Mr. Jonathan G. Katz
Re: Comment on Proposed Rules Pursuant to Section 307 of the Sarbanes-Oxley Act of 2002; Release Nos. 33-8150, 34-46868 and IC-25829, File No. S7-45-02
Dear Mr. Katz:
I am Senior Vice President and General Counsel of PPG Industries, Inc. ("PPG"). The purpose of this letter is to provide the Commission with my comments in response to the Proposed Rules Pursuant to Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act"); Release Nos. 33-8150, 34-46868 and IC-25829, File No. S7-45-02 (the "Proposed Rules").
I support the purposes of the Act. I believe the Act will enhance corporate responsibility and protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. I also support Section 307 of the Act calling for "up-the-ladder" internal reporting by attorneys of material violations. I believe the "up the ladder" internal reporting requirements of the Proposed Rules are an appropriate implementation of Section 307 and essentially codify a lawyer's professional responsibilities under existing standards. However, the "noisy withdrawal" and "disaffirmance" requirements in the Proposed Rules go far beyond the explicit mandates of Section 307 and should be withdrawn.
First, there is nothing in Section 307 or its legislative history that requires "noisy withdrawal" or "disaffirmance". In fact, the record shows that it was Congress' intention that Section 307 not impose any obligation to report outside the client-corporation. Nothing in Senator Edwards' remarks on July 10, 2002 (Cong. Rec. p. S6552) regarding the Edwards' amendment, which was essentially codified as Section 307, gives any indication that there was any intention to require lawyers to report material violations anywhere outside of the company involved. Remarks made by Section 307's sponsors, Senators Edwards, Enzi and Corzine, all indicate that they did not intend to require attorneys to report outside the corporate governance structure. Indeed, during the Senate's consideration of Section 307, Senator Sarbanes expressly asked Senator Edwards if Section 307 "only involves going up within the corporate structure" and not "outside of the corporate structure." Senator Edwards stated that "the only obligation that [Section 307] creates is the obligation to report to the client....There is no obligation to report anything outside the client - the corporation." Senator Sarbanes then stated "I think that is an important point. I simply asked the question to stress the fact that that is the way this amendment works." See July 10, 2002 Cong. Rec. p. S6557.
Second, complying with these requirements will not only preempt state law regarding attorney-client privilege (a preemption for which there is no express basis in the Act), but it could destroy the privilege, which is an essential underpinning of the right to legal representation, for securities and fiduciary matters.
Clients will be concerned that lawyers will be required to report to the Commission any matter that, in the lawyer's opinion, is a material violation. The effect will be to chill communications from the client to the attorney and discourage issuers from consulting with lawyers. This would lead to less reliable reporting to investors and frustrate the Act's purpose of restoring confidence in corporate disclosures. Existing professional standards under state law already require lawyers to act to prevent a criminal act that could do significant harm. For many years those rules have provided an appropriate balance between protecting the public and the attorney-client privilege. The "noisy withdrawal" and "disaffirmance" provisions of the Proposed Rules will destroy that balance at the expense of the attorney-client privilege.
The Commission should eliminate the "noisy withdrawal" and "disaffirmance" provisions of the Proposed Rules, which go far beyond what Congress intended under Section 307 of the Act, because of the severe adverse consequences of those proposals on communications between issuers and their lawyers.