December 23, 2002 (CORRECTED VERSION)

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary

    Re: File No. S7-45-02
    Release No. 33-8150; 34-46868; IC-25829
    Implementation of Standards of Professional Conduct for Attorneys

Ladies and Gentlemen:

We submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on its Release No. 33-8150; 34-46868; IC-25829; File No. S7-45-02, entitled "Implementation of Standards of Professional Conduct for Attorneys" (the "Release").

The group submitting this letter consists of a Stanford Law School securities law professor, securities lawyers from 11 different private law firms and in-house lawyers at two companies.1 The views reflected in this letter constitute a consensus of our individual perspectives. They do not reflect the official positions of the law firms or other organizations with which we are affiliated, or the clients of any of our law firms. Because this is a consensus document, our firms and we each reserve the right to express views that may not be fully reflected in this letter.

I. Summary.

Section 307 of the Sarbanes-Oxley Act of 2002 ("Section 307") (15 U.S.C. 72Q1 et seq.) mandates that the Commission, by January 26, 2003, adopt certain rules establishing "minimum standards of professional conduct for attorneys appearing and practicing before the Commission...." In response to this directive, the Commission on November 21, 2002, issued the Release, which contains proposed new Part 205 to Title 17, Chapter II of the Code of Federal Regulations (the "Proposed Rules"). The Proposed Rules impose upon attorneys appearing and practicing before the Commission "up the ladder" reporting requirements and "noisy withdrawal" requirements.

This comment letter urges three major points.

First, the Commission lacks authority to adopt "noisy withdrawal" requirements.

Second, the Commission lacks authority to adopt rules that are inconsistent with or that impinge upon existing doctrines of attorney-client privilege.

Third, the questions presented by the Release and Proposed Rules are fundamental to the operation of the Commission. They also cut to the core of the attorney-client relationship and propose a massive restructuring of traditional notions of professional responsibility. Further, they seek to implement dramatic and highly controversial proposals on an extremely fast schedule, despite the fact that haste is not mandated by the statute as to the most controversial elements of the Commission's proposal.

As the Commission is well aware, the President has announced an intent to nominate a new Chairman. The incoming Chairman has not had an opportunity to express any views as to the fundamental questions presented by the Release and by the Proposed Rules. In light of the complexity of the questions presented, out of deference to the incoming Chairman, and in an effort to promote a cooperative working relationship between the Commission and the private securities bar, we recommend that the Commission adopt only those rules that are minimally necessary to comply with the January 26, 2003, statutory deadline and that are clearly within the scope of the statutory obligation.

Accordingly, the rules to be adopted by January 26 should impose no "noisy withdrawal" requirements. They should also clearly state that they do not impinge on otherwise valid attorney-client privileges. The Commission will have ample opportunity following the January 26 deadline, acting in conjunction with the incoming Chairman, to consider the desirability of more extensive rules and the need to consider approaching Congress for additional statutory authority.

As signatories to this letter we emphasize that we take no position as to the ultimate wisdom of the policies reflected in the Release and in the Proposed Rules. The Release and Proposed Rules may or may not constitute sound social policy for the regulation of the bar, and the signatories to this letter hold many different opinions as to this question. In this regard, the signatories to this letter mirror the points of view evidenced in the debates leading up to the Report of the ABA Commission on Evaluation of the Rules of Professional Conduct (Ethics 2000) and the Preliminary Report of the ABA Task Force on Corporate Responsibility (July 2002).

We are, however, unanimous in the view that, whatever the wisdom of the Commission's proposals, "[p]olicy considerations cannot override...interpretation of the text and structure of the Act." Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 188 (1994). If the Commission wishes to adopt certain provisions here at issue, then it should request from Congress the delegation of authority that the Commission lacks today. Some of us might support such a request. Some of us might oppose it. All of us agree, however, that the Commission cannot arrogate unto itself power that Congress has not delegated to it. It is out of respect for this fundamental principle of law, and not out of any disagreement with underlying policy objectives, that we urge the Commission to recede from large portions of its proposal.

II. The Commission Lacks Authority to Adopt "Noisy Withdrawal" Requirements.

The Commission observes that its "noisy withdrawal" requirements "are not explicitly required by Section 307," and go "beyond what the Act expressly directed the Commission to do." Release at 6, 34. This is a serious understatement. The reality is that not a single word in the text of the Sarbanes-Oxley Act or in the relevant legislative history even hints that Congress contemplated granting to the Commission authority to impose "noisy withdrawal" requirements.

A federal agency may not "confer power upon itself," La. Pub. Serv. Comm'n v. F.C.C., 476 U.S. 355, 374 (1986). The Supreme Court has expressly cautioned the Commission that the "rulemaking power granted to an administrative agency charged with the administration of a federal statute is not the power to make law." Rather, it is "`the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.'" Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976), quoting Dixon v. United States, 381 U.S. 68, 74 (1965), quoting General Equipment Co v. Commission, 297 U.S. 129, 134 (1936) (criticizing the "broad view of [Rule 10b-5] advanced by the Commission in this case.").

The "language of the statute must [therefore] control the interpretation of the Rule," and the Commission cannot reach beyond the scope of the statutory delegation to adopt, enforce or construe a rule in a manner inconsistent with Congressional intent. Santa Fe v. Green, 430 U.S. 462, 472 (1977). See also, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975) (Powell, J., concurring) ("The starting point in every case involving the construction of a statute is the language itself.")

A. The Text of the Statute.

Here, the text of Section 307 is clear. The statute refers only to an obligation to report "up the ladder" within an organization. It makes no reference whatsoever to "noisy withdrawal" requirements.

This factor is particularly significant because it is clear on the face of the statute that Congress knows, with great precision, how to create an obligation that a professional "blow the whistle" or engage in a "noisy withdrawal" when Congress wishes to create such an obligation. See Securities Exchange Act §10A(b)(3) (creating an obligation for auditors to report to the Commission information relating to illegal acts that would have "a direct and material effect on the determination of final statement amounts" if, among other conditions, the auditor determines that "senior management has not taken, and the board of directors has not caused senior management to take, timely and appropriate remedial actions"). The fact that such a "noisy withdrawal" obligation is codified in Section 10A of the Securities Exchange Act of 1934, as amended, is all the more telling because several provisions of Title III of the Sarbanes-Oxley Act, the very title containing Section 307, were adopted as amendments to Section 10A. See, e.g., Section 301 (adding Section 10A(m)).

Substantial Supreme Court precedent supports the conclusion that, because Congress clearly knew how to draft language that would impose a "noisy withdrawal" obligation, but decided not to do so, the proper inference is that Congress did not intend to create such an obligation. See, e.g., Central Bank, 511 U.S. at 176 ("Congress knew how to impose aiding and abetting liability when it chose to do so"); Pinter v. Dahl 486 U.S. 622, 650 (1988) ("When Congress wished to create such liability it had little trouble doing so); Blue Chip Stamps, 421 U.S., at 734 ("When Congress wished to provide a remedy to those who neither purchase nor sell securities, it had little trouble in doing so expressly").

Nor does Section 3(a) of the Sarbanes-Oxley Act provide authority for the Commission to adopt rules that were clearly not contemplated by the Act. Only rules that are "in furtherance of [the] Act" may be adopted under the authority of Section 3(a). Moreover, because Section 307 specifically contemplates and addresses rulemaking by the Commission in the area of professional responsibility, the general rulemaking authority of Section 3(a) may not properly be interpreted to override the terms of the specific authority provided in Section 307.

B. The Presence of an Established, Alternative, Comprehensive Regulatory Regime.

The law is also clear that courts will not interpret the Commission's authority expansively if such interpretations intrude upon the established jurisdiction of other regulatory bodies or schemes. Consistent with this principle, when addressing the Commission's authority to regulate insurance the Supreme Court has proceeded with a "reluctance to disturb the state regulatory schemes that are in actual effect." SEC v. Variable Annuity Life Ins. Co. of Am., 359 U.S. 65, 68 (1959). Similarly, the Supreme Court refused to expand the scope of the federal securities laws to cover noncontributory, compulsory pension plans, in part because the Employee Retirement Income Securities Act of 1974 established an alternative comprehensive regulatory regime that vested substantial authority in the Department of Labor, not in the Securities and Exchange Commission. Int'l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 569-570 (1979).

The Commission was also denied authority to regulate certain certificates of deposit and related transactions because those instruments and transactions were "subject to the comprehensive set of regulations governing the banking industry." Marine Bank v. Weaver, 455 U.S. 551, 558 (1981). Accord, Banco Español de Credito v. Sec. Pacific Bank, 973 F.2d 51, 55 (2d Cir. 1992) (relying in part on the existence of an alternative regulatory regime governed by the Office of the Comptroller of the Currency.) Moreover, in determining whether a "note" is a "security" subject to Commission regulation, the Supreme Court also considers the existence of alternative regulatory regimes. Reves v. Ernst & Young, 494 U.S. 56, 69 (1990).

As a more general matter, the Supreme Court defers to traditionally dominant and established state regulatory schemes when issues of potential federal interference arise. See, United States v. Locke, 529 U.S. 89, 108 (2000) (noting that where "Congress legislated ... in a field which the States have traditionally occupied," the Supreme Court "start[s] with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress," quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947)).

As the Commission is well aware, the legal profession is already subject to extensive regulation "[g]enerally created, revised and enforced by the highest court of a state." Geoffrey C. Hazard, Susan P. Koniak and Roger C. Cramton, The Law and Ethics of Lawyering (3d. ed. 1999) at 858 - 59. This well-established alternative regulatory regime, operating at the state level, has traditionally been the dominant governing force for the bar. The presence of this alternative regulatory structure suggests that the authority delegated to the Commission under Section 307 cannot, consistent with Supreme Court authority, be read expansively to extend Commission jurisdiction to activities as to which the statute is silent and that are clearly governed by state-mandated regulatory regimes that are well-established and broadly respected.

Any effort by the legislative branch to regulate the bar also raises issues of federalism, which further argue against an expansive reading of the Commission's authority. The Commission itself has also quite recently appeared to endorse this view. In March 2002, David Becker, at the time General Counsel of the Commission, responded on behalf of Chairman Pitt to a proposal by several professors that the Commission should require a lawyer to "inform a corporate client's directors, including its independent directors, of prospective or ongoing illegal conduct that senior management refuses to rectify." March 7, 2002 letter to Chairman Pitt from Richard Painter et al. In response, Mr. Becker stated that "any such changes to the rules governing lawyers should be the result of Congressional changes to the securities laws," March 28, 2002 letter to Richard Painter et al. from David Becker. Mr. Becker further observed the "strong view among the bar that these matters are more appropriately addressed by state bar rules, which historically have been the source of professional responsibility requirements for lawyers, and have been overseen by state courts." Id.

C. Legislative History.

The fact that the statutory text is silent as to the delegation of authority to adopt "noisy withdrawal" requirements, and that established principles of construction do not allow the inference of such authority, is sufficient to put the matter to rest without resort to legislative history. But even if one extends the examination of the statute to its legislative history, one finds no support for the Commission's position. To the contrary, one finds express language indicating that the Commission's "noisy withdrawal" proposal is ultra vires.

By the Commission's own description, the "legislative history for Section 307 is limited." See Release at note 27. Not a single recorded utterance suggests that any Senator or Representative ever contemplated, discussed, or endorsed a "noisy withdrawal" requirement. To the contrary, the legislative history is clear that Congress sought only to emphasize to counsel that their obligation was to the corporate entity, not to the individual executives who could hire or fire them. Further, the legislative history is clear that Congress sought to impose "up the ladder" reporting requirements in a manner that was entirely respectful of existing attorney-client privileges. In fact, Senator Sarbanes himself stated that he believes that it is "an important point" that the only obligation that Section 307 creates is "up the ladder reporting" and that there is no obligation to report outside the corporate client. Remarks of Senator Paul Sarbanes, 148 Cong. Rec. S6557 (July 10, 2002).

As Senator Edwards, a co-sponsor of the amendment to the Sarbanes-Oxley Act that added Section 307, emphasizes, Section 307 "operates in a very simple way." Remarks for Senator John Edwards, 148 Cong. Rec. S6552 (July 10, 2002). "It is basically going up the ladder, up the chain of command...It basically instructs the SEC to start doing what they were doing 20 years ago, to start enforcing this up-the-ladder principle." Id.

The observations of Senator Enzi, also a co-sponsor of the amendment adding Section 307, are entirely consistent. "When their counsel and advice is sought, attorneys should have an explicit, not just an implied, duty to advise the primary officer and then, if necessary, the auditing committee or the board of directors..." Id. at S6555 (comments by Senator Enzi).

Senator Corzine, another co-sponsor of the amendment, agreed. Section 307 "seeks to go back to the old way: when lawyers know of illegal actions by a corporate agent, they should be required to report the violation to the corporation." Id. at S6556.

The Commission's proposed "noisy withdrawal" requirement does not "operate in a very simple way." It has nothing to do with instructing the SEC "to start doing what they were doing 20 years ago." It does nothing to "seek... to go back to the old way...." It instead strikes out in a new, complex and unprecedented direction that seeks to extend the Commission's authority over the legal profession in a manner that finds no support in the text of the statute and that is directly contradicted by the legislative history.

In its attempts to address a statutory text and legislative history that is entirely at odds with its "noisy withdrawal" proposal, the Release adopts an approach that conflicts with established principles of statutory construction. For example, the Commission quotes Senator Enzi's statement that "[t]he amendment [he] support[ed] would not require attorneys to report violations to the SEC, only to corporate legal counsel or the CEO, and ultimately, the board of directors." Release at note 57 quoting 148 Cong. Rec. S6555 (July 10, 2002) (statement of Sen. Enzi). A natural reading of this statement would suggest that Senator Enzi did not believe he was co-sponsoring or voting in favor of anything other than a straight forward "up-the-ladder" reporting requirement. The Commission reasons, however, that "Senator Enzi nowhere suggests that an attorney representing an issuer should not be required to (1) withdraw in the unlikely and extreme event that the issuer's board of directors failed to prevent an ongoing material violation, and (2) to notify the Commission that he had withdrawn for "professional considerations." Id. By the same logic, Senator Enzi nowhere suggests that an attorney representing an issuer should not be required to report all client confidences immediately to the Commission or present any evidence of wrongdoing - no matter how remote - immediately to the United States Attorney. Moreover, the Commission's desired inference from Senator Enzi's statement runs directly counter to Senator Sarbanes' observation that Section 307 creates no obligation to report outside the corporation. 148 Cong. Rec. S6557 (July 10, 2002) (Remarks of Sen. Sarbanes).

It is precisely because litigants can argue any inference they desire from silence that the Supreme Court requires clear and convincing evidence of Congressional intent before inferring the existence of private rights of action and broad delegations of authority. See , e.g., Alexander v. Sandoval 532 U.S. 275, 291 (2001) ("[I]t is most certainly incorrect to say that language in a regulation can conjure up a private cause of action that has not been authorized by Congress. Agencies may play the sorcerer's apprentice but not the sorcerer himself."); Touche Ross & Co. v. Redington, 442 U.S. 560, 571 (1979) ("[I]mplying a private right of action on the basis of congressional silence is a hazardous enterprise, at best). No such intent is evident here.

Finally, the argument that the statutory language calling for "minimum standards...including a rule" that imposes "up the ladder" reporting requirements implicitly authorizes "noisy withdrawal" requirements must also fail for at least three distinct reasons. First, as previously explained, established principles of statutory construction preclude this interpretation. Second, also as previously explained, the legislative history contradicts the inference. Third, this language serves a function that is clearly separate and distinct from an authorization to adopt a "noisy withdrawal" requirement. In particular, the direction to adopt "minimum standards" would allow the Commission to adopt a range of "up the ladder" requirements more expansive than those it has already proposed, and more expansive than those expressly defined in the statute. For example, it would allow the Commission to require that counsel report to the audit committee simultaneously with any report to a CEO or CLO if certain concerns are raised. It would also allow the Commission to establish specific internal review procedures, time deadlines, and record-keeping requirements, along with a host of other more stringent "up the ladder" requirements. By contrast, there is no necessary implication in the "minimum standards" language that would support the inference of "noisy withdrawal" requirements, particularly in contravention of principles of statutory construction and in the face of contrary legislative history.

III. The Proposed Rules Should Not Be Interpreted in a Manner That Creates a Conflict with Established Principles of Attorney-Client Privilege.

Just as the text and legislative history fail to support the inference that Congress authorized the Commission to adopt "noisy withdrawal requirements," the text and legislative history also fail to support the inference that Congress authorized the Commission to adopt rules that intrude in any way on established doctrines of attorney-client privilege.

"The attorney client privilege is one of the oldest recognized privileges for confidential communication." Swidler and Berlin v. United States, 524 U.S. 399, 403 (1998), citing Upjohn Co. v. United States, 449 U.S. 383, 389 (1981); Hunt v. Blackburn, 128 U.S. 464, 470 (1999). "The privilege is intended to encourage `full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of the law and the administration of justice.'" Swidler, supra, quoting Upjohn, supra, at 389. The privilege also serves "much broader purposes" than the Fifth Amendment protection against self-incrimination, Swidler supra at 387.

The courts have therefore "rejected use of a balancing test in defining the contours of the privilege" because to balance "ex post the importance of the information against clients interests" would "introduce... substantial uncertainty into the privilege's application." Swidler, supra at 387-388. The Supreme Court has, moreover, cautioned against slippery-slope logic when considering potential exceptions to the privilege. "A `no harm in one more exception' rational could contribute to the general erosion of the privilege, without reference to common law principles or `reason and experience.'" Swidler, supra at 410.

The Commission recognizes that issues relating to attorney-client privilege have historically been left to the domain of the state bars and state courts, and is aware that the Proposed Rules can create potential conflicts with state bar rules regarding disclosures of privileged information. See Release at 40-41. These privilege issues arise in the context of the "noisy withdrawal" requirements, aspects of the "up the ladder" reporting provisions and other provisions of the Proposed Rules. To the extent that the Proposed Rules conflict with established principles of attorney-client privilege, the Proposed Rules must be withdrawn because Congress did not delegate to the Commission authority to alter the principles of attorney-client privilege established in federal and state law.

A. The Text of the Statute.

The text of Section 307 does not support any intrusion whatsoever on attorney client-privilege. As discussed above, the obligations imposed by the actual wording of Section 307 stop at the level of the board of directors and go no further. Moreover, the text of the statute does not provide for any requirement (or option) for attorneys to undertake any actions that could impinge upon the attorney-client privilege.

B. Legislative History.

The legislative history also does not support any intrusion on attorney-client privilege. In calling assertions that Section 307 would cause a breach of the attorney-client privilege "ludicrous," Senator Enzi stated that no such breach would occur because the reporting requirements are "all internal" (i.e., all within the legal entity that is the client). Remarks for Senator Enzi, 148 Cong. Rec. S6555 (July 10, 2002). As noted above, Senator Enzi declared that "[t]he amendment that I am supporting would not require the attorneys to report violations to the SEC." Id. The Senator goes on to say that "[t]his amendment also does not empower the SEC to cause attorneys to breach their attorney/client privilege." Id.

C. Intrusions on Attorney-Client Privilege.

The Proposed Rules evidence an awareness on the part of the Commission of the need to respect the attorney-client privilege. The Release states that "up the ladder reporting" does not do violence to the privilege because the corporate entity, and not individual directors or officers, is the client. Release at 20-21. Other portions of the Proposed Rules, however, do not exhibit the same sensitivity.

D. Section 205.3(e)(2).

Consider, for example, Section 205.3(e)(2) of the Proposed Rules, which provides that an attorney may reveal to the Commission, "without the issuer's consent, confidential information related to the representation to the extent the attorney reasonably believes necessary:

        (i) to prevent the company from committing an illegal act that the attorney reasonably believes is likely to result in substantial injury to the financial interest or property of the issuer or investor;

        (ii) to prevent the issuer from committing an illegal act that the attorney reasonably believes is likely to perpetrate a fraud upon the Commission; or

        (iii) to rectify the consequences of the issuer's illegal act in the furtherance of which the attorney's services had been used."

(Emphasis supplied) Sections 205.3(e)(2) raises clear and profound attorney-client privilege issues. To the extent these provisions as they relate to ongoing or future criminal activities are meant to, or can be read to, cover more than the crime-fraud exception contained in the ethics rules of most state bars (i.e., if these clauses of the Proposed Rules permit revelations of privileged communications or information, including through disaffirmance of documents, outside the context of preventing an actual crime or fraud), they are clearly on a path to conflict with the rules promulgated by state bars and state courts, which are the historical repositories of attorney-client privilege rules.

Where Section 205.3(e)(2) allows for disclosure of privileged communications and information where the allegedly offending act has already occurred - as clearly intended by the use of the past tense in Section 205.3(e)(2)(iii) - the conflict is even more profound. Only a relatively few state bars permit or require disclosure to rectify harm caused by past illegal conduct. In addition, even where states require or permit disclosure of privileged communication or information, these states often define the information that may be disclosed more narrowly than the provisions of the Proposed Rules. Similarly, inconsistencies will arise between the types of circumstances in which disclosure is permitted under state rules and under the Proposed Rules (e.g., the Proposed Rules speak of a "material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation," whereas many states require or permit such disclosure only in the event of "fraud").

E. Section 205.3(d).

Consider also the problems raised by Section 205.3(d)(1)(i), which requires that if an "attorney reasonably believes that a material violation is ongoing or is about to occur and is likely to result in substantial injury" and where the attorney has not received "an appropriate response" or has not received "a response in a reasonable time," then the attorney shall: (1) "withdraw forthwith from" the representation (Section 205.3(d)(1)(i)(A)); (2) provide written notice to the Commission within one business day that "the withdrawal was based on professional considerations" (Section 205.3(d)(1)(i)(B)); and (3) promptly disaffirm to the Commission any document "filed with or submitted to the Commission...that the attorney reasonably believes is or may be materially false or misleading." (Section 205.3(d)(1)(i)(C)).

The requirement that attorneys specifically identify documents that have in the past been "filed with or submitted to" the Commission and that are believed to be materially false or misleading again creates a clear conflict with established principles of attorney-client privilege that prohibit disclosure of past offenses and that rely on criteria that differ dramatically from those relied upon by the Proposed Rules. Further, notwithstanding the suggestion that the Commission structured its Proposed Rules so that the "noisy withdrawal" would allow attorneys to "keep... confidential the particular facts underlying the withdrawal," Release at 40, the realpolitik of the situation is dramatically different. Any written notice to the Commission will, with high probability, trigger an investigation replete with requests for documentation required to be maintained by the Proposed Rules. This information will act as a clear roadmap for the Commission in its inquiry. The logical and unavoidable consequence of even a cryptic notification of withdrawal to the Commission - a notification as for which there is no foundation in the text or legislative history of the statute - will then be a contest challenging the limits of attorney-client privilege and rules protecting attorney work product.

F. Pre-Emption.

The Proposed Rules clearly will therefore lead to situations in which attorneys find themselves caught between two sets of rules pointing in different directions. The Commission has realized this fact and recognized that the only way such conflicts could be resolved is if the Commission's rules are preemptive. However, as discussed above, such preemption was not expressly granted by Congress in the Sarbanes-Oxley Act and cannot be inferred where neither the text nor the legislative history support preemption in the area.

    G. Issues Related to Subsidiaries and Joint Ventures with Independent Legal Identities.

Attorney-client privilege issues will also arise under the Proposed Rules in the context of a joint venture or wholly-owned or partially-owned subsidiary with respect to which much care is taken, for any number of important, substantive reasons, to preserve that entity's corporate independence from its publicly-traded parent entity. The Proposed Rules could arguably be interpreted to require reporting of issues at the subsidiary or joint venture entity up to the public parent or shareholder level. If the "ladder" is extended to the parent or shareholder level, a violation of the attorney-client privilege may well arise, and the subsidiary or joint venture entity's legal independence could be put at risk. Such potential problems would have wide-ranging implications and cannot be permitted to arise from rules that were never contemplated or sanctioned by Congress.

H. Confidentiality with Respect to Third Parties.

The Proposed Rules raise additional concerns with regard to attorney-client privilege by providing that no privilege or protection is waived when a company or its attorney shares with the Commission, pursuant to a confidentiality agreement, information related to a material violation. Section 205.3(e)(3). Again, the question arises - from where did the Commission's authority to adopt such a rule derive?

In support of this position, the Commission draws an analogy to Section 105(b)(5)(A) of the Sarbanes-Oxley Act, which provides that information received by the Public Company Accounting Oversight Board from a public accountant will remain confidential and privileged until it is used in a public proceeding, even if the Public Company Accounting Oversight Board shares such information with the Commission or other governmental persons. See Release at 43. However, Section 105(b)(5)(A) merely manifests that the drafters of the Sarbanes-Oxley Act knew how to expressly provide for a provision that permits revelation of privileged information without it constituting a waiver of privilege. If Congress wished for attorneys to provide privileged information to the Commission, Congress would have so provided in the Act. The fact that Congress provided for confidentiality in the context of accountant disclosures to the Public Company Accounting Oversight Board reads not as support for, but rather as evidence against, disclosures of privileged information to the Commission by attorneys.

IV. The Commission Should Adopt Only the Minimally Necessary Set of Rules by January 26, 2003.

As the Commission's own logic suggests, nothing in Section 307 requires that the Commission adopt any rules by January 26, 2003, that extend beyond a basic "up the ladder" reporting requirement that is fully consistent with the ethics rules of the various states and with established principles of attorney-client privilege. We believe that is precisely the category of rules that the Commission should adopt at this time. There will be ample time after January 26 for the Commission to address proposals that extend beyond "up the ladder" reporting and that call into question fundamental aspects of state ethical rules and attorney-client privilege.

This approach will promote a continued good working relationship between the private securities bar and the Commission and will allow the incoming Chairman to participate in a meaningful manner in the formulation of policies essential to the Commission's mission. It will also allow the Commission to explore the fundamental issues raised by the Proposed Rules in far greater depth than current circumstances and schedules permit. Further, a more measured approach to the questions presented by the Proposed Rules will allow the Commission to request from Congress whatever additional statutory authority it may require in order to adopt rules that extend beyond "up the ladder" reporting and that intrude upon the core values of the attorney-client relationship, should the Commission decide that such an intrusion is necessary and appropriate.

* * *

Thank you for your consideration of the foregoing.

Respectfully yours,

/s/ Joseph A. Grundfest

Joseph A. Grundfest
William A. Franke Professor of Law and Business
Stanford Law School
Stanford, CA 94305
(650) 723-0458

Professional Corporation

By: /s/ Ann Yvonne Walker

Ann Yvonne Walker
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300


By: /s/ Armando Castro

Armando Castro
2000 University Avenue
East Palo Alto, CA 94303
(650) 331-8000


By: /s/ Nancy Wojtas

Nancy Wojtas
Five Palo Alto Square
Palo Alto, CA 94306
(650) 843-5000


By: /s/ Horace L. Nash

Horace L. Nash
Two Palo Alto Square
Palo Alto, CA 94306
(650) 494-0600


By: /s/ Paul A. Blumenstein

Paul A. Blumenstein
400 Hamilton Avenue
Palo Alto, CA 94301
(650) 833-2000


By: _____________________

Brooks Stough
199 Constitution Drive
Menlo Park, CA 94025
(650) 321-2400


By: /s/ Kyle Guse

Kyle Guse
275 Middlefield Road
Menlo Park, CA 94025
(650) 324-7000


By: /s/ Simon M. Lorne

Simon M. Lorne
335 South Grand Avenue, 35th Floor
Los Angeles, CA 90071
(213) 683-9100


By: /s/ Lowell D. Ness

Lowell D. Ness
1020 Marsh Road
Menlo Park, CA 94025
(650) 614-7400


By: /s/ Stephen M. Wurzburg

Stephen M. Wurzburg
2550 Hanover Street
Palo Alto, CA 94304
(650) 233-4500


By: /s/ Matthew J. Mallow

Matthew J. Mallow
Four Times Square
New York, NY 10036
(212) 735-3000


By: /s/ Marie Oh Huber

Marie Oh Huber
Vice President, Assistant Secretary
and Assistant General Counsel
395 Page Mill Road, MS3A-10
Palo Alto, CA 94303
(650) 752-5000


By: /s/ David G. Pursel

David G. Pursel
Vice President, General Counsel and Secretary
1551 McCarthy Boulevard
Milpitas, CA 95035
(408) 433-8000

1 Many of us have previously commented on SEC proposals in the past. For example, during the past year we have commented on the proposal to add disclosure items to Form 8-K and shorten the filing deadline (Rel. No. 33-8106; Comment Letter dated October 3, 2002), the proposal to require companies to provide detailed disclosures regarding their critical accounting policies (Rel. No. 33-8098; Comment Letters dated August 6 and 20, 2002), the proposal to require company reporting on insider transactions (Rel. No. 33-8090; Comment Letter dated July 2, 2002) and the proposal to accelerate Form 10-Q and Form 10-K filing dates (Rel. No. 33-8089; Comment Letter dated May 30, 2002). Previously, we submitted comments on the "aircraft carrier" proposal (Rel. No. 33-7606; Comment Letter dated October 8, 1999); the proposal to amend Form S-8 (Rel. No. 33-7506; Comment Letter dated April 23, 1998); and the executive compensation disclosure rules (Rel. No. 33-6940; Comment Letter dated August 24, 1992). We have also requested and received a number of interpretive letters, including three letters regarding the application of the Section 16 rules (Interpretive Letters to Joseph A. Grundfest et al. dated April 25, 1991, August 19, 1991 and March 4, 1992). We are often referred to as the "Grundfest Group."