Latham & Watkins LLP

April 7, 2003

Via E-mail --

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Jonathan G. Katz, Secretary

Re: File No. S7-45-02
Release Nos. 33-8186; 34-47282; IC-25920
Implementation of Standards of Professional Conduct for Attorneys
17 C.F.R. § 205______________________________________

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:

  • The Original Proposal, which is not supported by the plain language of Section 307 or the legislative history of the Act, is inconsistent with, and in some cases violates, a number of state rules:

    • The Original Proposal requires a reporting attorney who has not received an appropriate response to terminate representation of the client and notify the SEC,6 while only some state rules of attorney conduct permit such action.

    • The Original Proposal imposes withdrawal and notice requirements in the case of any violation covered by Part 205, that is, to any material violation of securities law, breach of fiduciary duty, or similar violation,7 while most states permitting noisy withdrawal do so only in cases of crime or fraud, or where the attorney's services are used to further wrongdoing.

    • Part 205 requires attorneys to report evidence of material violations even if outside the field of the attorney's services, and thus the Original Proposal also would apply under these circumstances, while state withdrawal rules require a connection between the attorney's representation and the violation.

    Nothing in Section 307 expressly provides that these state rules are to be preempted by Part 205, not is there any indication in the Act that Congress intended such a result.8

  • The Commission asserts that noisy withdrawal as contemplated in the Original Proposal does not (i) operate as a waiver of the attorney-client privilege9 or (ii) violate an attorney's duty to maintain client confidences,10 even though these positions are contrary to the laws of a number of jurisdictions.

  • Most importantly, the Original Proposal would impose withdrawal and notice requirements on attorneys much like those for outside auditors under the Exchange Act, despite the vastly dissimilar roles of the two professions.11 The result would be to interfere with the attorney's function as advisor, confidant, and advocate, and to inhibit the critical flow of information between attorney and client, thus reducing rather than promoting compliance with law.

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:

One commenter suggested that the requirement would `risk destroying the trust and confidence many issuers have up to now placed in their legal counsel, creating divided loyalties and driving a wedge into the attorney-client relationship,' and others expressed similar views. Several commenters believed that the rule would not further the Commission's goals because it would cause clients to exclude attorneys from discussions that might prompt the attorney to begin the up-the-ladder reporting process.12

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.

* * *

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.

Respectfully submitted,


1 Implementation of Standards of Professional Conduct for Attorneys, 68 Fed. Reg. 6324 (proposed Feb. 6, 2003) (to be codified at 17 C.F.R. pts. 205, 240, and 249).
2 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
3 Id. § 307.
4 See, e.g., Trammel v. United States, 445 U.S. 40, 51 (1980) (stating that an attorney's ability to perform his or her services "rests on the need for the advocate and counselor to know all that relates to the client's reasons for seeking representation if the professional mission is to be carried out.").
5 See Latham & Watkins comment letter, dated December 18, 2002, in SEC File No. 33-8150.wp ("Latham & Watkins Initial Comments"), at 5-10.
6 Release at 6326.
7 17 C.F.R. § 205.2(i).
8 See Freightliner Corp. v. Myrick, 514 U.S. 280, 287 (1995) ("[A] federal statute implicitly overrides state law either when the scope of a statute indicates that Congress intended federal law to occupy a field exclusively, or when state law is in actual conflict with federal law."). citing English v. General Elec. Co., 496 U.S. 72, 78-79 (1990).
9 Release at 6327.
10 67 Fed. Reg. 71670 at 71692-93.
11 According to the Supreme Court an accountant serves a "public watchdog function," and "owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public," while and attorney serves as a "confidential adviser and advocate, a loyal representative whose duty it is to present the client's case in the most favorable possible light." United States v. Arthur Young & Co., 465 U.S. 805, 818 (1984).
12 Release at 6329 (footnotes omitted).
13 Another change contained in the Alternative Proposal is the inclusion of an exception to the attorney-withdrawal requirement if an attorney is prohibited from withdrawing by applicable order or rule. Release at 6328. In that case, the attorney must notify the issuer that he or she would have withdrawn but for the prohibition, which triggers the reporting requirement just as if the attorney had in fact withdrawn, and so again merely changes the sequence of events without repairing the damage to the attorney-client relationship posed by reporting-out requirements -- and in fact may aggravate the situation, by requiring an attorney who cannot withdraw to force a client with which he or she maintains a continuing relationship to report to the Commission.
14 Release at 6329.
15 Id. at 6327.
16 67 Ref. Reg. 71670 at 71690. We do not agree that this is the case, particularly in states that have not adopted the Kutak Commission's recommendation. See Latham & Watkins Initial Comments at 7. Moreover, the Kutak Commission's proposal was expressly limited to cases of criminal or fraudulent activity. Id. Neither of the Withdrawal Proposals necessarily includes such a limitation.
17 Joint Comments at 10.