The Florida Bar
April 7, 2003
Jonathan C. Katz, Secretary
Re: File No. S7-45-02
Dear Mr. Katz:
We are writing on behalf of The Florida Bar to provide comments with respect to the proposed implementation of Standards of Professional Conduct for Attorneys by the Securities and Exchange Commission ("SEC") and specifically to comment upon portions of the proposed deferred rules. See 68 Fed. Reg. 6324 (Feb. 6, 2003).
The Florida Bar is a mandatory Bar association with 71,793 members. The Florida Bar is charged with enforcing the Florida Rules of Professional Conduct for Florida lawyers and has a staff of around 100 employees who work full-time in this process.
We address our comments primarily to proposed Section 205.3(d)(4). In particular, we wish to express our concern that the implementation of such a rule, based upon the definitional framework provided, would result in a an irreconcilable conflict with the current Florida Rules of Professional Conduct and the current rules in most other jurisdictions.
In the Federal Register published on December 2, 2002, the commission proposes a Section 205.3(d)(4), which provides as follows:
The commission noted that it was prompted to add this provision by a decision of the Board of Governors of the Florida Bar in August 2002 where the board, by a 22-15 vote, held that an attorney discharged by a large corporation could not report to the SEC his concerns about what he thought might be improper accounting practices. The commission added that it was unsure whether the attorney would be covered by the proposed rule because it was unclear that the Florida attorney was appearing and practicing before the commission. 67 Fed. Reg. 71691-71692 and n.65 (Dec. 2, 2002). He was not.
It is important to review the background of Florida Bar Staff Opinion 23782. The facts as represented to the ethics department of The Florida Bar were that the inquiring attorney formerly worked as in-house patent counsel and vice president of legal affairs for Company A. While employed by Company A, he became aware of the amortization of certain patents by the company's accountants ( rather than expensing of these patents), that he thought might constitute securities fraud. The inquirer did not know that actual fraud had been committed because he did not handle the company's securities reporting to the SEC, or any securities matters for the company. Nor did he handle the company's accounting practices or reporting. The inquiringattorney was a patent lawyer for Company A. Because he had concerns about the handling of this particular patent by the company's accountants, the inquiring attorney reported his beliefs that there had been wrongdoing to his superiors within Company A. He brought the allegedly fraudulent conduct to the attention of the chief executive officer and chief financial officer of Company A and to its board of directors. The attorney was terminated by Company A.
At the request of the inquiring attorney, the ethics department of The Florida Bar issued a staff opinion discussing the inquiring attorney's ethical duty under the applicable Florida Rules of Professional Conduct. The opinion concluded that the inquiring attorney's duty was to go to the highest authority within his company to try to have the perceived misconduct corrected and to warn the officers and directors of Company A of the consequences of their actions. Rules 4-1.13(b) and 4-1.2(d), Florida Rules of Professional Conduct. The staff opinion noted that the inquirer had completed this notice to the highest authority within his company, as required.
Pursuant to Florida rule 4-1.2(d), the lawyer was not permitted to reveal his client's past wrongdoings to third parties, but was obligated to warn the client of the consequences of its perceived actions or of any possible future wrongdoing, which he did. The attorney could act only as allowed by Rule 4-1.6, Florida's confidentiality rule, which requires mandatory reporting only in certain very specific circumstances. Rule 4-1.6(a), Florida Rules of Professional Conduct, provides as follows:
Florida's other mandatory disclosure provision is not applicable here. Rule 4-3.3(a), Florida Rules of Professional Conduct, applies only when an attorney is directly representing a client before a court or tribunal, as attorney of record in that proceeding. In such instance Florida attorneys are required to "take remedial measures" to correct the record or to notify the court of a misrepresentation or material omission on the record if the client will not do so.
This is the only instance in which a Florida attorney is required to report past misrepresentation or fraud of a client. It is strictly limited to a judicial proceeding before a court or tribunal and is triggered only by actual firsthand knowledge of the wrongdoing by the attorney.
Because the triggering factors of Rule 4-3.3 or Rule 4-1.6(b) and (c), are not present, staff opinion 23782 properly concludes that the inquiring attorney's only duty, based upon the facts presented, was to report the misconduct to the highest authority within the company, which he had done. The important factors in the decision were: (1) the attorney did not represent the client before the SEC or before any court or tribunal; (2) the attorney no longer represented the client; and, (3) the inquirer did not actually know that the client had in fact committed fraud.
It is noteworthy that staff opinion 23782 advises the inquiring attorney to do exactly what Senator Enzi, in floor debates on the amendment to Section 307, stated as the goal of the amendment, to require corporate attorneys to report violations not to the SEC, but "only to corporate legal counsel or the CEO, and ultimately to the board of directors." 148 Cong.Rec. S6555 (July 10, 2002). Furthermore, we agree with the SEC that the proposed rule would not cover the lawyer subject to opinion 23782 because that attorney was not appearing and practicingbefore the commission as defined under Section 205.2, effective August 9, 2003.
Under Section 205.3(d), as adopted, an attorney practicing before the commission may disclose client confidential information:
This type of disclosure to rectify or correct a past violation is only permitted under the Florida Rules in an active court or administrative proceeding before a tribunal as set forth in Rule 4-3.3, Florida Rules of Professional Conduct, discussed above. Furthermore, the duty of Rule 4-3.3(a) is limited to misrepresentations or omissions discovered while the attorney is still representing the client. The only other instance in which a Florida attorney may reveal past misconduct of a client, arises under Rule 4-1.6(c)(4), where the attorney is personally accused of participating in a client's misconduct. An attorney thus accused, can reveal information necessary to exculpate the attorney, but cannot reveal more. Rule 4-1.6(a) and (e), Florida Rules of Professional Conduct.
The SEC's proposed rule defines a material violation as including an "inaccurate disclosure in the filing or submission to the Commission that has not been corrected and may be relied upon by investors." 67 Fed. Reg. 71690 (Dec. 2, 2002). It is this definitional framework proposed by the commission that is at the heart of the conflict with Florida ethics rules. Underthe proposed rule, an attorney would have an ongoing, never-ending duty to report current and past violations of his clients to the SEC.
This provision, contained in both the permissive disclosure provision of the final rule and the disclosure contained in the proposed rule, undercuts the premise of the attorney client relationship protected by the Florida Rules of Professional Conduct and most other state's rules. Rule 4-1.6(a), Florida Rules of Professional Conduct; Rule 1.6(a), Model Rules of Professional Conduct
The proposed definitional framework of Section 205.3(d)(4) will alter the lawyer-client landscape dramatically in Florida and most other states as well. Under the proposed rule, an attorney appearing before the SEC, who is a member of the Florida Bar, would be required to inform his client that the commission encourages the attorney to report to the commission any past conduct that has not been rectified even if the attorney is terminated from his engagement.
Beyond the vast chilling effect on the lawyer-client relationship, this direct conflict would subject a Florida attorney to discipline in one forum or another depending on which rule he or she decided to follow. The proposed rule paints with too broad a brush and presents attorneys with a Hobson's choice of discipline under SEC rules or potentially by state bars or other jurisdictions, depending upon the choice the lawyer makes. Even if the SEC moves to pre-empt the application of inconsistent state rules, it will still remain unclear whether an attorney will have full immunity from a client asserting a violation of common law fiduciary duty for choosing a duty to a governmental agency over loyalty to a client.
We know of no other area of federal law or regulation wherein such a duty is imposed.
Finally, the proposed rule creates a never-ending duty for a lawyer to monitor every activity of every corporate client who has any dealings with the SEC. This unending and unreasonable burden is precisely the reason that the Florida Rules of Professional Conduct do not require attorneys to report a client's past misdeeds to third parties, and strictly limits such reporting to very specific fraud on the court situations under Florida rule 4-3.3(a). Also, as aptly stated by the North Carolina Bar in its excellent comments on Section 205, the definition of "lawyer" in the rule is so broad that it includes attorneys who may have tangential relationships with SEC reporting matters, such as patent work, review of corporate minutes, or closings on sales of corporate properties. These attorneys, who have neither the means nor the knowledge to comply with Section 205, would still be caught in its net. Proposed Section 205 is written so broadly that it goes far beyond the Congressional intent for this section and creates an unreasonable burden upon both lawyers and their clients.
We ask the commission to review carefully this provision before implementing a specific proposal dealing with reporting requirements for an attorney who is a former employee of a corporate client and, more broadly, before allowing disclosure for what has been considered past conduct under the rules of Florida and many other states. We further ask the commission to adopt the Florida and majority rule that limits reporting requirements of in house attorneys regarding past conduct of their clients, to reporting up the chain of command within the client corporation, ultimately to the board of directors of the client.
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