SHEARMAN & STERLING
BROADGATE WEST
9 APPOLD STREET
LONDON EC2A 2AP, ENGLAND
(44-20) 7655-5000
WRITER'S DIRECT NUMBER:
+44 20 7655-5019
WRITER'S EMAIL ADDRESS:
jbartos@shearman.com
December 18, 2002
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
U.S.A.
Dear Mr. Katz:
We welcome the opportunity to comment on certain issues raised by proposed Part 205 in respect of its application outside the United States.
The aim of this letter is two-fold. First, we urge on the Commission the course of action suggested below in relation to the adoption of proposed Part 205 in the foreign context. Secondly, we aim to provide information to the Commission, as requested in the proposing release, in relation to a limited number of European countries with respect to which aspects of proposed Part 205 would violate local legal and ethical requirements imposed on attorneys and which would not.
We do not intend to comment herein on more general definitional issues applicable to both U.S. and foreign attorneys, which are the subject of a multi-firm letter of which Shearman & Sterling is a signatory.
Given the length of the comment period, the survey presented in this letter is of necessity preliminary and incomplete. There may well be conflicts with the rules of the countries surveyed that are not covered by this letter. The key areas of the proposal we have attempted to cover are:
- noisy withdrawal and disaffirmation
- withdrawal forthwith from all representation
- definition of attorney in relation to any distinctions between in-house and outside attorneys
- Qualified Legal Compliance Committees
- up the ladder reporting
- permitted disclosures under Part 205.3(e)
The countries surveyed are: England and Wales, France, Germany, Italy, Spain and Sweden. The survey has been a cooperative effort of leading practitioners in each country; the names and affiliations of the contributors are set forth at the end of this letter. Each is prepared to offer the Commission further information with respect to his jurisdiction at the contact numbers and e-mail addresses that are set forth herein and each takes full responsibility for the content of this letter relating to his jurisdiction.
In most of the jurisdictions surveyed, there were particular problems with local laws or rules in following the proposed noisy withdrawal and disaffirmation procedures. In addition, there are issues under local law in most jurisdictions with a requirement for lawyers to withdraw forthwith from all representation.
In certain jurisdictions the QLCC procedure is a permissible alternative. In others, the required report to the Commission of the QLCC members, the CLO or CEO is not viable if the assumption is made that the full board is not authorizing the report to the Commission; if this were the case, the issuer would likely have taken corrective action, in which event the QLCC members' report, or the report of the CLO or CEO, would not be required in the first place.
The least problematic aspect of proposed Part 205 is the concept set forth in Part 205.3(a) that the issuer as an organization is the client. This is consistent with the law and practice in all jurisdictions surveyed, although the precise procedural steps proposed for up the ladder reporting would pose practical problems of implementation for attorneys in Germany given the different corporate governance structures in Germany as compared with the United States. Nonetheless, the concept of reporting up the ladder is recognised in all the jurisdictions surveyed. We would support rules that required up the ladder reporting, but that were not overly prescriptive so as to create issues with differing corporate governance regimes.
We do not believe simply exempting foreign attorneys from Part 205 would solve the conflicts noted. In many jurisdictions, it is not uncommon for attorneys to be qualified in the United States and such jurisdictions. This practice arises both because U.S. attorneys who are overseas sometimes become qualified in the local jurisdiction, either voluntarily or pursuant to local requirements, and also because many foreign attorneys receive LLM degrees in the United States and qualify with a state bar association before returning home. Hence, these lawyers are all both foreign attorneys and U.S. attorneys. Thus, if the rules applied only to U.S. attorneys, those U.S. attorneys who are also qualified under local law would have to confront the conflicting mandates of the proposed rules and local rules.
Moreover, law firms in France, including the French offices of U.S. or other international law firms, are required to register as institutions with local bar associations and are subject to professional discipline, as are attorneys not admitted to practice in France, such as U.S. lawyers, who are employed by such law firms or offices. Any violation of the French rules by an attorney in such a firm or office, whether French or foreign, would subject the firm employing such attorney and the partner admitted to practice in France supervising such attorney to disciplinary sanctions.
Additionally, many law firms have partners and employ associates resident and admitted in a number of different national jurisdictions. To the extent compliance with Part 205 by an attorney in a particular country violated local rules, we understand there could be a violation no matter which attorney (locally qualified or U.S. qualified) within the firm took the action required by Part 205, such as disaffirmation or withdrawal, because the action could be construed as an action on behalf of the local firm or attorney. In other words, a local attorney could not do indirectly through someone else at his or her firm, e.g., a U.S. attorney, what the local attorney would be forbidden from doing by local law or rules.
For these reasons, it would appear that a simple exemption for foreign attorneys would not be workable and would not solve the areas of conflict identified in this letter.
It is worth again reiterating that the survey here is of a limited number of European countries. It does not cover any country in Latin America or Asia. To generalize from this survey to detailed solutions to the conflicts posed by Part 205 with foreign laws and regulations would be premature.
Nonetheless, it is clear that of the countries surveyed, the conflicts with the noisy withdrawal aspects of proposed Part 205 are the most serious. The objections to noisy withdrawal detailed in this letter relate to the "noisy" aspect (notification to the Commission), which conflicts with rules of confidentiality and secrecy; the "forthwith" aspect because in some jurisdictions there is a requirement for a successor attorney to be in place; withdrawal from unrelated matters, which may pose particular problems if, for instance, court proceedings are involved; and withdrawal at all because in one of the countries surveyed (Sweden) withdrawal pursuant to Part 205 may not constitute sufficient justification under local rules (in Germany it may not be justified if at an inopportune time). Hence, a "quiet withdrawal" requirement without Commission notification on the part of the attorney would solve the problems with noisy withdrawal in some countries, but to meet objections in other countries would need to be combined with a limitation on the matter withdrawn from to that relating to the document filed with the Commission and flexibility in timing to permit compliance with local requirements. Even this more limited withdrawal requirement may conflict with requirements in some countries, such as Sweden.
Since the noisy withdrawal requirements pose the most difficult issues both for foreign lawyers and for U.S. lawyers who are also qualified under or subject to local laws or rules or who are in the same firm as foreign lawyers, any solution must deal with both groups of lawyers. Solutions will be complex and we have not had sufficient time to develop them. Thus, we would urge deferring for the present application of those provisions of the proposed rule which require noisy withdrawal. The statute does not demand action on this set of issues now. As the discussion at the Roundtable of December 17, 2002 indicated, time is needed to work with foreign attorneys in developing a solution which would not subject covered lawyers to conflicting responsibilities. The American Bar Association is also pursuing this issue as it applies to U.S. lawyers. The report of the American Bar Association task force on corporate responsibility is expected in 2003 and action on its recommendations expected at the August 2003 annual meeting of the American Bar Association.
This would leave as mandatory provisions of Part 205 up the ladder reporting, which might then require some further interpretative advice later with respect to some countries, such as Germany, where the practical implementation of the provisions may raise some issues. Nonetheless, based on this limited survey, up the ladder reporting by an attorney would generally be permitted.
To the extent the QLCC procedure is permissive, it does not conflict with foreign laws and rules. But to make the QLCC procedure one which could be more widely adopted, it should be modified so that report of a material violation to the Commission is not a necessary part of the procedures.
While the focus of Section 307 of the Sarbanes-Oxley Act is on the regulation of lawyers, the slight legislative history of Section 307 supports the view that the up the ladder reporting mandated by Section 307 was meant to reinforce internal compliance processes within issuers. We believe the purposes of Part 205 are further supported by the Commission's rule making on disclosure controls and procedures and related rules, which do encourage the involvement of both foreign and U.S. in-house and outside attorneys in assessing an issuer's disclosure to ensure that timely, accurate and reliable disclosure is made.
The proposal in Part 205 requiring attorneys to "noisily withdraw" from representations in certain situations raises many difficulties for foreign attorneys. While in some jurisdictions attorneys would be permitted to follow the proposal, in most jurisdictions surveyed the proposal would require attorneys to violate their professional obligations, which could lead to disciplinary action by foreign bar associations or even criminal prosecution.
In England and Wales, an attorney's duty of confidentiality to a client is governed by the common law duty of confidentiality, common law legal professional privilege and professional conduct rules. In England and Wales, protection of professional privilege is absolute except in limited circumstances, including when the client waives it, to the extent that a client and attorney have abused their confidential relationship to facilitate crime or fraud or cover up crime or fraud, or where disclosure is required by law in England and Wales. Under case law, legal professional privilege does not attach to communications between a client and an attorney, or to legal documents drafted, as a step in a criminal or fraudulent enterprise, or for the purpose of covering up a crime or fraud, whether the attorney is a party to the plot or not.1 The Law Society, the professional body that regulates solicitors practicing in England and Wales, addresses this exception in Rule 16.02 of the Solicitors Practice Rules, which provides that the duty of confidentiality may be overridden "in certain exceptional circumstances." The Law Society amplified Rule 16.02 through note 1 to the rule, which states that the duty of confidentiality does not apply to information acquired by a solicitor where he or she is being used by the client to facilitate the commission of a crime or fraud because that is not within the scope of a professional retainer.
In England and Wales, unless a disclosure of client confidences can be justified as fitting within one of the exceptions provided above, the attorney's duty of confidentiality would prevail. However, to the extent that an attorney "noisily withdraws" from the representation of an issuer and disaffirms prior filings with the Commission in the manner prescribed by Part 205, without revealing the underlying violation, this alone should not constitute a disclosure of a client confidence. Therefore, complying with the "noisy withdrawal" and disaffirmation provisions of Part 205 should not constitute a breach of an attorney's duty of confidentiality in England and Wales.
French law considers the principle of professional secrecy (secret professionnel) to be the foundation of both the practice and the rule of law. This principle is enshrined in article 66-5 of the Law of December 31, 1971 and article 2 of the Unified Rules,2 each of which provides that all information shared between a client and his or her attorney is confidential. Under article 66-5 of the Law of December 31, 1971 all consultations, correspondence, meeting notes and, generally, all documents in a file relating to a matter, are covered by professional secrecy. Breach of article 66-5 is a criminal violation under article 226-13 of the French Criminal Code (Code Pénal), which provides that disclosure of confidential information covered by professional secrecy is punishable by imprisonment of up to one year and by a fine of up to €15,000.
In addition to the statutory basis of professional secrecy, the internal regulations of each local bar establish professional secrecy as one of the "essential principles" of the profession. As set forth in article 2.1 of the Unified Rules, "the principle of professional secrecy is a matter of public policy (d'ordre public).3 It is general, absolute and unlimited in time ... this principle is established in the interest of the public. An attorney may not be relieved [from the obligation to maintain such confidentiality] by his client, by any public authority whatsoever or, more generally, by anyone." In addition, article 1.3 of the Unified Rules sets forth values underlying the essential principles of the profession, including notably a duty of loyalty. Violation of the internal regulations of the bar subjects an attorney to disciplinary sanctions from the bar, including possible suspension or disbarment.
In connection with corporate representation, revelation by a French attorney of client confidences outside the corporation would clearly violate article 66-5 of the Law of December 31, 1971 and articles 1.3 and 2.1 of the Unified Rules, and would thus expose the attorney to criminal and professional disciplinary sanctions.
The disclosure of confidential information is not only punishable when the facts covered by professional secrecy are revealed but also when the existence of such facts may be inferred from such disclosure.4 Disaffirmance of a filing would therefore clearly constitute a violation of the foregoing provisions of French law and the Unified Rules. Providing written notice of withdrawal to the Commission would likely result in a similar violation. Application of the "noisy withdrawal" provisions of Part 205 to attorneys admitted to practice in France could therefore force such attorneys to choose between violating the Commission's rules of professional conduct and violating applicable criminal law and professional rules in their home jurisdiction. Furthermore, as noted above, confidential secrecy may not be waived by the client.
In addition, although the proposing release states, in relation to the United States, that "a Commission rule permitting disclosure would appear to preempt a state's rule forbidding disclosure," it is clear that under French law a rule promulgated by an administrative agency cannot preempt a law. This is also true of a rule promulgated by a foreign agency.
According to section 203 subsection 1 Nr. 3 of the German Penal Code (Strafgesetzbuch), an attorney who discloses a business secret that has become known to him or her without the consent of the client, or otherwise as required by German law, is punished by imprisonment of up to one year or by fine.
According to section 43a subsection 2 of the Federal Code of Ethics for Attorneys (Bundesrechtsanwaltsordnung), an attorney is obligated to maintain silence with regard to everything that has become known to him or her in his or her practice of law except facts that are obvious or are immaterial. An attorney who violates the duty of confidentiality faces sanctions by the Attorney Court (Anwaltsgericht). Possible sanctions according to section 114 of the Federal Code of Ethics for Attorneys range from a warning, to a fine of up to €25,000, to a limited ban on practicing as an attorney in certain fields of law, to disbarment.
Under the German Penal Code and the Federal Code of Ethics for Attorneys an attorney's obligation to maintain a client's confidences only relates to facts learned in the course of a representation, rather than opinions formed from such facts. We believe that the Part 205 notification and disaffirmation only reveals, implicitly, the attorney's own opinion that a material violation is ongoing or about to occur rather than any facts actually learned by the attorney in the representation of the issuer. The "noisy withdrawal" requirement of Part 205 does not appear to conflict with an attorney's obligations under German law because the withdrawing attorney is only required to disclose that "the withdrawal was based on professional considerations" without disclosing the particular facts underlying the withdrawal. Similarly, disaffirmation of a prior filing would also be permitted as long as the facts underlying the disaffirmation were not revealed.
In Italy, the duty of confidentiality imposed on attorneys is governed by statute and ethical rules governing attorney conduct. Section 622 of the Italian Penal Code, which is entitled "Disclosure of Professional Secrets," provides that if a person reveals confidential information received in connection with his or her profession without authorization, he or she may be punished by imprisonment of up to one year or by fine. To constitute a violation of section 622 the disclosure need not actually harm the client. A violation occurs if it is possible that the disclosure would harm the client. Notwithstanding the foregoing, an attorney may disclose confidential information if necessary to protect a legitimate interest of the attorney or others, or to the extent that maintaining the confidence would cover the existence of a crime recognized under Italian law (Italian Supreme Court December 15, 1961).
Section 13 of the Italian Code of Ethics for Attorneys provides that attorneys cannot be called to testify in trials about information received in their professional capacity. The Italian professional rules of conduct also impose a duty of confidentiality on an attorney, which covers all information regarding his or her current and former clients. The only exception to this duty is when the disclosure can prevent the client from committing a serious criminal offense.
The duty of confidentiality is a cornerstone of the attorney-client relationship, and in Italy the rules that govern this relationship are a matter of public policy (ordine pubblico), whose rationale is not only to protect the client, but also the public trust in the relationship between a client and his or her attorney. In Italy, unless a breach of confidential information can be justified as fitting within the limited exceptions provided above, the attorney's duty of confidentiality would prevail.
In Italy, the duty of confidentiality is very broad and covers not only disclosure of information learned by the client, but also covers disclosure of the existence of the representation. Therefore, we believe that under Italian law the mere act of notifying the Commission that the attorney is withdrawing from the representation because of "professional considerations" and disaffirming prior submissions to the Commission would constitute a breach of client confidences, which would violate both section 622 and the professional rules of conduct.
In Spain, the duty of confidentiality imposed on attorneys derives from the Spanish Constitution and from legal and ethical rules governing attorney conduct. Section 24 of the Spanish Constitution guarantees individuals the right of defence.5 Article 437.2 of the Act 6/1985, of July 1 of the Judicial Authority6 and article 32 of the Royal Decree 658/2001 of June 22, 2001 on the General Statute of the Spanish Legal Profession (Estatuto General de la Abogacía Española) (the "Decree of June 22, 2001") state that an attorney may not disclose any facts or information learned by the attorney during the representation of the client.
Article 5 of the Ethical Code of the Spanish Legal Profession (Código Deontológico de la Abogacía Española) also imposes a duty of confidentiality on an attorney, which remains in force even after the attorney has ceased to render his or her services to the client. Article 5.8 of the Ethical Code of the Spanish Legal Profession provides for a very limited exception to the duty of confidentiality. In exceptional cases, where the failure to disclose confidential information could lead to irreparable harm or clear injustice, an attorney may petition the Dean of his or her bar association solely for the purpose of determining whether or not to withdraw from the representation.
Under Spanish law, the mere act of notifying the Commission that the attorney is withdrawing from the representation because of "professional considerations" and disaffirming prior submissions to the Commission would constitute a breach of attorney-client privilege.
The duty of a Swedish attorney is to pursue his or her client's interests to the best of his or her abilities. A Swedish attorney is required to be faithful and loyal to his or her client and shall observe confidentiality with respect to his or her client's affairs. A Swedish attorney may not, without the permission of his or her client, reveal anything that has been confided to him or her as legal adviser or that he or she has learned in connection with such confidence, except to the extent required to do so by Swedish law.8 To the extent that a Swedish attorney learns that his or her client is acting in violation of law in connection with a representation the attorney may be required to withdraw from the representation, unless the breach is remedied. However, the general obligation of professional secrecy and confidentiality is not limited in time and would extend beyond the termination of the representation. This obligation is imposed by law and its breach may not only violate ethical standards, but also involve criminal penalties.
Disclosure by a Swedish attorney of any information that such attorney has learned in connection with his or her representation of the client would constitute a breach of attorney-client privilege. Under Swedish law, notification that an attorney is withdrawing from the representation because of "professional considerations" and disaffirming prior submissions to the Commission would constitute a breach of attorney-client privilege.
In principle, the consent of the client would relieve a Swedish attorney of his or her duty of confidentiality. However, under Swedish law, each member of the board of a limited liability company owes a duty of loyalty and confidentiality to the company. Disclosure of sensitive information by a member of the board, whether directly or by way of authorising a third party (e.g. a lawyer) to do the same, may, under certain circumstances, lead to criminal liability on the part of the board member. Therefore, it is possible that if a member of the board or the full board consents to an attorney's disclosure of confidential information, the member of the board or the full board may be deemed to have consented to a disclosure of confidential information without authorisation and to have violated Swedish law.
We understand that the proposed requirement that attorneys (and, as a result, law firms) withdraw forthwith from representing the issuer would compel law firms to withdraw from all representations of that issuer, even those unrelated to the material violations. For foreign lawyers, this requirement may conflict with local laws, regulations or rules limiting or prohibiting attorneys from withdrawing from representations.
In England and Wales, an attorney's ability to withdraw is limited by contractual obligations of the attorney to the client, ethical rules, and in the case of withdrawing from a litigation, rules of the court in which the litigation is pending. These rules may preclude attorneys from withdrawing from representations in the manner prescribed by Part 205.
In France, while an attorney may freely withdraw from representing a client, he or she is obligated to provide the client with sufficient notice to find another attorney.9 Withdrawing from a representation forthwith, as required by Part 205, may conflict with this obligation, particularly in the context of a litigation or negotiation, and expose the attorney to potential liability.
Under German law, attorneys may freely withdraw from a representation. However, if an attorney withdraws from a representation at an improper time without an important reason, such as during or immediately before a court hearing or immediately before a deadline, the attorney is liable for damages.10 To the extent that an attorney in Germany would be required to withdraw from the representation of the client pursuant to Part 205 he or she would not be able to do so forthwith if the withdrawal took place at an improper time because it is doubtful that a withdrawal requirement stemming from rules promulgated by the Commission would constitute an important reason for purposes of German law.
In Italy, an attorney may withdraw from a representation to the extent the withdrawal does not injure the interests of the client. For instance, in connection with a representation in a litigation context, court rules in Italy provide that an attorney cannot withdraw immediately. Rather, the attorney must continue with the representation until the client retains a new attorney. In non-litigation representations, an attorney can withdraw to the extent that his or her withdrawal does not prejudice the interests of the client. For example, an attorney cannot withdraw the day before an important meeting or deadline, or without instructing the new attorney of the pending matter. For the foregoing reasons an Italian attorney may not be able to comply with the requirement to withdraw forthwith.
Pursuant to article 26 of the Decree of June 22, 2001, a Spanish attorney may accept or reject the defence of any matter, as well as withdraw from a representation in any phase of the proceeding or negotiation. Pursuant to article 13.3 of the Ethical Code of the Spanish Legal Profession, as enacted on June 30, 2000, a Spanish attorney may withdraw from a representation where there is any disagreement with the client. The timing of a withdrawal is of the essence under Spanish law. Article 13 of the Ethical Code of the Spanish Legal Profession states that an attorney that withdraws from the defence of his or her client must perform any actions necessary to avoid leaving his or her client without representation. Under this principle a client could be left without representation if the attorney withdraws forthwith from a representation. Therefore, the requirement of Part 205 that an attorney withdraw forthwith could conflict with a Spanish attorney's professional obligations.
The duty of loyalty imposed on Swedish attorneys is understood to require a Swedish attorney to continue representing a client absent extraordinary circumstances or the consent of the client authorising withdrawal. As noted previously, a Swedish attorney may withdraw from a representation when the attorney knows that the client has acted in violation of law and the client refuses to remedy the violation. It is not clear that a material violation under Part 205 would rise to this standard. To the extent that a material violation of the issuer of the sort described in Part 205 does not rise to this standard, a Swedish attorney would not be able to withdraw from the representation of an issuer.
Attorney is defined broadly in Part 205 as "any person who is admitted, licensed, or otherwise qualified to practice law in any jurisdiction domestic or foreign, or who holds himself or herself out as admitted, licensed, or otherwise qualified to practice law." In the proposing release, the Commission noted the definition is broad enough to apply to lawyers employed in-house by an issuer, as well as attorneys retained to perform legal work on behalf of an issuer. This is consistent with U.S. practice, where in-house attorneys are licensed by, and subject to the professional obligations of, state bar associations to the same extent as attorneys working for law firms. However, this U.S. practice is inconsistent with the practice in certain other jurisdictions.
In England and Wales, as in the United States, in-house attorneys are licensed by, and subject to the same professional obligations of, the Law Society (in the case of solicitors) or the Bar Council (in the case of barristers) to the same extent as solicitors or barristers in private practice.
A cornerstone of the legal profession in France is its independence. Accordingly, pursuant to the Decree of November 27, 1991, article 115, a French attorney is prohibited from the practice of any other profession. Furthermore, the employee-employer relationship is viewed as incompatible with the principle of independence, with certain limited exceptions, since as a matter of law an in-house lawyer must comply with the instructions issued by his superiors. An attorney admitted to a French bar must therefore resign from the bar prior to accepting any such employment. In-house lawyers are therefore not members of any French bar, and in fact the majority have never been admitted to any bar. Although they provide legal advice to their employers, these lawyers are not "admitted, licensed or otherwise qualified to practice law." Likewise, while in-house lawyers are authorized to practice law, the scope of their practice is limited to providing advice to their employer.11 Therefore, in-house lawyers cannot as a practical matter hold themselves out generally as being qualified to practice law. Accordingly, in-house lawyers are not subject to most provisions of the Law of December 31, 1971, which governs attorneys, in particular article 66-5 of such law, or the Unified Rules, but are rather only subject to the same laws applicable to employees generally.12 There is therefore no legal basis under French law or French rules of professional conduct to hold in-house lawyers to a different standard than any other employee participating in the preparation of documents filed with the Commission or otherwise "appearing before the Commission."
In Germany, in-house attorneys do not need to be admitted to the bar and therefore, presumably, not all in-house attorneys are licensed to practice in Germany. To the extent that an in-house attorney is admitted to the bar, such attorney is subject to the same duties and obligations as an attorney in private practice only to the extent that the in-house attorney is as independent as a typical attorney, which is not the case because such attorney is subject to instructions from his or her employer.
All in-house attorneys in Italy are subject to the requirements of section 622 of the criminal code. However an attorney is subject to the Code of Ethics for Attorneys only if he or she is registered with the Italian Bar Association. In addition, pursuant to article 2105 of the Italian civil code, an in-house attorney in Italy owes a duty of confidence to the company for whom he or she works, which may be violated to the extent such attorney discloses confidential information of the company outside the company.
In Spain, as in the United States, in-house attorneys are regulated in the same manner as attorneys in private practice.
In Sweden, in-house lawyers cannot be members of the SBA and, therefore, are not covered by the ethical standards set by the SBA or any other regulation or statute governing attorneys. Unlike other jurisdictions, Sweden places no restriction on the practice of law and no restriction on the ability of persons in Sweden from holding themselves out as being qualified to practice law.
The Qualified Legal Compliance Committee (the "QLCC") is intended to provide an alternative procedure for reporting evidence of a material violation. However, in certain foreign jurisdictions where corporate governance and business practices differ from those in the United States, this alternative may be unavailable.
In England and Wales, the QLCC is likely a viable alternative to the "noisy withdrawal" requirement of Part 205. An attorney would be permitted to report violations to the QLCC since the QLCC would be a committee of the board of directors. In addition, we believe there are no restrictions on the ability of board members, acting in their capacity as members of the QLCC, to report material violations as required by Part 205.
In principle, the establishment of a QLCC is permissible under French law. Pursuant to article 225-37 of the French Commercial Code (Code de commerce), however, directors are bound by a duty of confidentiality with respect to information of a confidential nature presented as such by the chairman of the board. Since the QLCC would consist exclusively of directors, its members would be bound by this duty of confidentiality. Accordingly, the QLCC could investigate reports of material violations, notify the board of the results of the inquiry, and notify the Commission of a material violation or disaffirm a filing. Members of the QLCC would be prohibited, however, from disclosing evidence relating to the material violation if such evidence were provided by the chairman of the board at a board meeting with instructions to keep such evidence confidential.
A QLCC must consist of at least one member of the issuer's audit committee and two or more members of the issuer's board of directors who are not employed, directly or indirectly, by the issuer. Due to the German system of co-determination, practically every committee of the supervisory board must comprise at least one member of the supervisory board who is an employee representative. Under the German Co-Determination Act (Mitbestimmungsgesetz), at least two of the employee representatives must be representatives of trade unions. If at least one of these trade union representatives is not employed, directly or indirectly, by the issuer, as in general is the case, a QLCC can be installed in accordance with both the requirements of Part 205 and the Co-Determination Act.
Pursuant to Part 205, the QLCC would be responsible for initiating investigations, for directing the issuer to adopt appropriate remedial measures and/or for imposing appropriate sanctions. Such a rule would not be enforceable under German Stock Corporation Law if the remedial action was to be taken by the management board, since the QLCC cannot give instructions to the management board.13
If the issuer were to fail to act as directed by the QLCC, each QLCC-member, as well as the issuer's CLO and CEO, would be required to notify the Commission and disaffirm prior submissions. Depending on the required contents of the notification, such a requirement may collide with section 404 subsection 1 Nr. 1 Stock Corporation Act (Aktiengesetz), according to which a member of the management board or supervisory board may be punished by imprisonment of up to one year or by fine if, without authorisation, he or she discloses a secret of the company, in particular a trade or business secret, if such secret became known to him or her in his or her capacity as a member of the management board or supervisory board.14 Moreover, a member of the management board or the supervisory board may not, without authorisation, disclose an insider fact to another person.15 An "insider fact" is every fact concerning an issuer that, if disclosed to the public, would have a significant impact on the market price of the issuer's securities. A disclosure required by German capital markets law constitutes an authorisation under the German Securities Trading Act (Wertpapierhandelsgesetz). However, it is highly doubtful that a disclosure permitted under Part 205 would constitute an authorized disclosure for purposes of German law.
Therefore, the QLCC concept established by Part 205 may, at least in part, be incompatible with German stock corporation law. As a result, the availability of an alternative reporting procedures relieving an attorney from the "noisy withdrawal" requirement might not be available for German attorneys.
In Italy, an attorney would be permitted to report violations to the QLCC because the QLCC would be a committee of the board of directors. However, each member of the board of directors in an Italian company owes a duty of confidentiality to the company, which may not be breached without the consent of the company or as otherwise required by Italian law. We believe that under Italian law a board member would be prohibited from disclosing a material violation or disaffirming prior submissions unless the full board has authorized such actions, in which case the board would have likely caused the company to take remedial action and the QLCC would not be in the position of having to notify the Commission.
Under Spanish law, an attorney would be permitted to report evidence of a material violation to the QLCC because the QLCC would be a committee of the board of directors. However, a member of the board, acting in his or her capacity as a member of the QLCC, would be unable to make the disclosures required by Part 205 without violating Spanish law, on the assumption that the full board has not authorized disclosure (in which case the QLCC would likely not need to report to the Commission). Under the Spanish Corporations Act, each member of the board of a Spanish company has a duty of loyalty and confidentiality toward the company. Disclosure of information discussed at any board meeting by a current or former member of the board would violate these duties.
Under Swedish law, each member of the board of a limited liability company has a duty of loyalty and confidentiality towards the company. Disclosure of sensitive information by the board, or by individual members may, under certain circumstances, lead to criminal liability on the part of the board members. It is possible that a member of the board, acting in his or her capacity as a member of the QLCC, would be unable to make the disclosures required by Part 205 without violating Swedish law.
Part 205 provides that an attorney appearing and practising before the Commission in the representation of an issuer represents the issuer as an organisation and not any of the directors, officers or employees of the issuer. Under Part 205, an attorney is required to report certain material violations to the issuer's CLO or to both the CLO and CEO. Furthermore, Part 205 obligates an attorney who has made a report to the CLO and/or the CEO, but has not (in a reasonable time) received an appropriate response, to report the material violation "up the ladder" either to the audit committee of the issuer's board of directors, to another committee of the issuer's board of directors consisting solely of directors who are not employed, directly or indirectly, by the issuer, or to the issuer's board of directors if the issuer's board of directors has no committee consisting solely of directors who are not employed, directly or indirectly, by the issuer.
As a general rule, the concept set forth in section 205.3(a) of Part 205 is consistent with law and practice in England and Wales, France, Germany, Italy, Spain and Sweden, and attorneys in these jurisdictions would be able to comply with the substantive requirements of the "up the ladder" reporting requirement set forth in section 205.3(b) of Part 205.
However, the procedural steps prescribed by section 205.3 (b) would pose practical problems for German attorneys employed or retained by an issuer because of differences between corporate governance rules in Germany and the United States. German corporations are not required to have audit committees, although the German Corporate Governance Code, which is a code of "best practices," recommends that listed companies have an audit committee. To the extent a German corporation has an audit committee, the audit committee, like almost all committees of the supervisory committee, must contain at least one supervisory board member who is an employee representative. As noted above, under the German Co-Determination Act, at least two of the employee representatives must be representatives of trade unions. If at least one of these trade union representatives is not employed, directly or indirectly, by the issuer, such member may be placed on the issuer's audit committee or a committee of independent members of the supervisory board and such committee would meet the requirements of section 205.3(b)(4). However, if none of the trade union representatives is independent, the only alternative for a reporting attorney would be to notify the supervisory board.
In addition, "up the ladder" reporting requirements would pose specific problems for German attorneys employed by an issuer because they would interfere with reporting lines within German companies. The management board of a German corporation represents the corporation as the employer of in-house attorneys, and in-house attorneys report to the management board or to executive levels below the management board rather than the supervisory board. Requiring in-house attorneys to report to the supervisory board, or to a committee of the supervisory board, without the consent of the management board would interfere with the contractual duties of in-house attorneys.
Section 205.3(e) of Part 205 sets forth certain situations under which an attorney would be permitted to reveal confidential information to the Commission without the client's consent. Revelation would be permitted in connection with an investigation in which the attorney's compliance with section 205.3(e) is in issue or where the attorney reasonably believes it is necessary to prevent certain illegal acts or to rectify prior illegal acts in which the services of the attorney may have been used. In most jurisdictions surveyed, attorneys would be prohibited from making such disclosures.
In England and Wales, the rules regarding the duty of confidentiality, which are described in more detail above, permit an attorney to disclose client confidence only in limited circumstances, such as where the client consents to the disclosure, to prevent the solicitor from taking a step in what would be recognised in England and Wales as a crime or fraud, or in stifling or covering up such a crime or fraud, or otherwise where required by law in England and Wales. In addition, an attorney in England and Wales may also disclose client confidences if required in the interests of the attorney, such as where an attorney is defending himself from subsequent attack by the client in a professional liability claim.16 This "self-defence" exception is limited to protecting the attorney from actions brought by the client and would not apply to disclosure of confidential information in connection with an investigation, proceeding or litigation in which the attorney's compliance with section 205.3(e) is an issue. Therefore, in connection with the disclosures permitted by section 205.3(e), an attorney in England and Wales may only make such disclosures to the extent permitted by one of the foregoing limited exceptions.
To the extent section 205.3(e) permits, but does not mandate, disclosure of client confidences, a French attorney may comply with article 66-5 of the Law of December 31, 1971 and article 2.1 of the Unified Rules by simply refraining from disclosing confidential information.
Neither French law nor the Unified Rules contain a general "self-defense" exception to the principle of professional secrecy. Nevertheless, French criminal courts have in a limited number of instances authorized the disclosure of confidential information by a professional when necessary as part of a defense in a criminal proceeding.17 Administrative agencies do not have the power to order a professional to disclose information covered by professional secrecy.18 Therefore, it is unlikely that an attorney in France would be permitted to use reports prepared pursuant to section 205.3(e) to defend against charges of attorney misconduct.
Section 205.3(e) would permit an attorney to reveal information to the extent necessary to prevent commission of an illegal act which the attorney believes will result in either substantial injury to the financial or property interests of the issuer or investors or perpetration of a fraud upon the Commission. The French Criminal Code obliges any person "having knowledge of a felony the consequences of which it is still possible to prevent or limit, or the perpetrators of which are likely to commit new felonies that could be prevented" to inform the appropriate administrative or judicial authorities.19 Persons bound by professional secrecy are exempt from this requirement. In addition, the Criminal Code obliges anyone who is able to prevent a felony or misdemeanor against the bodily integrity of a person without risk to himself or to third parties to do so.20 It is unclear whether persons bound by professional secrecy are required to reveal confidential information in this latter case.
In addition to the foregoing, as noted above, an issuer cannot consent to disclosure of client confidences. Therefore, even if an issuer consented to the disclosures permitted by section 205.3(e), an attorney admitted to practice in France would still violate French law and the Unified Rules if he or she provided such information.
Under German penal law and ethical standards for attorneys, a German attorney could not disclose the confidential information permitted to be disclosed under section 205.3(e).
As stated above, a German attorney may not disclose a business secret that has become known to him or her without the consent of the client, or otherwise as required by German law. In addition, a German attorney is obligated to maintain silence with regard to everything that has become known to him in his practice of law except facts that are obvious or immaterial. Under German law, the authorisation granted in section 205.3(e) would likely not be sufficient to authorize the disclosure of confidential information.
The conflict between prohibitions against disclosure of client confidences set forth in German penal and ethical laws and the authorisation set forth in Part 205 could, in principle, be resolved if the client gave permission to the attorney to disclose such confidences. However, even if a client waived the attorney's duty to maintain silence, an attorney disclosing confidential information to the Commission might still commit a criminal offence under the German Securities Trading Act. An attorney advising an issuer is an insider with regard to all the facts concerning the issuer that become known to him in his practice unless disclosure is required by German law. An "insider fact" is every fact concerning an issuer that, if disclosed to the public, would have a significant impact on the market price of the issuer's securities. Disclosure of the substantive facts underlying material violations by the issuer would likely constitute disclosure of an insider fact to another person. It is highly doubtful that a permitted disclosure under section 205.3(e) would constitute an authorized disclosure for purposes of German law, even though disclosure is to a regulatory agency.
As noted previously, an Italian attorney's duty of confidence is very broad, and may be breached only in very limited circumstances. We do not believe that the situations described in section 205.3(e) fall within the limited expectations. Therefore, we believe that an Italian attorney would not be permitted to make any disclosure of confidential information to the Commission under section 205.3(e).
In Spain, articles 259-269 of the Criminal Judgment Act,21 which regulate the obligation of the general public to notify the relevant authorities of any crime perpetrated before it, provides that those who by reason of their position or profession have knowledge of any crime are obligated to promptly notify the relevant authorities of such crime. However, article 263 of the Act specifically states that attorneys are not obligated to do so with respect to any information, instructions or clarifications provided by their clients. As noted previously, a Spanish attorney's duty of confidentiality may only be breached with the consent of the client. Therefore, a Spanish attorney would not be permitted to make the disclosure called for in section 205.3(e) without the consent of his or her client.
As noted above, disclosure of any information that a Swedish attorney has learned in connection with the representation of a client, except to the extent required by Swedish law or pursuant to the consent of the client, would constitute a breach of attorney-client privilege. Therefore, a Swedish attorney would not be permitted to make any disclosures of confidential information to the Commission under section 205.3(e) unless required to do so by Swedish law or permitted to do so by his or her client.
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We hope that the Commission will find the information presented above useful in its deliberations on Part 205. As mentioned above, the lawyers listed below would be pleased to provide any further information that the Commission may require with respect to his jurisdiction, and each takes responsibility for the information provided herein with respect to his jurisdiction.
England and Wales
John L. Powell Q.C.
E-mail: j.powell@4newsquare.com
Telephone: +44 207 822 2000
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Italy
Marco Consonni
E-mail: mconsonni@galgano.it
Telephone: +39 02 7772141
Galgano
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France
Jacques Epstein
E-mail: jacquesepstein@shearman.com
Manuel A. Orillac
E-mail: morillac@shearman.com
Robert Flanigan
E-mail: rflanigan@shearman.com
Telephone: +33 1 53 89 7000
Shearman & Sterling
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Spain
Jose Blanco
E-mail: jblanco@ramoncajal.com
Telephone: +34 91 576 19 00
Ramon & Cajal
Albella, Pala, Ramon y Cajal
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Germany
Hans Diekmann
E-mail: hdiekmann@shearman.com
Telephone: +49-211 17888 0
Shearman & Sterling
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Sweden
Axel Calissendorff
E-mail: aca@msa.se
Göran Nyström
E-mail: gn@msa.se
Telephone: +46 8 505 765 00
Mannheimer Swartling Advokatbyrå
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Questions with regard to the comments herein on proposed Part 205, or with regard to any further assistance we may provide in crafting solutions with respect to its application in the foreign context, may be addressed to the undersigned at +44 207 655 5019 or to Daniel Kiely of this office at +44 207 655 5118.
Very truly yours,
James M. Bartos
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| 1 | See R. v. Cox and Railton (1884) 14 Q.B.D. 153; Bullivant v. Attorney-General for Victoria [1901] A.C. 196 at 201, 206; O'Rourke v. Darbishire [1902] A.C. 581; Finers v. Miro [1991] 1 W.L.R. 35 (C.A.)
| | 2 | The principal rules governing the legal profession in France are Law N°71-1130 of December 31, 1971, J.O., January 5, 1972, as amended (the "Law of December 31, 1971") and Decree N°91-1197 of November 27, 1991, J.O. November 28, 1991, as amended (the "Decree of November 27, 1991"). Both the Law of December 31, 1971 and the Decree of November 27, 1991 apply to all attorneys admitted to practice in France. In addition, French attorneys are subject to the internal regulations adopted by their local bar associations. The French legal profession is organized under 181 local, autonomous bar associations. In addition, a national organization, the National Bar Council (Conseil National des Barreaux), represents the various local bars before the government and has a role in harmonizing the internal regulations of the local bars. In 1999, the Conseil National des Barreaux promulgated unified internal bar regulations, known as the Règlement Intérieur Harmonisé (the "Unified Rules"). The Unified Rules have been adopted by 92 local bars, representing approximately 80% of attorneys admitted to practice in France. The Unified Rules are also applicable to law firms registered with those local bars and lawyers not admitted to practice in France who are employed by such law firms.
| | 3 | A rule is considered "d'ordre public" when it involves matters of public policy. It cannot be derogated from by private agreement. Code Civil [C. CIV.] art. 6 (Fr.).
| | 4 | For example, in an analogous situation a physician was found guilty of violating the professional secrecy rules by delivering a medical certificate to the wife of his patient. The patient and his wife were in divorce proceedings and the certificate stated that the patient would be admitted to the hospital for treatment but did not indicate the nature of his illness (Cass. crim., June 27, 1967, Gaz. Pal, 1967, 2, 178).
| | 5 | A judgment of the Provincial Audience of Las Palmas dated November 11, 2001 stated that if the client could not provide his of her attorney with any information or inform him or her of any facts because the client feared it might harm his or her interests, the right of defence would not be exercised in conformity with the requirement of section 24 of the Spanish Constitution, which states that everyone has the right of defence.
| | 6 | Ley Orgánica 6/1985, de 1 de Julio, del Poder Judicial.
| | 7 | The professional obligations of Swedish advocates are regulated under law and in the ethical rules adopted by the Swedish Bar Association (the "SBA"). Although the SBA is a private association, and members of the SBA do not have a monopoly on the practice of law, members of the SBA have the exclusive privilege of the title "Advocate." All references to "Swedish attorneys" in this letter are to "Advocates."
| | 8 | Section 19 of the Code of Conduct for Members of the Swedish Bar Association provides that a lawyer shall observe confidentiality with respect to his or her client's affairs and may not without permission, unless there is a statutory duty (which refers to Swedish statutes) to give information or reveal anything that has been confided to him or her as legal adviser or that he or she has learned in connection with such confidence. A lawyer shall impose the same confidentiality obligation on his or her staff.
| | 9 | NOUVEAU CODE DE PROCÉDURE CIVILE [N.C.P.C.], art. 419 (Fr).
| | 10 | §627 Subsection 2 German Civil Act (Bürgerliches Gesetzbuch).
| | 11 | Law of December 31, 1971, art. 58.
| | 12 | The Cercle Montesquieu, an association of the general counsels of some of the largest French companies, has adopted a code of ethics for in-house lawyers. Adoption of this code of ethics is optional. Principle 5 of the code provides that an in-house lawyer must defend the interests of the corporation and make those interests prevail over those of its shareholders and directors.
| | 13 | § 76 German Stock Corporation Act.
| | 14 | See §§ 93 Subsection 1 sentence 2 and 116 of the German Stock Corporation Act.
| | 15 | § 14 Abs. 1 Nr. 2 of the German Securities Trading Act.
| | 16 | Thus, a confider (e.g. the attorney's client) cannot rely on a duty of confidentiality to prevent the confident (the solicitor) from defending himself against subsequent attack from the confider, as in a professional liability claim. See Lillicrap v. Nalder [1993] I W.L.R. 94 (C.A.)
| | 17 | For example, the Cour de cassation authorized two attorneys to disclose correspondence with their client where criminal charges against the attorneys were based on other correspondence from the same matter. See Cass. crim., May 29, 1989, Bull. crim. 218. In an analogous situation, the Cour de cassation authorized a doctor accused of a crime by his patient to reveal professional secrets in his defense. See Cass. crim., December 20, 1967, D. 1969, 309, note Lepointe.
| | 18 | There is an ongoing controversial debate in France regarding the powers of the French tax authorities to access confidential information. In connection with this debate, France has adopted a law requiring professionals to include their clients' identities in their accounting records and provide such information to the tax authorities in the event of a tax audit. The professionals remain subject, however, to the prohibition against disclosing the nature of the work performed on behalf of the client or any documents relating thereto. See, e.g., JACQUES HAMELIN & ANDRÉ DAMIEN, LES RÈGLES DE LA PROFESSION D'AVOCAT, § 263 (9th ed. 2000).
| | 19 | CODE PÉNAL [C. PÉN.] art. 434-1 (Fr.)
| | 20 | C. PÉN. art. 223-6
| | 21 | Ley de Enjuiciamiento Criminal, promulgada por Real Decreto de 14 de septiembre de 1882.
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