The Business Roundtable
December 20, 2002
Mr. Jonathan G. Katz
Re: Release No. 33-8150, Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys, File No. S7-45-02
Dear Mr. Katz:
The following comments are submitted on behalf of The Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.7 trillion in annual revenues. The Business Roundtable strongly supported enactment of the Sarbanes-Oxley Act of 2002 (the "S-O Act"), and we support the Securities and Exchange Commission's efforts to implement the S-O Act. We believe the law will go a long way toward establishing new, higher standards for America's corporations. As CEOs, we are committed to maintaining a strong economy, a vibrant workforce, and creating new jobs. We appreciate the opportunity to provide you with our views on a recent Securities and Exchange Commission ("Commission") proposal to implement Section 307 of the S-O Act, relating to standards of professional conduct for attorneys. Please note that our comments are limited to those aspects of the proposal with direct corporate governance implications; we anticipate that individual attorneys, bar associations and others will submit comments on additional issues raised by the proposal.
Scope and Timing of the Proposal
Section 307 directs the Commission to issue rules addressing minimum standards of professional conduct for attorneys appearing and practicing before the Commission, including a rule requiring attorneys to report evidence of a material violation of securities law or breach of fiduciary duty by an issuer or its agent to the chief legal counsel or chief executive officer ("CEO") of the issuer, and potentially to the board or an independent board committee. The Commission is required to issue final rules under Section 307 by January 26, 2003.
The Roundtable supports the notion of an "up the ladder" reporting requirement, although we believe that companies today generally have processes in place by which the board is informed about any material potential violations of law. We are concerned, however, about the many areas in which the Commission's proposal goes beyond the internal reporting requirements set forth in Section 307. For example, the proposal would impose a "reporting out" obligation on attorneys who do not believe the board has appropriately responded to evidence of misconduct, and it sets forth a number of circumstances under which attorneys would be authorized to disclose confidential information relating to the representation of an issuer. Neither the "reporting out" requirement nor the disclosure provision is included in Section 307.
We believe the extension of the proposal beyond the mandate of Section 307 could trigger profound changes in the relationship between companies and their legal counsel. Specifically, we are concerned that, contrary to the Commission's expressed intent, the proposal could deter officers, directors and employees from seeking advice from counsel on sensitive matters. Although we agree that an attorney employed or retained by a company represents the company as an organization - not the company's officers, directors or employees - counsel cannot effectively represent an organization without open communication with the people who make up that organization. For this reason, it is vital that the Commission's rule not impair the willingness of officers, directors and employees to share their concerns with counsel.
Qualified Legal Compliance Committee
In addition to the broader issues discussed above, we are concerned about one aspect of the proposal in particular - the Qualified Legal Compliance Committee ("QLCC") alternative. Under the proposal, companies would be permitted to establish a QLCC as an alternative to the reporting mechanism provided by Section 307. The QLCC, which would be comprised of one audit committee member and at least two other independent directors, would be responsible for receiving evidence of a material violation or breach, determining whether an investigation is warranted, initiating any investigation, and directing the company to adopt appropriate remedial measures. If the company fails to implement remedial measures prescribed by the QLCC, each QLCC member would be required individually to disaffirm tainted documents and notify the Commission that a material violation has occurred, is occurring or is about to occur.
Although we commend the Commission for its efforts to provide flexibility in the proposal, we are concerned about the corporate governance implications of the QLCC alternative. We also have concerns about the provision requiring each QLCC member individually to notify the Commission of any failure by the company to follow a QLCC directive. In our view, this requirement would improperly deprive the full board of its authority and responsibility for corporate decision-making, particularly with respect to waivers of the company's attorney-client privilege. Moreover, we believe that requiring the QLCC to have independent authority to direct the company to adopt remedial measures (without input or approval from the full board) could undermine the board's position as the entity ultimately responsible for overseeing management of the company. Boards today generally are comprised of a majority of independent directors, a practice soon to be required by the major securities markets. Compelling these boards to delegate to a board committee the authority to prescribe potentially significant changes in the corporation's practices and procedures is inappropriate and undermines both the authority, and responsibility, of the board of directors as a whole.
We also question whether it is realistic to expect non-lawyers, even those with independent legal advice, to make the legal judgments required of a QLCC. In addition, we believe that very few (if any) directors would agree to serve on a QLCC, given the enormous responsibility and individual risk of liability associated with serving on such a committee. Independent directors, and audit committee members in particular, are already subject to many new requirements. Adopting additional responsibilities for such directors at this time, even as an alternative, may not be well received. Accordingly, the QLCC, as proposed, is not likely to find broad acceptance. If retained, the QLCC alternative should be carefully reviewed and refined to take into account the governance concerns discussed above.
We appreciate your consideration of these comments, and we would be happy to discuss these matters further or to meet with you if it would be helpful.
The Business Roundtable
cc: Hon. Harvey L. Pitt
Dianne N. Trudnak