdrawal requirement will have that consequence. To be sure, the attorney would not in the first instance be required to tell the Commission more than that the attorney's withdrawal "was based on professional considerations." But wouldn't the Commission's Staff, receiving notice of such a withdrawal, ask the company to explain the circumstances of the withdrawal. And won't the Commission's Staff also be likely to inquire into whether the attorney withdrew in a timely manner after making a report of evidence of a material violation, and not getting a prompt and appropriate response? If so, the attorney, under Section 205.3(d)(1)and (2), is permitted to disclose to the Commission the report and response and any contemporaneous records the attorney made concerning the report and response, as well as confidential information relating to the representation "to the extent the attorney reasonably believes necessary." Under this very likely scenario, it would be entirely reasonable for the client to perceive that the Commission would be using the attorney as the Commission's eyes and ears to build a case against the client.

Because of our conviction as to the harm done by a noisy withdrawal requirement, we do not think it appropriate to comment on lesser problems with the proposal. We do not mean to suggest that the proposal is free from other problems. We note, for example, the total vagueness inherent in the proposal's concept that evidence of a material violation sufficient to trigger noisy withdrawal absent appropriate response can be based not only on evidence of a violation of securities law or fiduciary, but also on evidence of a "similar violation" - a concept without any definition whatsoever.

2. The Proposed Alternative Approach Is Subject to the Same Fundamental Problems. Under the alternative proposal contained in the Proposing Release, the issuer, rather than the attorney, would be required to tell the Commission of the attorney's notice of withdrawal, through a public filing on Form 8-K, 20-F or 40-F.

The issuer would also be required to include in the filing "the circumstances related to" the notice of withdrawal.

In our view, the alternative approach is subject to the same fundamental problems as a requirement for "reporting out" by the issuer. To be sure, the attorney would not be required to report anything outside the issuer - but the issuer would be required to make a public filing as to the attorney's withdrawal. The attorney's withdrawal, under the alternative proposal, would cause disclosure to the Commission and to the public - it would just do so through the means of a required filing by the issuer.

In our view, this is "reporting out" - outside of the issuer - that is inconsistent with the Congressional intent that an attorney who encounters evidence of a material violation would report it up the ladder within the issuer.

Moreover, the chance of such reporting out is likely to harm investors by causing issuers not to consult counsel. Indeed, this is even more likely to be the case under the alternative proposal, since the reporting out would not just be to the Commission, which can investigate the circumstances of the withdrawal, but also to the public by means of a public filing. The public filing would be highly likely to excite instant negative investor reaction, even if the withdrawing attorney acted unreasonably in withdrawing. While the issuer would be free (indeed, required) under the alternative to disclose "the circumstances", that would expose the issuer to a high risk of losing the attorney-client privilege. Because of all these factors, it stands to reason that issuers would be even more reluctant to consult counsel on tough questions - a reluctance that is likely to harm investors.

The Commission stated in the Proposing Release that it "does not want the rule to discourage issuers from seeking and obtaining appropriate and effective legal advice." It is clear to us that the alternative proposal, like a requirement that an attorney directly notify the Commission of the attorney's withdrawal, will have precisely that undesirable effect - to the detriment of investor protection.

It may be argued that auditors of issuers are required under Section 10A of the Exchange Act to notify the Commission under some circumstances of auditors' withdrawal, and that attorneys should be treated the same way. We submit, however, that the analogy is fatally flawed. First, the requirements of notification to the Commission under Section 10A required specific legislation - and no such requirement is to be found in the Sarbanes-Oxley Act. Second, and more fundamental, as the Supreme Court has made clear, the relationship between public auditor and company is very different from the relationship between attorney and client. The attorney acts as counselor to and advocate for the client, not as certifier to the investing public. For that basic reason, there is an attorney-client privilege, but not an auditor-client privilege. Couch v. United States, 409 U.S. 322, 335 (1973). For the same reason, attorney work product is protected, but auditor work product generally is not. See United States v. Arthur Young & Co., 465 U.S. 805, 817-18 (1984)(explaining why the attorney work product doctrine did not apply to independent certified public accountants).

It is in large part because of, as the Supreme Court put it in Arthur Young, the attorney's "role as the client's confidential advisor and advocate" that issuers are willing to seek advice from their lawyers, and give the lawyers the facts needed for the rendering of effective advice. If that confidentiality is perceived to be destroyed or seriously weakened, so too will be the willingness of corporate officers to seek guidance from their counsel. The harm to investors that would result, in our judgment, far outweighs any slight benefit that might result in what we (and the Commission) expect would be the unusual case of directors of a public company disregarding counsel's advice as to the existence of evidence of a material violation and the absence of an appropriate response by the issuer.

* * * * * * *

We appreciate the opportunity to comment on the proposed rule and would be pleased to answer any questions you might have regarding our comments. Please contact Meredith Brown at (212) 909-6528, Alan Paley at (212) 909-6694 or Peter Loughran at (212) 909-6375.

Respectfully submitted,


cc: Giovanni P. Prezioso
Alan L. Beller

1 148 Cong. Rec. S6555 (July 10, 2002).