Elaine J. Mittleman, Esq.
2040 Arch Drive
Falls Church, VA 22043
Telephone (703) 734-0482
Fax (703) 734-0482
Admitted in the District of Columbia; Not Admitted in Virginia
April 7, 2003
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-45-02; Proposed Rule: Implementation of Standards
of Professional Conduct for Attorneys
Dear Mr. Katz:
I am submitting comments in response to Release Nos. 33-8186; 34-47282 and IC-25920, dated January 29, 2003, on the proposed rules implementing Section 307 of the Sarbanes-Oxley Act. These comments supplement my comment letter dated December 18, 2002.
As I stated in my previous letter, the first step in restoring confidence in the role of attorneys must be a more precise analysis determining which acts or failures to act by attorneys contributed to the corporate scandals. It appears that the vast majority of attorneys have acted ethically and well within the bounds of the law, as have their clients. Moreover, it is not clear that having a requirement that lawyers go up the ladder to report material violations - and then make a noisy withdrawal - would necessarily have prevented or limited the recent scandals. I believe that the primary failure of attorneys was that they were not motivated or sufficiently knowledgeable to detect the material violations, thereby triggering the reporting requirement. If attorneys do not keep up their antennae for ethical violations, they may not see them and thus have the duty to report them. Moreover, attorneys may consider that it is in their interest to avoid raising difficult compliance issues with their clients.
In a recent article in Barron's, Judge Stanley Sporkin stated that what is needed to restore market confidence is for the Commission and Congress to conduct a broad investigation. Judge Sporkin stated, "What we need is a large study to draw the threads together. We've done a great job of getting things out into the open, but lately we've sort of let things slip." He suggested that the study should evaluate the roles of everyone from day traders to mutual funds, hedge funds and venture-capital shops. See Jack Willoughby, Barron's, April 7, 2003, at 20.
I believe that the type of study proposed by Judge Sporkin should also address the role of attorneys. The noisy withdrawal may not have the intended effects, particularly if attorneys are sufficiently concerned about the negative consequences of making a noisy withdrawal on their careers. There must be sufficient protection for attorneys who do make a noisy withdrawal. The Proposed Rules essentially ignore the real-world dilemma facing attorneys who believe they are obligated to make a noisy withdrawal.
Proposed Rules 205.3(d) and (e)
Following are specific comments on the Proposed Rules 205.3(d) and (e), concerning noisy withdrawal.
- Definition of "attorney" - It is not clear if the term, "attorney," is a defined term. Does the noisy withdrawal provision apply equally to all attorneys or are there different requirements for supervisory and subordinate attorneys? Is the term, "attorney," meant to reflect individual attorneys as well as the firm as an entity? What if different attorneys in the same firm or legal department have varying opinions as to whether a material violation has occurred? Is the Commission equally concerned when any attorney withdraws or only when supervising attorneys or the law firm entity withdraw from representation?
- Alternative Approach - The alternative approach of having the issuer, rather than the attorney, notify the Commission if the attorney has withdrawn, may present problems of its own. If the situation requires the attorney to make a noisy withdrawal, then at least the act of notifying the Commission is within the control of the attorney. However, under the alternative approach, the issuer, rather than the attorney, is required to notify the Commission. The consequences of notifying the Commission may be quite significant. As a result, it is not difficult to predict that the issuer may put pressure on the attorney not to trigger the requirement that the issuer notify the Commission. This potential conflict between the attorney and the issuer seems ripe for abuse.
- The extent of reporting under these provisions - The comments previously received explain that one problem with the proposed rules is that there will be over-reporting, in part out of attorneys' need to protect themselves from accusations of failure to report. I believe that the opposite may happen. The obvious and severe retaliation that an attorney or a law firm may face as a result of reporting surely serves as a strong disincentive to making reports or an incentive to interpret situations in a way that reporting is not required. The resulting complexities if a firm loses a major client - even in matters wholly unrelated to the Commission's activiites - because of reporting to the Commission cannot be overstated. Thus, the requirement to report to the Commission seems to be wholly unreasonable in the real world practice of law. What happens to the attorney or the law firm after the report is made to the Commission?
I want to emphasize that I am firmly in favor of attorneys taking a much stronger ethical stand. However, the methods by which ethical concerns are expressed must not result in career suicide or they will be utterly unworkable and avoided.
Moreover, the concerns in many of the comments about violation of the attorney-client privilege are arguably a surrogate for concerns with losing the attorney-client relationship entirely. If a valued client is lost, the law firm itself may be at risk. The example of Arthur Andersen may be instructive. Although the professional responsibilities of an accounting firm are not fully equivalent to those of a law firm, attorneys could fear that the fate of Arthur Andersen may befall their own firm.
The emphasis in the comments on the utility of consultation with the client to ensure compliance with securities laws reinforces the need for additional study suggested by Judge Sporkin. The recent crisis in corporate governance reveals that the consultation process itself has not prevented securities fraud in all cases. Although it can be acknowledged that most attorneys and their clients act ethically, these Proposed Rules are to address the situations in which wrongdoing has occurred. The mere availability of consultation with the client does not necessarily deter or prevent a material violation by the issuer. As a result, the impairment of the lines of communication between attorney and client, although unfortunate, may not substantially reduce the occurrence of material violations. It is necessary to understand the causes of the material violations and the role of the attorney in those violations before it can be assumed that consultation with the client is the primary method by which violations may be prevented.
- I believe that the Commission should also consider the role and duties of attorneys employed by the federal government. Presumably those attorneys also should have some ethical responsibilities involving reporting ethical concerns up the ladder. Similarly, government attorneys should be protected from retaliation. The proposed rules seem to be silent about the duties of government attorneys. See The McDade Act, 28 U.S.C. §530B ("an attorney for the Government shall be subject to State laws and rules, and local Federal court rules, governing attorneys in each state where such attorney engages in that attorney's duties, to the same extent and in the same manner as other attorneys in that State"). Even if Sarbanes-Oxley applies only to the private sector, the Commission may consider additional comments on the role and duties of government attorneys.
I would be pleased to assist the Commission and answer any questions or provide additional information. Thank you for the opportunity to comment on the proposed rules.
Elaine J. Mittleman