801 California Street
Mountain View, CA 94041

  April 7, 2003  
Horace L. Nash Email hnash@fenwick.com
Direct Dial 650.335.7934

Via E-Mail: Rule-comments@sec.gov

Jonathan Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

Re: File No. S7-45-02
Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys

Dear Mr. Katz:

Thank you for the opportunity to comment on the Commission's most recent rule proposals governing attorney conduct.1 After consulting with colleagues who are in-house counsel at public companies, and in light of our own experience, we believe the Commission should consider, in lieu of its "noisy withdrawal" proposals, new disclosure alternatives that we present below.

We believe that both variants of noisy withdrawal proposed by the Commission are fundamentally flawed.2 However, we believe that the Commission can achieve the objectives of those proposals by requiring new issuer disclosures regarding the role of attorneys in the issuer's corporate governance and disclosure compliance activities. Those disclosures can be tailored to achieve the goals that noisy withdrawal was intended to serve - promoting up-the-ladder reporting and enhancing investor confidence - while also preserving the well-recognized benefits of attorney-client privilege and the traditional role of attorneys as advocates and advisors. We have circulated this letter among our public company clients, and it reflects the support and feedback from several of them. As a result, we believe this letter reflects the general sentiment of public companies with which we work on a regular basis.

"Up-the-Ladder" Reporting Compared With "Noisy Withdrawal"

We support the Commission's up-the-ladder reporting requirements, but we have concerns about extending them to include noisy withdrawal. We believe that the Commission's adoption of Part 2053 was consistent with the purposes of the securities laws, the functioning of a well-run public company, and the roles and responsibilities of in-house and external counsel with respect to the company and its shareholders, directors, executives and other employees. Up-the-ladder reporting is also consistent with existing legal and ethical obligations of attorneys, which we believe most attorneys understand and observe. The Commission's reminder to attorneys that the client is the company, not its executives, is appropriate. We also believe that attorneys should withdraw from representations in appropriate circumstances. Those circumstances might include a situation where an appropriate response to evidence of a material violation reported up the ladder has not been received within an appropriate time.

However, we believe that the original "noisy withdrawal" proposal and the currently proposed Form 8-K issuer disclosure alternative are fundamentally flawed in ways that will not serve the best interests of investors and will not promote better compliance with the securities laws. We believe there is a serious risk that the noisy withdrawal proposals could lower the overall level of securities law compliance rather than raising it. To avoid that risk, and to avoid disrupting well-established and salutary norms governing attorney-client relationships, we believe the Commission should consider additional new issuer disclosures, discussed below, that are more specifically tailored to achieving its objectives.

The Commission identified the objectives of the noisy withdrawal proposals as: "to further the purposes of the up-the-ladder requirement and enhance investor confidence in the financial reporting process."4 The Commission felt that special attention to attorneys is warranted because:

...attorneys play a varied and crucial role in the Commission's processes. Attorneys prepare, or assist in preparing, materials that are filed with or submitted to the Commission by or on behalf of issuers. Public investors rely on these materials in making their investment decisions. Thus, the Commission, and the investing public, must be able to rely upon the integrity of in-house and retained lawyers who represent issuers before the Commission. Attorneys also play an important and expanding role in the internal processes and governance of issuers, ensuring compliance with applicable reporting and disclosure requirements, including requirements mandated by the federal securities laws.5

Noisy withdrawal will not further the purpose of up-the-ladder reporting or enhance investor confidence in financial reporting if it undermines this important and expanding role of attorneys.

The foundation for the attorneys' crucial role in the Commission's processes is a relationship of trust and confidence between attorneys, both in-house and external, and the board members, executives and employees of their client companies. This relationship of trust enables attorneys to gain a thorough understanding of the company and its business, which is essential to providing well-informed advice and accurate disclosures. It also fosters open and candid communications from and with company executives and other employees who make important decisions about the company's conduct and public disclosure of information. With such open and candid communication, attorneys are better positioned to help the client understand how disclosure and other requirements of the securities laws apply to its situation. If communication is less open and less candid, counsel will lack the information they need in order to advise the client properly, which we believe will result in less complete and less accurate disclosure and less effective compliance by the company.

Noisy Withdrawal Is Likely To Impair Access To Counsel

The Commission stated that it does not intend to impair advocacy or issuers' resort to legal counsel by virtue of its proposed noisy withdrawal requirements.6 Nonetheless, we remain concerned that this impairment may be exactly what will happen if either variant of the noisy withdrawal proposals is mandated.

Like many other commenters,7 we believe that the proposed noisy withdrawal regulations will interfere with the relationship of trust and confidence that is at the heart of the attorney's role and enables him or her to act as an effective advisor and advocate for the client. A rule that undermines such a beneficial relationship should not be undertaken lightly. In attempting to motivate attorneys to police client conduct, the Commission risks converting counselors to constables. Even under the up-the-ladder regime, we believe some company personnel may hesitate to consult with counsel for fear that overly cautious counsel will overreact to potential violations and begin running up the ladder before the relevant facts can be gathered and analyzed. Adding the "noisy withdrawal" requirement and imposing potential sanctions on attorneys for failing to report material violations of law by clients may add to the client's concern that attorneys will consciously or unconsciously seek to protect themselves - by taking an overly conservative approach to disclosure or compliance issues - rather than using judgment and persuasion to help the client make balanced disclosure in good faith compliance with regulations. Indeed, this rule may give counsel an incentive to behave in ways that primarily protect attorneys rather than serve clients. Our clients have repeatedly expressed their sincere concern about this problem, and we believe the concern applies equally to in-house and outside attorneys.

In the context of corporate disclosure and corporate governance counseling, trusted attorneys are able to serve as effective advocates of compliance and to guide responsible corporate behavior only if they are involved in the process. Public companies in general are highly motivated to behave legally and ethically, and recent developments have enhanced that motivation. The in-house and outside attorneys representing those companies help them understand securities law requirements that are frequently complex and subject to interpretation, and help them exercise judgment in applying these requirements to the company's specific circumstances. We believe that their regular and well-informed involvement produces more accurate disclosure and better compliance. Inhibiting attorney access to information will inevitably degrade the quality of the advice and the resulting compliance. As a result, we are concerned that the net effect of a noisy withdrawal regime may be to undermine the Commission's stated objectives.

Disclosure Alternatives Can Effectively Serve Commission Objectives

In lieu of requiring either variant of noisy withdrawal, we recommend that the Commission consider a disclosure-oriented approach focused on activities that enhance the ability of attorneys to help public companies comply with applicable disclosure requirements, while fostering up-the-ladder reporting and enhancing public confidence in financial reporting. We believe it is better to encourage companies to facilitate opportunities for attorneys to speak up and persuade rather than mandating that they withdraw and "report out."

Accordingly, we suggest that the Commission consider requiring public companies to disclose important details about the level of attorney involvement in their corporate governance and disclosure compliance practices. Examples of possible disclosures include:

  • Do the company's inside and outside counsel attend board meetings? How many meetings?

  • Does the board require counsel to affirm their duties to report material violations up the ladder?

  • Do the company's inside and outside counsel attend audit committee meetings? How many meetings?

  • Do audit committee meetings include private sessions with in-house or outside counsel without management present?

  • Do the company's inside and outside counsel attend meetings of the governance committee? How many meetings?

  • Does the company's in-house and external counsel attend the company's internal disclosure committee meetings?

  • Does the company require its in-house and external counsel to fulfill continuing education requirements, including ethics training?

  • Does the company's code of ethics apply to in-house and outside counsel?

We believe that this disclosure-oriented approach is likely to be more effective than a noisy withdrawal approach for a variety of reasons. To begin with it is likely to encourage issuers to increase the involvement of in-house or outside attorneys in key corporate governance and financial reporting processes. Greater attorney access to company information and decision-making should help them better understand company trends and developments and improve the quality of issuer reporting generally. That access will also provide counsel with opportunities to educate company management on governance reforms and best practices, and to encourage their adoption. A regular line of communication between attorneys and audit committee members, for example, will facilitate both up-the-ladder reporting and down-the-ladder inquiry. It will provide a regular forum for attorneys to raise questions with the audit committee. It will also enable the audit committee to question the attorneys about the quality of the company's disclosures and compliance programs, and about the level of access that the attorneys have to information within the organization.

Moreover, having every public company report on these aspects of its relationship with counsel would quickly begin to reinforce investor confidence in public company reporting on a broad front. The noisy withdrawal disclosures are expected to occur only in exceptional circumstances, so they are unlikely to have much direct impact on investor confidence.

Finally, the disclosures we propose would not interfere with well-recognized benefits of the attorney-client privilege, as many are concerned noisy withdrawal will do. The privilege is so fundamental and of such long standing that the Commission should think long and hard before adopting rules that change it. We believe that our proposed disclosure approach would be less revolutionary but more effective in maintaining and reinforcing the role of attorneys as trusted counselors and advocates, and promoting high standards of public company securities law compliance.

We urge the Commission to consider this alternative to noisy withdrawal. It is in keeping with the traditional disclosure orientation of the securities laws, is more targeted at achieving the process and investor confidence goals identified by the Commission, and is more likely to be effective in promoting public company securities law compliance.

Sincerely yours,


Horace L. Nash


cc: Hon. William M. Donaldson, Chairman
Hon. Paul S. Atkins, Commissioner
Hon. Roel C. Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey J. Goldschmid, Commissioner

1 Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys (Rel. Nos. 33-8186; 34-47282; IC-25920; File No. S7-45-02); referred to in this letter as the "Proposing Release."
2 We believe that both "noisy withdrawal" proposals in the Proposing Release are equivalent in terms of the risks and alternatives that we discuss in this letter, so we do not distinguish between them here. When we refer to "noisy withdrawal," we are referring to both of these proposals.
3 Final Rule: Implementation of Standards of Professional Conduct for Attorneys (Rel. Nos. 33-8185, 34-47276, IC-25919, S7-45-02).
4 Proposing Release, Part III.
5 Proposing Release, Part II.
6 See Proposing Release, Part III.
7 See Proposing Release, Part III, Section C.