LATHAM & WATKINS
December 18, 2002
Via E-mail -- email@example.com
Securities and Exchange Commission
Re: File No. 33-8150.wp
Ladies and Gentlemen:
Latham & Watkins submits this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on its November 21, 2002 release entitled Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys, Release Nos. 33-8150; 34-46868; IC-25829 (the "Release")1. The Release concerns the Commission's proposed rule2 (the "Proposed Rule") to implement provisions of Section 307 of the Sarbanes-Oxley Act of 20023 (the "Act"), Rules of Professional Responsibility for Attorneys4 ("Section 307").
Latham & Watkins has joined a group of law firms in submitting a letter (the "Joint Comments") to the Commission in this rulemaking that recommends important changes to certain definitions in the Proposed Rule. Specifically, the Joint Comments raise concerns about the breadth and ambiguity of the circumstances in which attorneys would be required to report evidence of a material violation, the applicability of the rule to attorneys not representing issuers in a legal capacity, the overbreadth of the definition of "appearing and practicing before the Commission" in covering attorneys not directly involved in preparing documents submitted to the Commission, and the applicability of the rule to attorneys retained by third parties who happen to provide a benefit to an issuer. The Joint Comments also urge the Commission to defer final action on the Proposed Rule's noisy withdrawal requirements and on whether foreign attorneys should be subject to the Proposed Rule, neither of which is specifically called for by Section 307, until there has been sufficient time to carefully consider the possible negative effects, many of which are raised in the Joint Comments. The comments below are in addition to the points made in the Joint Comments.
Latham & Watkins understands the Congressional goal of restoring investor confidence in the public securities markets. If appropriately implemented, Section 307 would further this goal by imposing suitable obligations on attorneys representing issuers to report material securities law violations to appropriate company officers or board members. This must be done, however, without undermining the fundamental concept of our legal system that attorneys should be forceful and effective advocates of their clients' positions and interests, and for that reason must be able to engage in open and candid exchanges of information and views with their clients, under the protection of established principles of confidentiality and attorney-client privilege.
The Proposed Rule includes provisions that are consistent with the congressional intent embodied in Section 307 and that satisfy the requirements of Section 307. The Proposed Rule, however, goes beyond the prescriptions of Section 307 in some areas, and much of what exceeds the congressional mandate may lead to undesirable consequences, or worse. Some of the Proposed Rule's requirements, if adopted in their current form, would be impractical and unduly burdensome, and would disrupt the vital relationship between attorneys and clients. In addition, some provisions of the Proposed Rule are at odds with applicable state or foreign laws to which attorneys who represent issuers remain subject. Our comments and recommendations regarding the Proposed Rule in this letter focus on a few such significant problem areas.
1. The duty of an attorney representing an issuer is to the issuer, and not to the shareholders or any other constituency.
Section 205.3(a) of the Proposed Rule states that "[a]n attorney appearing and practicing before the Commission in the representation of an issuer represents the issuer as an organization and shall act in the best interest of the issuer and its shareholders . . ." (emphasis added). It is a settled principle, however, that the duties of the attorney representing a corporation run only to the corporate client. Like officers and directors, shareholders are corporate constituents, with separate identities from the corporation, and as such they are owed no duties by the corporation's attorneys.
When an attorney is employed or retained to represent an organization, that attorney represents the interests of the organization as an entity.5 As with any attorney-client relationship, the attorney owes the organization as a client certain professional duties, such as the duties of loyalty and competence. The ABA's Model Rules of Professional Conduct ("Model Rules") and Model Code of Professional Responsibility6 ("Model Code") are both clear that by representing an organization, the attorney does not thereby also form an attorney-client relationship with any individuals employed by it, any individual who directs its operations, or anyone who has an ownership or other beneficial interest in it, such as its shareholders.7
The Model Code specifically provides that
This "entity" theory of organizational representation is also reflected in the Model Rules. Model Rule 1.13(a), on representing organizations, states that "a lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents." While the language of the Model Rules differs slightly from that of the Model Code, there is no indication that a different meaning was intended.9 Moreover, Model Rule 1.13 specifically addresses the ethical delineation between a corporate client and its constituents. Comment  to Rule 1.13 provides that "officers, directors, employees and shareholders are the constituents of the corporate organizational client" (emphasis added). Further, to make clear that the attorney must distinguish between the corporate entity and its constituents, Comment  to Rule 1.13 provides that where the organization's interests become adverse to those of a constituent "the lawyer should advise any constituent . . . that the lawyer cannot represent such constituent . . . ."
The Proposed Rule's extension of the corporate attorney's duty to shareholders is contradicted by ethical rules and relevant case law.10 To implement the investment purpose of the Act in a way that effectively splits the attorney's allegiance between the issuer and its shareholders (or even among different shareholders), sets up an unworkable model for legal representation. Moreover, such a formulation purports to impose upon attorneys a duty to shareholders similar to that of directors, but without comparable authority or protections. The reference to an attorney's duty to a client's shareholders should be removed from the Proposed Rule.
2. An attorney representing an issuer has a duty to provide competent legal service, not generally to act in the issuer's "best interest."
Proposed Rule Section 205.3(a) states that "[a]n attorney appearing and practicing before the Commission in the representation of an issuer represents the issuer as an organization and shall act in the best interests of the issuer . . ." (emphasis added). This broad statement of an attorney's duty has no precedent in the rules of professional conduct or ethics and confuses the distinctly separate roles of an issuer's management and its legal counsel.
An attorney is required to act with reasonable competence, diligence, and loyalty in the representation of corporate clients. It is up to the company's executive officers and directors, however, to act "in the best interest" of the organization. As proposed, Section 205.3(a) could be construed to put attorneys in the untenable position of having to make judgments as to "the best interest" of corporate clients, without the information, authority, and protection that officers and directors enjoy in so doing.
There is only one place in the Model Rules where an attorney is charged with acting "in the best interest" of an organization. Rule 1.13(b) provides:
Rule 1.13(b) thus requires attorneys to act "in the best interest" of a corporate client only when the attorney knows that (i) in a matter related to the representation, (ii) an individual associated with the organization is violating a legal duty and (iii) the behavior is likely to result in substantial injury to the organization. In this narrow circumstance only, an attorney's duty to determine how to proceed as reasonably necessary "in the best interest" of the organization is triggered.
The Model Rules go on to identify certain duties running from attorneys to their clients, including duties of loyalty, confidentiality, and competence.11 Beyond the narrow context of Rule 1.13, however, nothing in the Model Rules suggests that attorneys have a general duty to proceed in "the best interest" of clients. The attorney's obligation is to give competent legal advice. It is up to management to choose a course of action in the best interest of the corporation in light of all relevant considerations, including but not limited to legal advice. Management is both obligated and appropriately positioned to make this kind of judgment; legal counsel is not. When the client is a company, its officers and directors are charged with determining the company's "best interests," and they are protected from undue liability in making this determination by the business judgment rule, which does not apply to attorneys.12
The Proposed Rule's imposition upon attorneys who practice before the Commission a new general duty to act "in the best interest" of their corporate clients is impractical, unprecedented, unreasonable and unwise. The "best interest" provision should be deleted from the Proposed Rule or, if retained, limited to the narrow circumstances contemplated by Model Rule 1.13(b).
3. Provisions in the Proposed Rule regarding withdrawal and disclosure of client information are inconsistent with laws governing the attorney-client relationship and privilege.
The Joint Comments discuss a number of significant problems raised by the noisy withdrawal provisions of Proposed Rule Section 205.3(d). The following points are in addition to those set forth in the Joint Comments.
Section 307 does not contemplate noisy withdrawal,13 and is therefore not support for supplanting existing rules governing attorney conduct or privilege. Among other issues, the Proposed Rule's noisy withdrawal provisions go well beyond existing rules that permit noisy withdrawal by an attorney under specific circumstances. Section 205.3(d)(1) requires noisy withdrawal where an issuer fails to correct a securities law violation, breach of fiduciary duty, or similar violation. State rules typically do not allow noisy withdrawal under these circumstances alone; there must be an underlying crime or fraud, or the client must utilize the attorney's services to pursue an imprudent or repugnant objective.14 This is consistent with the noisy withdrawal provisions in the ABA's Model Rules.15 At least eight states further limit noisy withdrawal to circumstances in which the client acts with criminal intent.16 Because a securities violation, breach of fiduciary duty, or similar violation could be the result of negligence, of an officer's failure to make an informed decision, or of other acts or omissions that do not rise to the level of criminal or fraudulent behavior, 205.3(d)(1) would impose withdrawal requirements potentially at odds with these state bar rules.
Section 205.3(d)(1) apparently would also mandate noisy withdrawal even if the violation in question falls outside the subject matter of the attorney's services.17 A number of states do not permit withdrawal under these circumstances, however; the attorney's interactions with the client must have the requisite connection to a crime, fraud, or repugnant objective motivating the withdrawal.18 Once again, in such states attorneys would be required to comply with 205.3(d)(1) if they "appear and practice" before the Commission, but in practice such compliance could trigger violations of state bar rules, which prohibit noisy withdrawal except under narrower circumstances.
The Proposed Rule purports to provide blanket protection from waiver of privilege with regard to information revealed in the course of a noisy withdrawal. Section 205.3(d)(3) states that the notification to the Commission required in the case of noisy withdrawal "does not breach the attorney-client privilege." In its discussion of this point, the Commission declares that this is "largely settled law."19 The Commission supports its position by noting that nearly forty states have adopted the 1981 recommendation of the Kutak Commission, which states that noisy withdrawal, "to the extent an attorney reasonably believes necessary to prevent a criminal or fraudulent act or to rectify the consequences of a criminal or fraudulent act in which the attorney's services were used," does not constitute a "disclosure" for privilege purposes.20 No mention is made, however, of the states that have not embraced the Kutak Commission's formulation. Moreover, in requiring noisy withdrawal even in cases that do not involve criminal or fraudulent acts by the issuer, the Proposed Rule goes beyond the Kutak framework and, as discussed above, beyond what is permissible under some state rules.21
Section 205.3(e)(2) of the Proposed Rule permits an attorney to reveal confidential information of a client under certain circumstances.22 The Commission cites the approach adopted by the majority of states as support for this position.23 The Commission goes on to state that, where a state rule forbids disclosure of confidential information under circumstances in which disclosure is permitted under the Proposed Rule, the Proposed Rule "would appear to preempt" the state rule.24 Given the enabling legislation's silence on the subject, attorneys may find this observation of little comfort when faced with conflicting state duties.
Similarly, Section 205.3(e)(3) expressly provides that "where an issuer, through its attorney, shares with the Commission, pursuant to a confidentiality agreement, information related to a material violation, such sharing of information shall not constitute a waiver of any otherwise applicable privilege or protection as to other persons." In explaining this provision, the Commission notes that this "would set forth the Commission's position on an unsettled question."25 It is indeed unsettled. Currently, for example, such protection from waiver of privilege for information disclosed to a government agency has been recognized by several Circuit Courts of Appeals, and rejected by others.26 Given the high stakes associated with waiver of privilege, uncertainty as to interpretation of the Proposed Rule's requirements in this regard is troubling.
These examples highlight a basic problem with the Commission's approach to attorney withdrawal and disclosure of confidential or privileged information. These areas are subject to numerous state and federal rules, developed over many years, which balance private rights and the public interest. The relevant sections of the Proposed Rule contain requirements for attorneys to take action that goes outside the attorney-client relationship, involving noisy withdrawal, which is neither mentioned in Section 307 (as the Commission acknowledges27) nor supported by any legislative history as being the intent of Congress in including Section 307.28 Professional responsibility of attorneys is not a matter so fundamentally national in character as to support preemption of relevant state laws, absent a specific expression of Congress's intent to preempt. That expression does not exist here, and we do not believe the Commission can, or should, assert such preemption in formulating rules under Section 307.
4. Noisy withdrawal would alter the essential relationship between issuers and their attorneys.
The noisy withdrawal requirement in the Proposed Rule is similar in some ways to that which exists for accountants under the Exchange Act.29 The fact that a similar obligation has previously been imposed on accountants and not attorneys reflects the fundamental difference between the role each plays with respect to issuers, a difference recognized by the Supreme Court.
In denying a petitioner's assertion of accountant-client privilege, the Court noted that 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 an 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." 30 The Court regards the adverse effect of agency disclosure rules on the accountant-client dialogue as immaterial to the relationship, while it views the attorney's role as the client's advocate as necessitating full and frank communications, without the chilling effect of possible disclosure to third parties.31
In Trammel v. United States, the Court characterized the attorney-client relationship as "rooted in the imperative need for confidence and trust," adding that it "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."32 Section 307 is consistent with this view, requiring only that an attorney report evidence of material violations up the ladder within the issuer's management structure, but not to third parties. A new requirement to go outside the issuer would transform the attorney from advocate and advisor to quasi-regulator, creating an adversarial relationship in which the open and frank exchange of information would become impossible. Such a result would defeat the purpose of Section 307, by making it much more difficult for an attorney representing an issuer before the Commission to become aware of a material violation in the first place.
The Commission's noisy withdrawal proposal is particularly troublesome in the context of an attorney representing an issuer in a Commission inquiry or investigation. The Commission has said that the noisy withdrawal requirement would apply in such cases.33 It is difficult to imagine how an attorney defending an issuer could provide the vigorous defense required under applicable ethical rules if at the same time he is obliged to act as informant for the Commission. Federal courts have recognized the need to protect information provided to an attorney in the course of his or her work on behalf of a client. For example, in United States v. Goldfarb, the U.S. Court of Appeals for the Sixth Circuit said that:
In light of these and other problems related to the noisy withdrawal proposal and the limited time remaining to issue rules under Section 307, we urge the Commission to adopt the recommendation set forth in the Joint Comments and defer final action on Section 205.3(d) and related provisions of the Proposed Rule until all issues can be fully reviewed and resolved.
5. The Proposed Rule should include an express safe harbor provision.
The Commission requested comments as to whether the Proposed Rule should include a "safe harbor," protecting attorneys from all but Commission action related to the Proposed Rule.35 We believe that a provision protecting attorneys who make good faith efforts to comply with the Proposed Rule to the fullest extent permitted by law is essential. An attorney's reporting obligation under the Proposed Rule depends on the ability to evaluate information obtained in the course of representing a client--information that in many cases is provided by that client. That attorneys have neither the power to compel clients to provide information nor the ability to test information they have obtained through further inquiry makes evaluation of evidence of a violation and the appropriateness of a client's response imprecise, and therefore fraught with potential for error. Even an attorney who gets it right, reporting evidence of an actual material violation in strict compliance with the Proposed Rule, would still be vulnerable to lawsuits challenging the reasonableness of his or her actions or claiming breach of duties owed under other applicable laws with respect to professional responsibility of attorneys.
The Proposed Rule also should not serve as a new basis for claims by private parties against attorneys for failure to report material violations. The Proposed Rule provides that a violation by a covered attorney would be treated as a violation of the Exchange Act, with penalties to be imposed only by the Commission.36 The Commission has expressed its view, consistent with congressional intent, that nothing in Section 307 or the Proposed Rule creates a private right of action against an attorney "based on his or her compliance or non-compliance . . . ."37
Finally, the Commission discusses the question of criminal liability for violation of the Proposed Rule, stating that it "does not believe . . . that violations of the proposed rule would, without more, meet the standard prescribed in Section 32(a) of the Exchange Act (15 U.S.C. 78ff), which provides for the imposition of criminal penalties."38 We agree. In Section 307, Congress directed the Commission to issue rules regarding professional responsibility of attorneys appearing before it. The Commission has long regulated the conduct of such attorneys,39 and measures available under the Commission's rules for attorney discipline are appropriate and sufficient for purposes of enforcing obligations under Section 307.
In order to make certain that attorneys are not the targets of lawsuits or subject to criminal liability related to Section 307 or the Proposed Rule, the Commission should include an express safe harbor provision. The provision should state that the sole remedy for violation of the Proposed Rule is disciplinary sanction by the Commission consistent with historic practice, that violations of the rule will not be subject to criminal prosecution, and that no party may bring an action, in any forum, against an attorney (i) for non-compliance with the Proposed Rule or (ii) based on claimed violation of any other law, rule, or duty as a result of the attorney's compliance, non-compliance, or actions taken in attempting to comply with the Proposed Rule.
6. Qualified Legal Compliance Committees should not be subject to noisy withdrawal requirements or to any other requirement for outside reporting, and issuers should be permitted to engage independent persons who are not directors to sit on QLCCs.
We agree in concept with the Commission's proposal to permit each issuer to form a qualified legal compliance committee ("QLCC") for purposes of receiving and addressing attorney reports made pursuant to Section 307. A body such as the QLCC, with full authority to investigate, retain experts, and order remedial measures, would be in a far better position than an attorney, inside or outside the issuer, to get reliable information needed to evaluate either a reported violation or measures taken by the issuer in response.
Certain aspects of the Proposed Rule present practical problems for QLCCs. Because they will be independent from issuers and their responsibilities often will involve complicated legal issues, we expect QLCCs to engage their own legal counsel. According to Section 205.3(b)(6), attorneys retained to investigate reports of evidence of material violations are themselves appearing and practicing before the Commission in the representation of the issuer. Thus, counsel for the QLCC may be required to report the QLCC's failure to take appropriate action in response to the reported violation up the ladder (presumably to the audit committee or entire board of directors), and ultimately to noisily withdraw under Section 205.3(d) if the issuer does not take appropriate measures to deal with the violation. This defeats a purpose of the QLCC: to shift responsibility for up-the-ladder reporting from the attorney who makes the initial report to an independent committee of the issuer's board. If the noisy withdrawal requirement is to remain a part of the Proposed Rule, then at the very least the Commission should add a provision to Section 205.3(c) to the effect that counsel engaged by a QLCC is not considered to be appearing and practicing before the Commission, and therefore is not subject to up-the-ladder reporting or noisy withdrawal requirements.
According to the definition of QLCC in the Proposed Rule, if an issuer fails to take a remedial measure ordered by the QLCC, then each member of the QLCC, as well as the issuer's chief executive officer and chief legal officer, would be required to report the violation in question to the Commission and disaffirm any documents believed by them to be tainted by the violation.40 Because use of a QLCC as proposed would be optional, adding new requirements for individual directors and executives to report evidence of violations to the Commission is likely to discourage many issuers from forming QLCCs. Moreover, even without this obligation, issuers would still be subject to applicable rules regarding reporting and disclosure of material information under the securities laws and Commission's rules, including newly implemented requirements under the Act for chief executive officers and chief financial officers to certify reports filed with the Commission.
The reporting and disaffirmation requirement in the definition of QLCC is particularly troubling with respect to the issuer's chief legal officer. The CLO is an attorney advising and representing the issuer, and all the problems in requiring attorneys to go outside the attorney-client relationship in the context of a noisy withdrawal, some of which have been discussed in these comments, would apply with equal force to reporting and disaffirmation by CLOs as set forth in the QLCC definition. We recommend that the reporting obligations at Section 202.2(j)(5) be deleted from the definition of QLCC, or at least that they not apply to the CLO or any other individual who has an attorney-client relationship with the issuer.
Section 307 permits up-the-ladder reports to committees consisting solely of independent directors or to entire boards. Independent directors are required to be involved in a number of areas in addition to those related to Section 307, and requiring here that each QLCC include at least one member of the issuer's audit committee and two other independent directors could make it difficult for some issuers, particularly smaller ones, to establish QLCCs. We do not believe that the language in Section 307 regarding reports to committees made up of independent directors necessarily requires that only independent directors be on a QLCC, so long as reports ultimately are made to an appropriate body within the issuer. To make it less burdensome for issuers to set up QLCCs, the Commission should consider allowing boards to engage otherwise qualified, independent individuals who are not board members to serve on QLCCs. This would preserve the independent character of the QLCC without excessively burdening directors.
7. Non-U.S. Attorneys Should be Exempted from the Proposed Rule
The Commission has requested comment on whether the Proposed Rule should apply to attorneys who are licensed to practice in jurisdictions outside the United States ("non-U.S. Attorneys").41 Non-U.S. Attorneys practice under different legal codes and are subject to different practice rules than attorneys in the United States, and subjecting them to the reporting and monitoring requirements of the Proposed Rule would be unworkable and unwise. We accordingly urge the Commission to exempt non-U.S. Attorneys broadly from the Proposed Rule. At the very least, the Commission should defer a decision on this question beyond the deadline for final rules under Section 307, as recommended in the Joint Comments.
The entire scheme of Part 205 depends on a non-U.S. Attorney making a determination that a "material violation" has occurred, which in turn triggers duties such as up-the-ladder reporting and noisy withdrawal. "Material violation" is defined as "material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation." "Securities laws" covers U.S. federal and state securities laws.
We do not see how a non-U.S. Attorney can be expected to reach a conclusion that there may have been a material violation of an unfamiliar set laws, such as the securities laws of the United States.42 Non-U.S. Attorneys face similar obstacles in attempting to analyze our concepts of fiduciary duty (which are typically difficult to translate into the civil law context).
Even if a non-U.S. Attorney could somehow make the required determination, the Proposed Rule's "noisy withdrawal" feature, the very point of which is to bring material violations to the attention of third parties, would violate the confidentiality requirements applicable to attorneys licensed in France, Germany, and the United Kingdom (and, we suspect, in many other jurisdictions). In particular:
Unless non-U.S. Attorneys are exempted from the Proposed Rule, the Commission will be forced to regulate the conduct of non-U.S. Attorneys who could be considered to be "appearing and practicing before the Commission," and who are subject to a wide range of legal requirements in their home jurisdictions. We submit that this responsibility should remain that of the relevant foreign regulatory authorities.
8. The Commission should narrow the definition of "material violation" under the Proposed Rule to include only violations that meet the accepted test for materiality under the securities laws and that are related to compliance with those laws.
The Proposed Rule defines "material violation" as "a material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation."43 The definition is taken almost verbatim from Section 307, adding only the term "material" to modify the breaches of fiduciary duty and similar violations that trigger attorney reporting obligations. "Material," in turn, is defined as referring "to conduct or information about which a reasonable investor would want to be informed before making an investment decision." We believe that these definitions are overbroad, that they are not consistent with the concept of materiality that should apply to investor decision-making, and that they will lead to significant uncertainty for attorneys under the Proposed Rule. Without more precise and appropriate guidance on the nature of the violations being targeted, we believe the obligations levied on attorneys would extend well beyond the purposes of the Act, and would be unworkable in practice.
The Act was intended to correct certain perceived shortcomings in securities regulation that Congress believed resulted in well-publicized cases of non-disclosure of material facts and events, to the detriment of investors. Consistent with that aim, Section 307 was added to enlist attorneys who represent issuers before the Commission in bringing certain material violations to the attention of appropriate officers or board members. That should not mean, however, that attorneys representing issuers before the Commission are to become the designated watchdogs for all manner of violation that might be deemed "material" in any sense. Rather, Section 307 should apply only to violations, including breaches of fiduciary duty or similar violations, falling within the Supreme Court's definition of materiality with respect to investors set forth in TSC Industries, Inc. v. Northway, Inc.44 In addition, a violation that triggers the attorney reporting obligation under Section 307 should be one of the offenses the Act is designed to prevent.
First, to be "material" for purposes of Section 307, a violation must be sufficiently important from an investor standpoint. We believe the definition of "material violation" should include the complete definition of materiality set forth in TSC v. Northway; i.e., that there be a substantial likelihood that information regarding the violation in question "would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available."45 In this way, application of the Proposed Rule will be based on an objective standard that is well-grounded in relevant case law, providing meaningful guidance to practitioners.
Second, to require attorney reporting under Section 307, a breach of fiduciary duty or similar violation must be related to the issuer's compliance with securities laws.46 We believe that to require more would be to take the Proposed Rule outside the objectives of the Act as well as the intended scope of Section 307. There, Congress directed the Commission to issue rules for "attorneys appearing and practicing before the Commission in any way in the representation of issuers" and required reporting of "material violation[s] of securities laws." Given the connection between the securities law expertise of attorneys who appear and practice before the Commission (and are therefore subject to Section 307), Section 307's express requirement to report securities law violations, and the Act's general focus on protecting investors from securities law violations, it is hard to imagine that attorneys who are subject to Section 307 would then also be required to report other broad categories of violations that are wholly unrelated to securities laws. The associated problems would be compounded by the fact that each state has its own laws of fiduciary duty, and that the term "similar violation," without further narrowing, would encompass virtually all laws of significance to which an issuer is subject anywhere it does business. To be effective and to be consistent with the Act, the Proposed Rule should expressly tie the obligation of an attorney to report evidence of material violations to only those breaches of fiduciary duty or other law that are implicated in issuers' disclosures under the aegis of the securities laws,47 and that meet the materiality standard in TSC v. Northway.
In order for Section 307 to work as intended, we believe that attorneys, issuers, and investors need to understand with reasonable certainty both the nature and the degree of significance of violations that must be reported under Section 307. To be consistent with the Act, the Proposed Rule should make clear that these questions are to be answered with reference to the securities laws. We urge the Commission to lend needed clarity to the reporting obligation under the Proposed Rule by expressly incorporating the materiality standard set forth in TSC v. Northway, and by expanding the definition of material violation to make clear that breaches of fiduciary duty and similar violations subject to Section 307 are those implicated by an issuer's reporting obligations under the securities laws.
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We appreciate the opportunity to submit comments on the Proposed Rule. We are available to respond to any questions the Staff may have regarding these comments.