Compass Bancshares, Inc.
VIA E-MAIL to firstname.lastname@example.org
December 12, 2002
Securities and Exchange Commission
Re: Proposed Rule to Implement Sarbanes-Oxley Act Section 307 Implementation of Standards of Professional Conduct for Attorneys
Dear Mr. Katz:
Compass Bancshares, Inc. ("Compass") appreciates the opportunity to comment on the Proposed Rule issued by the Securities and Exchange Commission under Section 307 of the Sarbanes-Oxley Act (the "Act").
Compass is a financial services company that was organized in 1970 and operates approximately 344 full-service banking offices in Alabama, Arizona, Colorado, Florida, Nebraska, New Mexico and Texas. Compass has $23.7 billion in assets and is among the top forty (40) bank holding companies in the United States in terms of assets.
Section 307 was primarily designed to require attorneys to report evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the company or any agent thereof to the chief legal counsel or the chief executive officer of the company; and, if they do not respond appropriately to the evidence, requiring the attorney to report the evidence to the audit committee, another committee of independent directors, or the full board of directors. Proposed Part 205 to the Code of Federal Regulations ("Part 205") is the Commission's attempt to respond to Congress' mandate for an effective "up the ladder" reporting system.
Compass strongly supports this "up the ladder" reporting requirement for attorneys. We view up the ladder reporting as formally stating an attorney's already existing duty to bring matters of concern to the attention of her superior. However, we can not support Part 205 as written. In our opinion, Part 205 goes beyond Congress' stated purpose in enacting Section 307. Specifically Part 205: (i) expands an attorney's responsibility beyond that of her client; (ii) unnecessarily requires notification to the Commission that an attorney has gone "up the ladder"; (iii) may result in disclosure of confidential information; (iv) erodes the attorney client privilege; (v) discourages a company's management from seeking legal advice; and (vi) will ultimately result in less disclosure by issuers.
I. Only the Issuer is the Attorney's Client
Part 205 includes repeated references to an attorney's duty to act in the best interests of "the issuer and its shareholders" and makes implied references to protecting the investing public as well. It should be clear to all attorneys that their client is the issuer and the attorney's duties are to the issuer only. While it is noble to think that an attorney acts for the issuer's shareholders or for the investing public as a whole, it is ludicrous to believe that an attorney can "represent" much less protect the interests of such a disparate group. The interests of shareholders are not always identical to that of the issuer and in some instances are adverse1. The Commission makes a point of stating the principle of corporate representation - that the attorney does not represent the issuer's management personally. It should also be understood that the attorney has not been engaged to represent the shareholders (either individually or collectively) or the investing public as a whole, who may not have any intention to purchase shares in the issuer. The Commission should not create or imply a duty for attorneys to anyone other than their client - not their client's managers, shareholders, individual directors and certainly not the investing public as a whole.
II. "Up the Ladder" should not include the Commission
Congress' stated purpose of Section 307 was for a rule requiring an attorney to report evidence of a material violation of the securities laws to the issuer's chief legal officer ("CLO") and/or the chief executive officer. If the attorney did not receive a satisfactory response then the attorney was to have reported the evidence to the audit committee, another board committee or the full board of directors. Part 205 would expand the up the ladder concept to require an attorney to give notice in writing to the CLO and for CLO to respond in writing to the attorney's satisfaction. Nowhere in Section 307 or the comments of the legislators who enacted Section 307 does it appear that attorneys would be required to raise issues only in writing or respond to issues only in writing. Nor does Section 307 contemplate that attorneys would be permitted to make, let alone be required under threat of sanction to make, disclosure to the Commission. A review of the comments of sponsors of Section 307 (Senators Edwards and Enzi) indicate they did not intend for attorneys to make disclosures to the Commission but rather to keep the attorney's duty to disclose potential material violations of the securities laws within the reporting structure of the issuer. The disclosure obligation was meant to be internal to the issuer (preserving the attorney-client privilege) to let those persons charged with compliance with the law (the issuer's directors) know that the issuer may be violating the law.
In our opinion, Section 307, as envisioned by the Congress, was correct in insisting that any counsel who believes there may be a material violation of the securities laws must discuss her concerns with the issuer's CLO. An attorney should be free to raise issues to the CLO in whatever form and setting she chooses and should not be required to begin building a file for future litigation simply to discuss a concern. The CLO should, through her own methods, determine the validity of the attorney's report and determine the appropriate response, if any, to be given to the attorney or whether the issue should be elevated "up the ladder" to the CEO or the board of directors. The Commission's insistence on the CLO having to issue a response in writing to the attorney creates an undue burden on the CLO to conform to an approach to responding to an issue which the CLO may not feel is warranted. Additionally, the resources of the issuer should not be tied up with unnecessary paperwork. Part 205 would potentially create additional expenses to issuers by requiring an issuer hire another counsel to prove that the attorney's report drew an incorrect conclusion. A CLO satisfying herself that the report is incorrect and need not be acted upon is a far cry from a requirement that the CLO prove, through a written analysis (and potentially with a legal opinion from another attorney), that the report is incorrect.
III. Part 205 Places too much Power at the Hands of Attorneys
Part 205 would create the potential for an outside counsel to bring an issuer to it's knees simply because of a disagreement with the conclusion reached on a securities law matter. Determinations of securities laws matter are subjective and depend upon specific facts and circumstances. The best of legal practitioner can have an honest disagreement of the meaning of securities laws or their application to a specific set of facts. That such a disagreement may lead to a "noisy withdrawal" is of particular concern.
For example, Part 205 would require an attorney at a lawfirm, engaged to work on a securities matter for an issuer, to raise in a written memo to her supervising attorney, evidence of a violation. Thus begins a monstrous cycle of paper that, if not checked, would engulf the time and expertise of many persons. If the supervising attorney didn't respond or, in the mind of the attorney, didn't respond appropriately the attorney would be required to write to the issuer's CLO, then potentially to the issuer's CEO, audit committee and then full board of directors. This cycle would continue until the attorney was either convinced her view of the matter was incorrect or the attorney made a "noisy withdrawal" notifying the Commission. All of this could happen even though the attorney's lawfirm reached an opposite conclusion than the attorney. Accordingly, an outside counsel, acting alone, should not be permitted to make a noisy withdrawal. It is wholly inappropriate for the Commission to empower any one attorney at a lawfirm (which may not even be the issuer's regular outside counsel) to create a situation that could put at risk the savings of employees and the investors. If the Commission is to allow this exceptional step then only the lawfirm as a whole should be permitted this extraordinary right. This would force all communications up the ladder in the firm and prevent any attorney with a vendetta from causing a scandal at an otherwise compliant issuer.
IV. Part 205 will Discourage Issuers from Seeking Legal Advice and Lead to Less Disclosure by Issuers.
A noisy withdrawal would have the same effect on an issuer's share price that the iceberg had on the titanic - it would sink the issuer. Issuers will be so afraid of a "noisy withdrawal" by a counsel that they will avoid any situation in which there may be a potential disagreement with outside counsel on securities law matters. Issuers will stop seeking advice on many routine topics of disclosure and will absolutely not seek outside counsel advice on sensitive topics of disclosure.
Additionally, Part 205 could have the undesirable effect of supplanting the business judgment of an issuer's management with that of an outside counsel. For example an attorney working with an issuer on a transactional matter may raise an issue with the amount of reserves carried by an issuer in connection with the transaction, concerned that management may be over-reserving with the intent of freeing reserves to meet short-term earnings estimates. Attorneys, especially outside counsel, often do not often have a full and complete picture of an issuer's business to make a determination of potential losses to an issuer that would require reserves. Moreover the issuer's management may take a view on the effect the economic climate may have on its earnings. Management may be concerned that a particular product or line of business may be faltering. If the counsel disagrees with the issuer's management, the attorney will be required to begin the "up the ladder" cycle. The attorney would be seeking to substitute her judgment of whether the issuer's levels of reserves are sufficient, understated or overstated. The issuer's board of directors and shareholders may see the judgement of their management subrogated to the "business judgement" of the attorneys.
Finally, Congress' stated purpose for Section 307 made it clear that any disclosure obligation was meant to be internal to the issuer with the goal of preserving the attorney-client privilege. The potential for an attorney to disclose client confidences to the Commission may prompt outside counsel to provide Miranda-type warnings to clients that any thing they say may be used against them. Management's fear of not being able to rely on the attorney-client privilege will not lend itself to open and frank discussions concerning matters which may require disclosure and most certainly will lead to less overall disclosure and more mistakes and misfilings under the securities laws.
V. Lack of a Qualified Legal Compliance Committee Should Not be Viewed Negatively.
Under Part 205 an issuer may choose to establish a Qualified Legal Compliance Committee ("QLCC") to investigate reports of material violations of securities law. While Compass supports this alternative to submission of reports directly to the CLO, we believe it is imperative that the Commission make clear a decision by an issuer not to establish a QLCC is not to be viewed negatively. There should be no pressure on an issuer to adopt a QLCC simply because a prominent issuer has adopted one or the media believes that the only "compliant" issuers are ones that have adopted a QLCC.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the Part 205. We would be happy to discuss our comments with representatives of the Commission at their convenience.