M E M O R A N D U M
Mr. Chairman and Honorable Commissioners:
While the Commission's intentions are noble in purpose, I am writing to delineate several prospective shortcomings with your proposed rule, Implementation of Standards of Professional Conduct for Attorneys:
I believe the difficulties with the proposal stem largely from Subsection 205.3(b). This Subsection purports to prescribe the duty of an attorney who appears or practices before the Commission in the representation of an issuer to report evidence of a "material violation." The proposed rule would not require an attorney to "know" that a violation has been committed. The rule's reporting obligation would be triggered when an attorney "reasonably believes" that a material violation has occurred, is occurring or is about to occur, limiting the instances in which the reporting duty prescribed by the rule will arise to those where it is appropriate to protect investors. The attorney would be initially directed to make this report to the issuer's CLO, or to the issuer's CLO and chief executive officer. The attorney also would be obligated to take reasonable steps under the circumstances to document the report and the response thereto, and to retain such documentation for a reasonable time.
The proposed course of action the Commission is imposing on attorneys is fraught with ambiguity. Among other things, attorneys are left to speculate about what the SEC may regard as a `similar violation' to a violation of securities law or breach of fiduciary duty. The rules potentially force attorneys to make judgments about whether evidence reflects a `material violation' which, with retrospection, can easily be second-guessed. Moreover, the rules require attorneys to assess whether the chief legal counsel or CEO has `appropriately respond[ed]' to the reported evidence. These grossly ambiguous standards will provide little guidance to attorneys that may indeed wish to address issues of corporate malfeasance. While the proposal is noble in purpose, the abstract and ambiguous nature of it is fatally flawed. Lawyers are creatures of specificity; they require specific and detailed guidance, particularly in the context of standards of professional conduct.
Additionally, the Commission has failed to address whether the congressional mandate in Sarbanes Oxley is intended to preempt state laws governing the reporting of evidence by counsel. This potentially creates inconsistencies between the state and federal ethical regimes, as an attorney may be subject to disciplinary authority of the Commission regardless of whether the attorney was disciplined for violating a state ethical rule applying to the same conduct. Such inconsistencies must be accounted for, in any proposed federal rule purporting to establish standards of professional conduct.
Lastly, the law of unintended consequences is not to be forgotten. The effects of Commission action against lawyers may grossly interfere with the undivided duty of loyalty that lawyers owe to their clients and may even cause issuers to avoid obtaining legal advice, knowing that it could be tainted by the lawyer's interest in self-protection. Recall the reflections from a speech of Edward Greene, General Counsel of the Commission in 1982: "With respect to attorneys, the Commission generally has not sought to develop or apply independent standards of professional conduct . . . [T]he Commission, as a matter of policy, generally refrains from using its administrative forum to conduct de novo determinations of the professional obligations of attorneys."