Latham & Watkins LLP
April 7, 2003
Via E-mail -- email@example.com
Securities and Exchange Commission
Re: File No. S7-45-02
Ladies and Gentlemen:
Latham & Watkins LLP submits this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on its January 29, 2003 release entitled "Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys," Release Nos. 33-8186; 34-47282; IC-25920 (the "Release").1 The Release contains proposed amendments to rules adopted by the Commission (codified at 17 C.F.R. Part 205) ("Part 205") in response to requirements of Sarbanes-Oxley Act of 20022 (the "Act") Section 307: Rules of Professional Responsibility for Attorneys3 ("Section 307").
Part 205 requires attorneys who appear and practice before the Commission to report credible evidence of material violations by issuers or certain persons associated with the issuers to the issuers' Chief Legal Officers (or also to their Chief Executive Officers) and, in some circumstances, "up the ladder" to the issuers' boards of directors. The Release requests comment on the following proposed amendments to Part 205: (i) a provision requiring "noisy withdrawal," i.e., withdrawal from representation and notice to the SEC by a reporting attorney who does not receive an appropriate response from the issuer following an up-the-ladder report (the "Original Proposal") and (ii) an alternative to the Original Proposal wherein the reporting attorney would still be required to withdraw, but which would require the issuer to report the circumstances surrounding the withdrawal to the SEC, using Form 8-K (or a comparable form for foreign private issuers) (the "Alternative Proposal" and, together with the Original Proposal, the "Withdrawal Proposals"). The Original Proposal was also part of the rulemaking that led to Part 205, and was widely commented upon in that proceeding, including by this firm.
Latham & Watkins LLP has joined a group of law firms in a comment letter (the "Joint Comments") regarding the Release. The Joint Comments express our concerns about the significant negative effects either of the Withdrawal Proposals will have on the attorney's role and effectiveness in client decision-making and, ultimately, compliance. The comments below are in addition to those set forth in the Joint Comments.
In sum, we believe that either of the Withdrawal Proposals, if adopted, is likely to do more harm than good in terms of issuer compliance. The potential for confidential communications to be disclosed outside the attorney-client relationship will inhibit open and meaningful dialogue -- long recognized as the cornerstone of effective legal representation. 4 Therefore, the requirements under Part 205 should be limited to "up-the-ladder" reporting within the issuer, consistent with Section 307, and we urge the Commission not to adopt either Withdrawal Proposal.
In our December 18, 2002 comments in the Part 205 rulemaking, we discussed the following deficiencies in the Original Proposal5:
With the Alternative Proposal, by requiring issuers rather than withdrawing attorneys to notify the SEC regarding withdrawals, the Commission seeks to address some of the above problems, but the alternative is no less flawed than the original, and it in fact raises some new problems. As support for the Alternative Proposal, the Commission notes the following regarding comments on the Original Proposal:
The comments cited by the Commission, which are consistent with views expressed in many submissions in the Part 205 rulemaking (including those of this firm), raise valid concerns about the Original Proposal. The Commission acknowledges these concerns, but its Alternative Proposal does not address them. Requiring the issuer to notify the SEC of an attorney's withdrawal, rather than making the attorney do so, creates a distinction without a difference. In either case, an attorney's report under Part 205 of credible evidence of a material violation, absent a response the reporting attorney believes to be appropriate, leads to mandatory withdrawal and a report to the Commission. Attorney withdrawal under the Alternative Proposal is just as noisy as in the Original Proposal.
By transferring responsibility for "reporting-out" from attorney to client, the Alternative Proposal appears designed to relieve concerns about forcing attorneys to divulge client confidences. This change from the Original Proposal is purely technical, however. There is no practical difference between requiring attorneys to disclose confidential information and requiring them to cause their clients to do so.13 Either way, clients will face the prospect that information shared with attorneys could trigger a new reporting obligation, and the "wedge" in the attorney-client relationship would still result.
In addition to simply shifting the reporting obligation to issuers, the Alternative Proposal includes two additional requirements not found in the Original Proposal: (i) that the report include the circumstances related to the withdrawal of the reporting attorney and (ii) that the report be filed on Form 8-K (or comparable form in the case of a foreign private issuer), and thus be immediately available to the public.14 These changes reflect a dramatic departure from the Original Proposal's requirement that a withdrawing attorney "give written notice to the Commission of the attorney's withdrawal, indicating that the withdrawal was based on professional considerations."15 The Release contains virtually no discussion of these changes, and also provides no guidance on the level of detail required in describing the "circumstances" related to the withdrawal. These new requirements raise additional grave concerns regarding the Alternative Proposal.
In the November 2002 release discussing the original Part 205 proposal, the Commission claimed that notice that an attorney was withdrawing for "professional considerations" would not violate attorney-client privilege, based on conclusions of the Kutak Commission outlined in 1981.16 A key to the Kutak analysis was that notice of withdrawal for non-specific reasons, such as professional considerations, conveys no substantive information to the recipient of the notice, and so client information to which the privilege applies remains protected. Requiring an issuer to report the "circumstances" surrounding a withdrawal goes well beyond the Kutak formulation, and may have the effect of forcing an issuer to waive its privilege with respect to attorney-client communications.
The Alternative Proposal's additional requirement to report an attorney's withdrawal on Form 8-K raises the stakes even further. A report to the Commission would be required where (i) a covered attorney reported evidence of a material violation up the ladder to the issuer's board of directors and (ii) the attorney did not receive what he or she believed was an appropriate response from the issuer. These two events do not necessarily mean, however, that a violation has in fact occurred or that, if it has, it must be disclosed to the public under the securities laws. Nonetheless, the Alternative Proposal would require such public disclosure within two days of the withdrawal. As noted in the Joint Comments, "damaging public disclosure could be required, even under circumstances in which the issuer is acting reasonably, prior to the issuer having an opportunity to make its case to the Commission."17 The impact of such disclosure, on the issuer and investors, could be disastrous and irreparable. That possibility is hardly conducive to the free flow of information between attorney and client.
Latham & Watkins LLP continues to believe that any amendment to Part 205 that involves withdrawal and reporting outside the issuer would be inconsistent with Congress's intent with respect to Section 307. Moreover, such requirements would be counterproductive in the Commission's efforts to ensure public company compliance, because the companies that most need attorney involvement in their decisions would be the ones least likely to seek it.
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We appreciate the opportunity to submit comments on the Withdrawal Proposals. We are available to respond to any questions the Staff may have regarding these comments.