The Bar Association of San Francisco
April 3, 2003
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-45-02
Dear Mr. Chairman and Honorable Commissioners:
The Bar Association of San Francisco responds to your request for comments regarding the SEC's Implementation of Standards of Professional Conduct for Attorneys. This Association previously submitted written comments, dated December 18, 2002, in regard to the original version of proposed Rule 205 under Section 307 of the Sarbanes-Oxley Act. The Beverly Hills Bar Association joined in our response.
The State Bar of California's Committee on Professional Responsibility and Conduct ("COPRAC") has submitted written comments on both the proposed Standards [File No. S7-45-02, Release No. 33-8186] and the proposed final Rule under Section 307 of the Sarbanes-Oxley Act of 2002 [File No. S7-45-02, Release No. 33-8185]. This Association joins in the response submitted by COPRAC, and provides the following additional comments on its own behalf.
In connection with the Association's desire to provide assistance in the development of rules of professional conduct for lawyers which serve and protect the public, preserve the attorney-client relationship, and promote the administration of justice, this letter addresses our concerns about the "noisy withdrawal" and alternative "issuer reporting" provisions proposed by the SEC and recommends against the adoption of either provision.
The SEC Should Refrain from Further Rule-Making at This Time: The SEC, with its adoption of 17 CFR Part 205 ("Rule 205"), has met, and in the view of many commentators, has gone beyond Congress' mandate under Section 307 of the Sarbanes-Oxley Act ("Section 307"). The intent behind Section 307 is to create open lines of communication between attorneys and their issuer clients in order to prevent securities law violations from occurring or going unreported. Implementation of Rule 205 will unquestionably lead to foreseeable as well as to unforeseeable problems and requests for clarification. The mandatory "up-the-ladder" reporting requirements in the existing draft of the Rule should be tested by actual experience before a decision is made to add even more controversial mandatory withdrawal requirements. It is remains to be seen whether the proposed "noisy withdrawal" or related "issuer reporting" provisions are either necessary or desirable. A determination should first be made whether the Rule in its present form will provide the intended protection of the public based on how it is actually applied. We, therefore, recommend that the SEC evaluate the practical consequences of implementing the proposed Rule and refrain from adding any additional requirements at this time.
Neither Notice of Withdraw Recommendations Should be Adopted: This Association recommends that the proposed "noisy withdrawal" or "issuer reporting" provisions be left out of Rule 205 altogether. Either requirement would result in greater harm to the public. The intent behind Section 307 is to improve compliance by issuers with the securities laws and not to turn issuers and their attorneys into adversaries. The Rule should be drafted to encourage attorneys to effectively counsel issuer-clients in a cooperative environment with respect to the complex application of the securities laws and not to encourage lawyers to protect their own interests at the expense of their clients. Either alternative would lead to negative consequences for the public, since an issuer-client that questions or hesitates in following the advice of its lawyer could end up without affordable legal services and competent advice when such services and advice are most needed.
Noisy Withdrawal Provisions Raise Fundamental Issues Regarding the Attorney-Client Relationship. One of the purposes of Section 307 is to protect the public by insuring that attorneys remain involved with the business decisions of their issuer clients, and thereby able to effectively counsel clients to avoid violating securities laws. The proposed "noisy withdrawal" provisions would work against improving lines of communication between the issuer and its attorney, would increase tension between the professional interest of counsel and the interest of the client, and would reduce the opportunity for lawyers to effectively counsel their clients against committing illegal acts and to rectify existing and prior violations of the law. In actual practice, lawyers are frequently required to work with clients over a considerable period of time in order to succeed in persuading the client on the most appropriate course of action. Forcing an attorney to involuntarily withdraw from representation is in direct opposition to the very function of the attorney-client relationship. The central features of the attorney-client relationship are undivided loyalty and confidentiality. These time honored protections afford clients the opportunity to candidly disclose information regarding potential violations with the predictability that such information will not be disclosed to third parties without the clients' consent. Candid and full disclosure enables attorneys to render proper advice. The fact that some lawyers working for publicly owned companies recently involved in corporate failures may not have properly counseled their clients, is not a valid reason to undermine the attorney-client relationship for all lawyers and their corporate clients. The public is best served by enhancing the fiduciary relationship between attorneys and their clients to allow adequately informed attorneys to properly counsel their clients regarding the application of complex laws. The proposed mandatory withdraw and issuer notification rules as well as other "reporting out" features of the Rule unreasonably interfere with these important public policies and are in direct contradiction to the well-established role of the attorney in the legal system in this country. Decisions with respect to non-consensual withdrawal and the means by which withdrawal should be accomplished should remain with the lawyer as part of the lawyer's independent professional judgment and should not be mandated by statute.
The "noisy withdrawal" requirements would invariably have a chilling effect on the attorney-client relationship. Even in situations where rules of professional conduct permit discretionary "noisy withdrawal," the discretion is rarely invoked, for good reason. Clients would be disinclined to divulge information to their attorneys due to legitimate concerns that attorneys would be required to withdraw, leaving the issuer without representation, and subject the issuer to an SEC investigation solely by reason of the notice of withdrawal. Subsequent counsel taking on the representation of the issuer-client could be subject to compulsory withdrawal as well, leaving the client without adequate representation. We do not believe that separating the client from the counsel of it's choice serves the public interest, so long as the attorney has not violated ABA Model Rule 1.2(d) by counseling, aiding and assisting the violation of law.
Attorneys representing issuer-clients in litigation and related matters before a tribunal cannot easily withdraw representation. The proposed "noisy withdrawal" requirements and the alternative "issuer-notification" requirements would be in contravention of state ethics and evidence rules.
The Proposed "Issuer Reporting" Requirements Would Produce Similar Unfavorable Results. The proposed "issuer reporting" rules require that after an attorney withdraws from representation under Rule 205, the issuer, rather than the attorney, must report the attorney's withdrawal to the SEC. The issuer would also be required to publically disclose, through the use of amended SEC reporting forms, the attorney's withdrawal. Whether the attorney or the client is forced to report an attorney's withdrawal, the same negative consequences will result. The chilling effect on the attorney-client relationship, the undermining of client confidentiality and the fiduciary duty of loyalty would not be materially different if the Rule imposed the obligation on the client, rather than the lawyer, to notify the SEC of the lawyer's withdrawal. The proposed "issuer reporting" requirement would lead to the same adverse consequence of removing the attorney from the client's decision-making process and rendering counsel less able to effectively counsel against violating the securities laws and rectifying previous violations. Placing the burden of reporting on the client, rather than the attorney, would prove especially detrimental to the attorney-client relationship, because it would force the client to draw attention to itself by reason of the attorney's decision to withdraw. This exacerbates rather than mitigates the conflict of interest between attorney and the client created by the mandatory withdrawal provisions of the proposed Rule. The proposed issuer notification provisions would only provide the client with a stronger incentive not to consult with attorneys regarding potential securities violations.
The concept of "noisy withdrawal" and "issuer reporting" go far beyond what was mandated by Congress under Section 307. Although it was intended that the SEC be allowed to issue regulations regarding mandatory up the ladder reporting, it was not the intent of Congress that issuers be forced to regulate their attorneys on behalf of the SEC, or that attorneys be forced to do the same to their clients. An attorney always retains the right to withdraw from representation if faced with intentional disregard of the law, and the existence of that right should be sufficient.
Thank you for the opportunity to comment on these proposed standards.