New York County Lawyers' Association
Committee on Securities and Exchanges
December 18, 2002
Mr. Jonathan G. Katz
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Comment of the Committee on Securities and Exchanges of the New York County Lawyers' Association on the Proposed Rule Relating to the Implementation of Standards of Professional Conduct for Attorneys, File No. S7-45-02
Dear Mr. Katz:
The Committee on Securities and Exchanges of the New York County Lawyers' Association submits the following comments in response to the above-referenced United States Securities and Exchange Commission's ("SEC" or "Commission") rule proposal regarding the implementation of the provisions of the Sarbanes-Oxley Act of 2002 ("SOA"). The Committee on Securities and Exchanges of the New York County Lawyers' Association has over 100 members who are attorneys in private practice, in-house counsel for corporations and financial services companies and self-regulatory organizations. Many of our members are former SEC attorneys as well as attorneys from federal and state law enforcement agencies.1
In response to SOA Section 307, the SEC has proposed new Part 205 to its rules for those who appear and practice before the SEC. The new standards require an attorney "to report evidence of a material violation or breach of fiduciary duty or similar violation by the company or any agent thereof to the chief legal counsel or chief executive officer." However, the new rule does not permit the attorney to end such reporting, instead, the attorney who does not receive an appropriate response must report to either the audit committee, an independent committee of the board of directors or the full board of directors.2 The SEC claims that this new proposed rule will protect investors and increase public confidence in companies by having attorneys police their clients. The issue is, however, whether the benefits of the proposed rule, as it stands, outweigh the risks to the attorney-client relationship.
The Committee members strongly recommend that the SEC delay action on many aspects of this proposal. They believe the proposal impermissibly broadens the parameters of SOA Section 307. The scope should also be limited to exclude foreign lawyers given the ethical requirements, confidentiality differences and other jurisdictional issues that exist in various foreign countries. The Committee generally believes that this new rule will not ferret out nor prevent fraud. Rather, it will have the draconian effect, perhaps unintended by Congress, of fundamentally altering the relationship between attorneys and clients.
This proposal redefines the role of corporate attorneys. The Committee believed that neither the SEC nor Congress can or should make an attorney an informant on his or her client. Certain Committee members believed that the SEC has obligated attorneys to perform certain functions that may result in conflict with their ethical responsibilities to and representation of issuers and may result in unintended negative consequences to businesses, careers and shareholder value.
Other Committee members suggested that this new rule has not fully addressed the long-standing tensions among several ethical considerations governing attorney conduct, including the preservation of client confidences, non-participation in ongoing criminal activity and adequate and vigorous representation of clients. The inherent tension in the issue of attorney conduct and ethics versus vigorous representation of clients has long existed. Certain Committee members did not agree that this additional rule needed to be adopted to address these long-standing issues. Essentially, this new rule will not prevent ethical violations or the perpetration of fraud. Other comments from Committee members included that this new rule will separate clients from their attorneys, and clients will lose the ability to place confidence in counsel. Further, the expectation of privacy and confidentiality that encompasses the relationship will be lost.
Certain Committee members also believed that this new rule will result in a "chilling effect" on attorney-client relations. Further, this rule may result in the denial of the right to counsel of the client's choice, by making counsel a witness, or by making client and counsel's interests non-mutual. Committee members also believed that "noisy withdrawal" in any event is already required by various state codes of ethics, and reporting "up-the-ladder" to senior counsel or management has always been and remains an appropriate course of conduct. Further, Congress in its enabling legislation requires no such action.
The Committee members also believed that, while this proposed new rule may be politically expedient, it may do more harm than good. In fact, certain Committee members suggested that the procedures proscribed by the proposed rule should be set forth as ethical guidelines rather than requirements of a rule. Further, Committee members believed that the SEC could still prosecute counsel if it believed that an attorney was involved in fraud or some form of securities law violation.
Additionally, some Committee members believed that the proposed rule may divert attention from ongoing investigatory proceedings to a collateral issue of attorney conduct. For example, rather than focusing on uncovering the fraud itself or taking actions to correct the false public disclosures, time and effort will be devoted to determine whether counsel "reasonably" followed the proposed rule's provisions. Moreover, there is concern that the rule could be subject to abuse and unnecessary disclosures. In fact, the Committee believed that an attorney's fear of a referral of potential disciplinary action would carry great weight in how a counsel proceeds with advising a client. Thus, the Committee believed that the potential for abuse is great.
The Committee members also questioned that there are no definitive guidelines or even a definition of what constitutes a reasonable or appropriate response. Further, the SEC will be reviewing all of these transactions and occurrences in hindsight as to what constitutes materiality, leading to further apprehension on the part of the attorney and negatively impacting the attorney's ability to provide effective advice to his or her client.
The SEC has also expansively defined the word "attorney." The SEC could in fact bring into the rubric of this rule, those attorneys who are CEOs of companies or work for investment banks, but who do not function as lawyers. CEOs signing financial certifications before the SEC would be held to this standard, solely because they are licensed attorneys. This places an onerous burden on those non-practicing lawyers.
Certain Committee members also believed that the scope of the rule may require attorneys on the other side of a corporate transaction to breach their ethical requirements and alert the other side's management of an alleged material violation of law. This results from the definition in Section 205.2(f) that defines "In the representation of an issuer" to mean "acting in any way on behalf, at the behest, or for the benefit of an issuer, whether or not employed or retained by the issuer." Underwriter's counsel in a public offering is acting "for the benefit of the issuer." This may require an attorney to bring to the attention of management of the issuer an alleged material violation of law.
In sum, the Committee believes that there are many issues regarding the implementation of this proposal that were not contemplated. The Committee believes that the SEC and the securities law bar should work to refine these proposals. New proposals from the SEC would then be forthcoming, and accomplish the SEC's statutorily mandated function under the SOA. The Committee thanks the SEC for the opportunity to respond to this proposal. The Committee is also ready to offer assistance and further commentary.
If the Commission or you should have any questions, please do not hesitate to contact Ernest E. Badway at (973) 622-3333 or any of the other Committee members listed below who drafted this letter to the SEC on behalf of the Committee.
Ernest E. Badway, Co-Chair
Suzanne E. Auletta, Co-Chair
Matthew Levine, Vice-Chair
Ronit V. Fischer
Marc D. Powers
|1|| Members of the Committee employed by Self-Regulatory Organizations, federal and state government agencies, other regulatory agencies or private law firms express no opinion regarding any of the proposed rules. Individual members of the Committee may have views that differ from those presented. Moreover, this comment is solely that of the Committee on Securities and Exchanges, has not been approved by the Board of Directors of the New York County Lawyers' Association, and does not necessarily represent the views of the Board.
|2|| See Securities Act of 1933 Release Number 33-8150; Securities Exchange Act of 1934 Release Number 34-46868; Investment Company Act of 1940 Release Number IC-25829.