VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
Post Office Box 352
Grand Rapids, Michigan 49501-0352
Telephone 616 / 336-6000 Fax 616 / 336-7000 www.varnumlaw.com
December 18, 2002
VIA E-MAIL (firstname.lastname@example.org)
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. 33-8150.wp
Proposed Rule: Implementation of Standards of Professional Conduct For Attorneys
[Release Nos. 33-8150; 34-46868; IC-25829; File No. S7-45-O2]
Dear Mr. Katz:
This letter is intended to oppose certain provisions of Proposed Rule 205.3 of Part 205 which serves as an amendment to Title 17, Chapter II, of the Code of Federal Regulations.
The Proposed Rule includes at least four fundamental changes to the way attorneys and their clients interact. The changes include:
- The reporting duties are not restricted to disclosures only "up the ladder" within a SEC issuer;
- The reporting duties are mandatory, not discretionary;
- The duties extend beyond the scope of the lawyer's engagement; and
- The duties may be triggered by less than actual knowledge.
We do not agree with the SEC's view that: "These provisions embody ethical principles that legal commentators in the ABA have been considering for years, and are similar in important respects to ethical rules that have already been enacted in a number of jurisdictions." The ABA and various state bar organizations are addressing any shortcomings in the existing state ethnical rules to the extent such rules have not proven to deter attorney misconduct. Virtually all of the present and proposed rules, however, and even the rejected Ethics 2000 proposals, involve only discretionary, not mandatory, disclosures.
The "reporting out" provision the SEC proposes changes presently discretionary authority for disclosure of information protected by the attorney-client privilege by a lawyer in very restricted circumstances, to an affirmative mandatory duty of disclosure to law enforcement authorities. Such a provision conflicts with the confidentiality provisions in state ethical rules which apply to virtually all lawyers. These ethical rules have long been the basis for clients' willingness to raise disclosure and compliance issues, allowing lawyers to render independent legal advice. If the final rule issued by the SEC does not protect the confidentiality provisions in state ethical rules, lawyer's ability to properly advise and represent clients in a variety of adversarial contexts, including before the SEC, will be compromised.
Further, the Proposed Rule leaves the definition of many terms (e.g., "material violation," "reasonably to believe") to only best guesses. That is to say, largely undefined conditions seem to place an affirmative duty upon most every lawyer retained by an SEC issuer (not just the issuer's SEC counsel) to report client conduct to persons outside the organization (i.e., to the SEC), even though the only source of the information is protected or privileged under existing ethical rules. One factor seems clear, however, that a lawyer's duty will be triggered by much less than "actual knowledge," another inconsistency with the current ethical rules. Since the Proposed Rule applies to all lawyers working for an organization, not just those doing SEC work, any lawyer working on any "material" matter for an issuer (e.g., even the product liability defense lawyer) may have to acquire some SEC law expertise, and this hardly seems intended. We believe that any implemented rule should at least be modified to clarify that lawyers need only consider information or evidence which is within the scope of the lawyer's engagement by the issuer.
The Proposed Rule also appears to create a mandatory, affirmative, direct duty to broad classes of diverse shareholders, most of whom have widely varying interests and objectives. Such duties would undoubtedly create impermissible conflicts which would never be permitted under the ethical rules of many U.S. jurisdictions. At the very least, the Proposed Rule should be clarified to ensure a lawyer for an organization does not really represent the interest of any particular shareholder or group of shareholders (unless an engagement so provides).
Among provisions not included in the Proposed Rule are:
- The definition of "similar violations" used in Sarbanes-Oxley section 307, a phrase that would benefit greatly from clarification;
- A safe harbor provision protecting lawyers from suits based on statements contained in notices required by the rule, similar to that for auditors under section 10A(3)(c) of the 1934 Securities Exchange Act, as amended; and
- A provision negating private rights of action by shareholders or others seeking to force lawyers to comply with the rule or seeking damages for its violation.
The SEC states that it does not want its final rule to impair zealous advocacy or discourage issuers from seeking and obtaining effective and creative legal advice. We fear the Proposed Rule, if enacted in its current form, will do that. The SEC admits the Proposed Rule goes beyond the Sarbanes-Oxley Act. The SEC has the ability to implement a final rule that will not inhibit clients' willingness to raise disclosure and compliance issues (allowing lawyers to properly advise and represent clients), while satisfying the SEC's statutory mandate. As such, we respectfully request that the concerns expressed herein receive additional consideration before implementing a final rule.
Very truly yours,
VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP
Joseph B. Levan