American College of Trial Lawyers
April 2, 2003
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Sarbanes-Oxley Act of 2002
§ 307 - Implementation of Standards of Professional
Conduct for Attorneys - Part 205 (File No. S7-45-02)
Dear Mr. Katz:
I enclose three copies of a Supplemental Statement of the American College of Trial Lawyers Regarding the Withdrawal and Notification Provisions of the SEC Proposed Implementation of Standards of Professional Conduct for Attorneys.
Michael A. Cooper
cc: Hon. William H. Donaldson, Chairman
Hon. Paul S. Atkins, Commissioner
Hon. Roel C. Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey J. Goldschmid, Commissioner
Hon. Paul S. Sarbanes
Hon. Richard C. Shelby
Hon. John R. Edwards
Hon. Michael G. Oxley
Hon. Barney Frank
REGARDING THE WITHDRAWAL AND NOTIFICATION PROVISIONS
OF THE SEC PROPOSED IMPLEMENTATION OF STANDARDS
OF PROFESSIONAL CONDUCT FOR ATTORNEYS
(FILE NO. S7-45-02)
The American College of Trial Lawyers (the "College") submits this Supplemental Statement in response to both the renewed invitation by the Securities and Exchange Commission (the "Commission") for comment on the "noisy withdrawal" provisions of Part 205 as originally proposed and the Commission's invitation to comment on an alternative proposal requiring attorney withdrawal and notification of the Commission by the issuer/client rather than the attorney.1
The College is strongly of the view that
- The Commission's authority to require an attorney to withdraw from representing a client is doubtful, and exercising that authority in the manner proposed would undermine the Commission's stated objectives.
- Requiring notification of the Commission, either by the attorney or by the issuer, will not protect the interests of the investing public, but will undermine the attorney-client privilege.
- An attorney should not, under any circumstances, be required to withdraw from representing an issuer in unrelated matters.
1. The College does not question the Commission's authority to require reasonable qualifications for attorneys who practice before it. 17 C.F.R. §201.102, but does question whether the Commission has authority to require an attorney to terminate an existing client relationship. Mandating the severance of an attorney-client relationship does not comfortably fall within the authority conferred on the SEC by Congress in Section 307 of Sarbanes-Oxley to adopt rules "setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission . . . ." Moreover, the ethics rules in force in the various states, patterned after the ABA Model Rules or the earlier ABA Model Code, comprehensively enumerate the circumstances under which an attorney either must or may withdraw from representing a client. See, e.g., ABA Model Rule 1.16. For the Commission to impose a separate withdrawal requirement is, as the Conference of Chief Justices has pointed out, "inconsistent with principles of federalism."2
Even if the Commission had authority to mandate withdrawal from a representation, the College believes that withdrawal under either the original or the alternative proposal is mandated prematurely. An attorney who has reported evidence of a material violation to an officer of a corporate client, has received an inadequate response or no response at all, and concludes that there is substantial evidence of a material violation that is ongoing or about to occur and is likely to injure the issuer or investors, ought to be free to continue to advise, and remonstrate with, the issuer's board of directors and senior management until the point is reached (if ever) that "the representation will result in violation of the rules of professional conduct or other law." Model Rule 1.16(a)(1). Surely, continued representation up to that point ought to be preferable in the Commission's eyes to depriving the client of counsel who urges compliance with the law.
2. The Commission's alternative proposal, which would require withdrawal and prompt notification of the Commission by the issuer and not the withdrawing lawyer, does not obviate one of the College's principal objections to the original proposal, namely, that requiring withdrawal and notification will effectively discourage issuers from retaining counsel who are conservative in the advice they render. The Commission professes "not [to] want the rule to discourage issuers from seeking and obtaining appropriate and effective legal advice." Release No. 33-8186 at 5. Yet, that is precisely the predictable effect of mandating withdrawal and notification that will almost certainly lead to adverse market reaction, a Commission inquiry and possible private securities litigation. Confronted with those prospects, an issuer will be tempted either not to consult outside counsel or to select counsel thought less likely to give cautious advice ─ and, in either case, to disclose to counsel fewer potentially troublesome facts.
The alternative proposal would require the issuer to file with the Commission a Form 8-K reporting not only the lawyer's withdrawal, but also "the circumstances related thereto." Disclosure of the "circumstances" would almost certainly be either too general and opaque to convey meaningful information or so specific as to jeopardize the attorney-client privilege. The College objected to the original proposal on the latter ground (see Appendix at 2-3, 8-9), and the alternative proposal is equally, if not more, objectionable.
3. Both the original and the alternative proposals would require the lawyer to "withdraw from representing the issuer." The absence of any limiting language suggests that the lawyer (or law firm) might be required to resign from all engagements for the issuer, including engagements having nothing whatsoever to do with the matter that occasioned the withdrawal. The Commission has explicitly invited comment on "whether an attorney who is required to withdraw under this paragraph should be required to withdraw from all representation of the issuer, or only from representation on the matter concerning the material violation." Release at 13.
Requiring a lawyer to withdraw from all representations, even if unrelated, not only goes far beyond what is necessary to fulfill the Commission's objectives, but also could perversely discourage the lawyer from advising that a material violation exists for fear of the drastic economic consequences that might flow from such advice. Moreover, mandating withdrawal from all representations could impose significant additional costs and delays on the issuer. In short, requiring withdrawal across the board could only be explained as punitive, which is not an appropriate basis for a rule of the sort the Commission is contemplating.
The College remains convinced that any rule that goes beyond the "up the ladder" reporting requirement imposed by Section 307 itself and requires notification to the Commission by either the issuer or the lawyer would be unauthorized, ill-advised and self-defeating.
APRIL 2, 2003
STATEMENT OPPOSING SEC PROPOSED PART 205 IMPLEMENTATION OF STANDARDS OF PROFESSIONAL CONDUCT FOR ATTORNEYS (FILE NO. 33-8150.WP)
The American College of Trial Lawyers (the "College") strongly opposes Part 205, the rule proposed by the Securities and Exchange Commission (the "Commission") purporting to implement Standards of Professional Conduct for Attorneys under Section 307 of the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 (2002). The College's principal objections to the Proposed Rule are:
First, the Proposed Rule is an unprecedented, unwise and unnecessary intrusion by the federal government into matters - to wit, the articulation of lawyers' professional duties and the sanctions for violating those duties - that have been the regulatory province of the states and their respective judiciaries since our nation was founded.
Second, the Proposed Rule exceeds the mandate given to the SEC by Congress in Section 307 by requiring lawyers to communicate privileged information to the SEC, and further threatens to eviscerate the attorney-client privilege by requiring so-called "noisy withdrawals" under circumstances that will inevitably affect clients adversely.
Third, the Proposed Rule and the promulgating Release (Release No. 33-8150 ("Release")) vacillate between objective and subjective standards in ways that will confuse attorneys subject to the rule and are certain to encourage second-guessing by enforcement authorities evaluating a lawyer's compliance with the Proposed Rule.
Finally and most importantly, the Proposed Rule would undermine the time-tested protections traditionally accorded to confidential attorney-client communications and thereby defeat the privilege's avowed purpose of encouraging clients to comply with legal requirements.
The American College of Trial Lawyers, founded in 1950, is composed of the best of the trial bar in the United States and Canada. The College is dedicated to maintaining and improving the standards of trial practice, the administration of the justice and the ethics of the profession. Admission is by invitation only and only after an intensive investigation of a candidate's qualifications. Fellows are carefully selected and include lawyers who represent plaintiffs and those who represent defendants in civil cases, and also include both prosecutors and defense counsel. The College is thus able, and continually strives, to speak with a balanced voice in the interests of the legal profession, the client community and the public.
The SEC's Proposed Rule would in many circumstances require attorneys, by words and actions1, to trigger SEC investigations of their clients on the basis of shared confidences that are at present absolutely privileged ― even though the attorneys are forbidden to make such disclosures by the rules of professional conduct governing their state licensure, and even though the client's conduct may not violate the securities laws.2 Proposed Rule 205.1 provides that the SEC's standards of conduct "shall govern" when "the standards of a state where an attorney is admitted or practices conflict," but this is no comfort to attorneys who must somehow satisfy the contradictory standards at the risk of possible SEC sanctions for failing to disclose, on the one hand, possible state disciplinary proceedings for making disclosure, on the other hand, and possible malpractice actions by clients as well as suits by third parties from all sides whichever course the attorney pursues.
Section 307 will be searched in vain for Congressional authorization to the SEC to trump state regulation of attorney conduct in the sweeping manner proposed by Part 205. The seriousness of the threat of SEC sanctions, moreover, must be gauged in light of the Proposed Rule's provision that a violation of the Rule "shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 . . . subject to the same penalties and remedies . . . ." (Section 205.6(a)).
The "noisy withdrawal" provision of the Proposed Rule goes far beyond an attorney's obligations under ABA Model Rule 1.16(a), which requires withdrawal only if continuation of the representation will result in a future legal or ethical violation. Even then, the attorney must take necessary steps to protect the client from any adverse consequences of the withdrawal. (Model Rule 1.16(d)). Moreover, the "noisy withdrawal" requirement is not part of the SEC's mandate under Section 307 because that section only requires reporting up-the-ladder within a corporation. And yet the Commission proposes to incorporate the very different, additional requirement of disclosure outside the corporation in a rule that is extraordinarily lengthy, complex and controversial after allowing effectively less than 30 days for comment.
No one can deny the importance of preventing Enron-type abuses by corporate managers. Nevertheless, the SEC's Proposed Rule, which would convert attorneys from representatives of their clients' interests into policemen who act against their clients' interests, is not the solution to this challenge. In our political system, the judiciary and the bar are charged with upholding fundamental legal rights even when popular passions demand extreme remedies for extreme problems. The dramatic changes in the historic attorney-client relationship so fundamental to our legal system that have been recommended by the Commission would subvert its foundational values and impede its proper functioning.
The SEC presciently recognizes the possibility that the Proposed Rule might "create an incentive on issuers not to share confidences with a lawyer," with the result that "the lawyer may not be able" to avoid or remedy illegal conduct, and could thereby "decrease the rule's effectiveness" in deterring securities violations. (Release at 64). The SEC dismisses the importance of this concern by suggesting that there are "no data" on the subject. (Id.). But common sense strongly suggests that clients would be less likely to discuss questionable conduct with their attorneys and seek their legal advice if the attorneys were obligated to signal the SEC that the clients should be investigated.3 Even in those instances where the disclosure called for by the Proposed Rule is permissive rather than mandatory, that is, where disclosure is to be made by internal corporate counsel, clients would be inhibited by the knowledge that their confidences could be revealed by their legal counsel. This inhibition would be reinforced by legitimate client concerns that counsel might feel impelled by the threat of third-party litigation to make the disclosure, regardless of the client's best interests.
The Proposed Rule would impose mandatory obligations upon a wide range of attorneys, including many who would be surprised to learn that they practice before the SEC and are subject to its provisions. The Proposed Rule is ostensibly limited to attorneys "appearing and practicing" before the Commission "in the representation of an issuer" (Section 205.2(a),(f)), but it then defines those terms so broadly that they include some attorneys who are neither retained nor employed by an issuer, others who never advise as to securities law matters, and still others who do not even practice law. For example, an attorney engages "in the representation of an issuer" for purposes of the Proposed Rule when he or she "act[s] in any way . . . for the benefit of an issuer, whether or not employed or retained by the issuer." (Section 205.2(f)). Similarly, partners in a law firm may be subject to the requirements and sanctions of the Proposed Rule even if they do no securities work, if they could exercise supervisory authority over a younger associate who does such work. (See Release at 52). In some circumstances, an attorney is deemed to be practicing before the Commission if he or she makes a statement that another party later incorporates in its communication with the SEC. (See Section 205.2(a)).
The nature of the duties imposed on attorneys by the Proposed Rule is also extremely broad. Existing standards of professional conduct typically come into play only when an attorney knows or is aware of possible wrongdoing; in that situation, the attorney is conscious of the issues involved and can exercise caution and judgment in complying with the governing standard of professional conduct. The Proposed Rule contains a purportedly "objective" standard that asks instead whether the attorney should "reasonably" have "believed" that a client had engaged, was engaging, or was about to engage, in suspected wrongdoing. (See Section 205.2(e)). The Proposed Rule thereby creates an entirely new set of "hidden" duties that can ensnare attorneys who have the highest ethical standards and the best of intentions. At the same time, the Proposed Rule omits the safe-harbor or similar provisions found in comparable professional standards (see, e.g., Restatement (Third) of the Law Governing Lawyers, § 67(4)), and thus leaves attorneys' judgments on these matters open to unrestrained second-guessing in later administrative enforcement proceedings or civil actions by the SEC, clients or third parties. And the Commission clouds the "objectivity" of its approach by acknowledging that whether a given attorney has become aware of information that would lead the attorney "reasonably to believe" that a material violation of law has occurred, is occurring or is about to occur will "turn at least in part, on the attorney's training, experience, position and seniority." (Release at 27).
The Proposed Rule is unprecedented, not only because it would mark the first time that the federal government has purported to prescribe rules of professional conduct directed solely at attorneys, but also because it directly conflicts with many of the governing state law rules of professional conduct and thereby places even the most scrupulous attorneys in unavoidable professional peril. For example, an attorney who should be aware that an issuer failed to reveal publicly information that an investor "would want to be informed of" is required in some circumstances to withdraw from any representation of the issuer, even if it involves wholly unrelated matters, including pending litigation. (Proposed Rule 205.3(d)). That requirement conflicts not only with ABA Model Rule 1.16(b) but also with court rules in effect in most jurisdictions.
Similarly, the Proposed Rule adopts a doctrine of limited waiver (see Section 2-205.3(e)(3)) that has been rejected in all but one federal judicial circuit. Federal Rule of Evidence 501, itself a congressional statute, mandates that in resolving privilege issues either "principles of the common law as they may be interpreted by the courts of the United States in the light of reason or experience" or "State law" be applied, depending upon whether the rule of decision is provided by federal or state law. Even the Judicial Conference of the United States cannot modify privilege rules without express Congressional "approv[al]." 28 U.S.C. §2074(b).
There is no such Congressional authorization here. Although the SEC Release setting forth the Proposed Rule purportedly "responds to the directive" of Section 307 (Release at 1), Section 307 does not so much as mention the attorney-client privilege ― nor need it inasmuch as the up-the-ladder reporting required by the statute does not threaten invasion of the corporate privilege - and the statute could not be clearer in requiring disclosures only to higher authorities within the issuer corporation, not to the SEC. There is a total absence of authorization for the Proposed Rule's attempts to require attorneys to disclose clients' confidences or to signal the Commission when clients should be investigated.
Proposed Rule 205.3(e) would allow an attorney to reveal client confidential information in order to prevent an issuer from committing any illegal act that is likely to result in substantial financial injury. Model Rule 1.6 properly limits disclosure of a client's privileged communications to situations in which there is a risk of death or bodily harm, in accordance with the special protections the common law has always afforded those unique interests. Over the last two decades, the ABA has on three occasions rejected attempts to abrogate the attorney-client privilege for the sake of monetary interests, and the Commission's Proposed Rule is even broader. The reasons that these proposals have been rejected by the ABA are no less cogent and important now, after Enron, than they have been for centuries.
The SEC's Proposed Rule would fundamentally change the role of the attorney from a representative and advocate of the client to a representative and protector of the financial interests of others. This would necessarily restrict the free flow of information between attorney and client, thereby degrading the quality and appropriateness of the attorney's advice while decreasing any meaningful opportunity to deter client misconduct. The Proposed Rule, if adopted, would not prevent corporate misconduct. On the contrary, it would exacerbate the problem by deterring clients from discussing illegal or possibly illegal conduct with attorneys who would counsel against such actions. An attorney cannot represent a client in the ways our legal system envisions and, indeed, requires, if the attorney is perceived by the client as merely another potential adversary who serves interests that are in opposition to the client's interests. Thus, the Proposed Rule would have the unintended effect of diminishing the contribution that attorneys can make toward solving the problems that Sarbanes-Oxley was enacted to address, while dismantling the foundational principles that have allowed our legal system to meet similar challenges in the past.
December 17, 2002
|Footnotes to Statement|
|1|| The College's initial Statement commenting on Part 205 as originally proposed is appended hereto.
|2|| Letter dated December 13, 2002, from Hon. Judith S. Kaye, President, Conference of Chief Justices, to Jonathan G. Katz, Secretary, SEC, at 4.
|Footnotes to Appendix|
|1|| When an attorney has reported evidence of a material violation of law up the corporate ladder, does not receive an appropriate response and believes the violation is ongoing or about to occur and is likely to result in substantial injury to the financial interest or property of the issuer or of investors, the attorney must withdraw from representing the issuer, give written notice of that withdrawal to the Commission within one business day "indicating that the withdrawal is based on professional considerations" and "promptly disaffirm" any statement in a document filed with the Commission that the attorney prepared or assisted in preparing and "reasonably believes is or may be materially false or misleading" (Section 205.3(d)(1)(i)(A)-(C) (emphasis added)). Although the Proposed Rule requires that withdrawing counsel state only that he is doing so for "professional considerations," that code phrase "virtually ensures an immediate inquiry by the Commission," (Release at 41).
|2|| The definition of "material violation" in Section 205.2(i) includes, in addition to a violation of the securities laws, "a material breach of fiduciary duty, or a similar material violation."
|3|| As already noted (supra at 2-3, n.1), although counsel need only state that he is withdrawing for "professional considerations," a notice of withdrawal so phrased "virtually ensures an immediate inquiry by the Commission." (Release at 41).