From: John Bullock [johnbullock@worldnet.att.net] Sent: Wednesday, December 18, 2002 3:29 PM To: rule-comments@sec.gov Subject: File No. S7-45-02 18 December 2002 United States Securities and Exchange Commission Re: Standards of Professional Conduct for Attorneys Proposed Rule, November 21, 2002 File No. S7-45-02 Gentlemen: I am in general agreement with the proposed rule, but have two points of disagreement. First, the proposed threshold of evidence upon which reporting by an attorney becomes mandatory is too high - i.e. evidence "that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur." An attorney should not have to reach a conclusion or belief in the existence of a material violation before being required to report. I agree that "mere suspicion" should not trigger mandatory reporting (although I might encourage informal reports based on mere suspicion, and certainly would not "preclude" them, as the proposal suggests.) But I disagree with the proposal that "an individual attorney is not, however, required to report within the issuer evidence of a material violation that the attorney thinks is insufficient to lead an attorney, acting reasonably, to believe that a material violation has occurred, is occurring, or is about to occur." As the Commission itself notes, "[A]ttorneys are not necessarily expected to identify issues they are not equipped to see." And an attorney may be only peripherally involved in a matter, and may not have access to a broad range of relevant information. An attorney is therefore much more likely to discover evidence of a lesser quality, or which is outside of his or her expertise, but which would lead him or her reasonably to suspect, and reasonably to pursue in further investigation. But as the proposal also states, there is no investigative obligation upon the attorney, no requirement to probe what may be "the tip of an iceberg." That obligation falls (correctly, I concur) upon responsible officers of an issuer - to consider the reported evidence, investigate where appropriate, and take actions necessary to prevent or minimize any threatened harm to the issuer. Those responsible officers should be given notice at a level less than a firm determination by an attorney. Accordingly, the threshold for mandatory reporting by an attorney should be the level of evidence that a responsible corporate officer should want to know, so that the client can pursue an investigation and take appropriate action. The standard should therefore be "some credible information that a material violation may have occurred, may be occurring, or may be about to occur." Second, the attorney should report such credible information not only to the issuer's chief legal officer or to both the issuer's chief legal officer and its chief executive officer, but also, simultaneously, to the issuer's audit committee, other committee of independent directors, or full board. Such simultaneous report can be a summary, but there is no reason why an audit committee should not be immediately made aware that an attorney has reported some evidence of a possible material violation of law. The committee, knowing that notice has been given to the CLO and/or CEO, need not take action itself. But an audit committee should reasonably want to know immediately of any such report, so that it might elect to act or to rely upon a delegation to the company's officers. An audit committee might, and perhaps should, want to receive interim reports of the activities prompted by the initial report. And the audit committee should certainly want to be informed of a final report of the issuer's CLO or CEO, whether that report finds a material violation or concludes that no material violation had occurred. I am aware that attorneys will fear, and not without justification, hindsight evaluation of their activities, and accusations of failure to report evidence of a material violation which they never perceived. But attorneys will be subject to such accusations with any standard, i.e. that they should have known that a certain set of facts met a certain threshold, and should have reported that set of facts to their client. Their defense will be, in all cases, that they did not in fact know. The Commission can strengthen that defense by stating, again, that an attorney should not be expected to know all of the intricacies of corporate organization and conduct, particularly conduct which a corporate officer or employee has sought to obfuscate or hide. But in any case, this proposed standard of ethical conduct should focus upon what an attorney does in fact know, and what action that knowledge should trigger. A standard of liability is necessarily a different issue. I am also aware that a sound working relationship between an attorney and corporate officers promotes the effective exchange of relevant information and good legal advice. I am aware that a report which suggests a material violation of law may strain that relationship. Some officers of some corporations may consider such a report, particularly when made to an audit committee, to be an act of personal disloyalty to them and to their interests. And a lawyer-client relationship is unlikely to survive when corporate officers do not want to be advised of potential problems, or have notice given to others. Some corporate officers willfully avoid such evidence, or engage in shell games with their directors, shareholders, auditors and regulators to hide it, presenting instead a facade of well-being. Such officers will not tolerate reports, or those who make them. But the proposed standard for attorneys is about ethics, and not fees. The conduct of an attorney should be based upon the premise that corporate officers recognize their own ethical responsibility to look for and pursue evidence of wrongdoing, and will welcome, if not demand, assistance from any source. Very truly yours, John Bullock Tel: 203-784-3181 Fax: 203-784-3123 email: mail@johnbullock.com