International Bar Association
U.S. Securities and Exchange Commission
April 3, 2003
Re: File No. S7-45-02
Ladies and Gentlemen:
We are submitting this letter in response to the request of the U.S. Securities and Exchange Commission (the "Commission") for comments in respect of the Commission's alternative proposed Section 205.3 of the attorney conduct rule (the "Alternative Proposed Rule"), which would create an alternative to the proposed "Noisy Withdrawal" provisions of the rule (the "Noisy Withdrawal Provision"). The Alternative Proposed Rule appears in Release No. 33-8186 (the "Proposing Release"). We would also like to take this opportunity to comment upon a concern we have regarding the final Part 205 attorney conduct rule (the "Original Rule"). We appreciate the Commission's responsiveness to the concerns of non-U.S. lawyers in the adoption of the Original Rule and are grateful for the opportunity to again participate in the comment process. We intend our comments to be helpful to the Commission in its efforts to appropriately implement the Sarbanes-Oxley Act of 2002 (the "Act") and effectively deal with the various wrongdoings that the Act is aimed at preventing.
The International Bar Association (the "IBA") is a dual-membership organisation. The membership of the IBA's Section on Business Law includes 13,000 individual lawyers from over 170 countries, and more than 180 bar associations and law societies are members of the IBA.
The IBA and, in a business context, its Section on Business Law promote the exchange of information between legal associations and international practitioners worldwide with the aim of influencing the development of international law reform and shaping the future of the legal profession. We are "the global voice of the legal profession".
Our membership is made up largely of lawyers licensed under the laws of non-U.S. jurisdictions and non-U.S. legal associations. Accordingly, the focus of our comments will be on those aspects of the Original Rule and the Alternative Proposed Rule that have created the greatest concern and uncertainty for our non-U.S. members, although many of our comments are applicable to all lawyers. In any event, we are certain that many U.S. lawyers and U.S. law firms will be submitting extensive comments on behalf of U.S. lawyers.
The Original Rule
The Commission should be applauded for their responsiveness to the concerns of non-U.S. lawyers in the Original Rule.
We are thankful for the Commission's response to comments by the IBA and other foreign law organisations regarding the Original Rule. We feel that the Original Rule takes into consideration the difficulty that most foreign lawyers would have faced should the Original Rule have been adopted as proposed. However there is an important gap and inconsistency in the Original Rule that we would like to call to the Commission's attention.
There appears to be an omission in the carve out in the Final Rule Part 205.6(d) from sanctions and discipline for attorneys practising outside the U.S. In the Original Rule adopting release, the Commission stated that attorneys practising outside the U.S. who are subject to similar restrictions in their home jurisdiction must only comply with the Original Rule to the "maximum extent allowed by the regulations and laws to which they are subject". However, the actual text of the Original Rule states, "An attorney practicing outside the United States shall not be required to comply with the requirements of this part to the extent that such compliance is prohibited by applicable foreign law." (emphasis added). There is no mention in the text of the rule to regulations that would govern attorneys practising outside the United States. In many jurisdictions, including the U.S., lawyers are regulated not only by law, but also by disciplinary bodies and, in some cases, the court system. We believe that the current Part 205.6(d), as written, might not protect a lawyer who was prohibited from complying with the Original Rule by a rule from a regulatory body or other form of regulation that was not actual law in their home jurisdiction but which a foreign attorney has to fully comply with for fear of sanction or being prevented from practising. It is important for the Commission to clarify this for lawyers outside the U.S. and we feel that an amendment to the Original Rule is warranted, not least to fulfil what we feel was clearly the Commission's intention.
Part 205.2(j)(2) states that a non-appearing foreign attorney is an attorney "who does not hold himself or herself out as practicing, and does not give legal advice regarding, United States Federal or State Securities or other laws". We assume that it is clear that the Commission is intending the reference to only other U.S. Federal or State laws. If the Commission has the opportunity to clarify the wording to "...other United States Federal or state laws" this could only be helpful.
The Current request for comments
1. The Noisy Withdrawal Provision should not be adopted in any form.
We remain totally opposed to the Noisy Withdrawal Provision. We commented at length on the problems concerning the Noisy Withdrawal Provision in our comment letter to the proposed Original Rules, and referred to conflicts and/or inconsistencies with local laws and regulations in many countries. In particular, the provisions regarding the qualified legal compliance committee ("QLCC") and the "safe harbour" that it provides, put lawyers who represent foreign companies at a distinct disadvantage. In many foreign jurisdictions, the creation of a QLCC is not possible or will not be pursued for a combination of legal and/or custom and therefore lawyers representing foreign companies that cannot or which choose not to form a QLCC would be unable to inform the QLCC of evidence of a material violation and thereby "opt-out" of the Noisy Withdrawal Provision. This would create a clear disadvantage to lawyers who represent foreign companies which cannot, under the laws of their home jurisdiction, or where it is not customary to, create a QLCC. If any form of this rule survives, there must be an alternative to the QLCC where one does not exist, e.g. reporting to the full board.
2. Additional obligations beyond those already adopted in the Original Rule should not be imposed upon attorneys or issuers.
The emphasis of the Original Rule is the "up the ladder" reporting requirements for lawyers who discover material violations of law by their issuer-client. While we appreciate the importance of these requirements, any new requirement for lawyers to withdraw from representing the issuer or for lawyers or issuers to report a material violation of law to the Commission is unnecessary and threatens conflicts with local law or regulations regarding confidentiality and privilege, as well as, damage to the lawyer/client relationship.
Almost all lawyers subject to the Commission's attorney conduct rules will already have home country (or in the U.S., state) statutory, court or bar association standards that govern their professional conduct and provide sanctions for misconduct. A U.S. federal requirement applicable only to securities lawyers would create inconsistency with home country or state regulation and would be inappropriate. Further, any requirement for attorneys or issuers to report to the Commission would have adverse effects on the lawyer/client relationship and would risk a decline in the exchange of information between the lawyer and client. If the Alternative Proposed Rule has the effect of chilling the lawyer/client relationship, the quality of advice that issuers receive from their counsel will be compromised, which would be contrary to the Commission's objectives. The issuer is also already subject to the numerous disclosure requirements of the Commission and no further disclosure requirement is necessary.
3. The Alternative Proposed Rule, if adopted, should include an option for the issuer to seek advice from an independent third party law firm and/or time for confidential discussion with the Commission.
Under the Alternative Proposed Rule, an issuer who has received notice that its lawyer has withdrawn in accordance with the attorney conduct rules would have to report to the Commission, within two business days, not only the withdrawal of the lawyer, but the "circumstances related thereto." We believe that such a reporting requirement, mandating disclosure in a public filing within two business days, would force issuers to produce disclosure that could be speculative or preliminary, and ultimately, misleading. It might also cause inappropriate disclosure of errant views by misinformed lawyers, to the detriment of investors and the markets. We feel that the inclusion of the following two options would ensure that such disclosure is only made if it is in fact warranted.
First, the issuer should be provided with adequate time to seek advice from an independent third party law firm regarding the circumstances relating to their lawyer's withdrawal. If this third party law firm advises that the circumstances do not warrant the withdrawal of the attorney or concludes there is a colourable defense on behalf of the issuer regarding the reported evidence of a material violation, then disclosure by the issuer in a public filing or to the Commission should not be required. Similar protection is given in the Original Rule to an issuer when they are providing an "appropriate response" to their lawyer regarding reported evidence of a material violation; however, once an attorney has resigned, no such protection is applicable and the issuer must fulfil the reporting requirement within two business days.
If the Commission does not adopt our proposal regarding an independent third party analysis or in conjunction with our proposal, the issuer should have the option of seeking a confidential discussion with the Commission to explain the circumstances behind the withdrawal of their lawyer, to discuss what actions should be taken by the company and to decide what information, if any, should be disclosed to the public.
These two options would protect issuers from hastily disclosing information that would unjustly affect the issuer, the markets and, importantly, investors.
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We appreciate the Commission's consideration of our views. If you have any questions regarding this letter or would like to get in touch with the IBA, please feel free to call Michael Diedring, Deputy Executive Director, on +44 20 7629 1206.
cc: Hon. William H. Donaldson, Chairman
Mr. Giovanni Prezioso, General Counsel
Mr. Ethiopis Tafara, Senior International Counsel
Hon. Paul S. Sarbanes, United States Senate
Hon. Michael G. Oxley, United States House of Representatives