1111 Superior Avenue
Cleveland, OH. 44114-2584
tel: 216 523-5000
December 18, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys
File No. 33-8150.wp
Dear Mr. Katz:
We are pleased to submit comments, as attorneys in the Eaton Corporation Law Department, to the Securities and Exchange Commission's proposed rule regarding Implementation of Standards of Professional Conduct for Attorneys (the "Proposed Rules").
The concerns addressed in this letter relate to three aspects of the Proposed Rules:
(1) The provisions of proposed Section 205.3(d) which require an attorney who has reported evidence of a material violation under paragraph 3(b) of proposed Section 205.2 to withdraw, to provide notice of the withdrawal to the Commission and, possibly, to disaffirm certain written material filed with or submitted to the Commission.
(2) The expansive definition of those attorneys who will be deemed to be subject to the mandates of the Proposed Rules as set forth in proposed Sections 205.2(a)(4), (c) and (f).
(3) The nature of the reporting obligations of an in-house attorney who both has "supervisory" responsibility and "subordinate" reporting relationships, particularly in light of the provisions of proposed Sections 205.3(b)(4) and 205.5(c).
Proposed Section 205.3(d)
As clearly set forth in Section 307 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), the Commission is directed to establish a rule that requires a reporting attorney who is not provided with an appropriate response to "report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors (comprised of non-employees), or to the board of directors". Neither Section 307, nor the legislative intent of Congress in enacting the Sarbanes-Oxley (see Blank Rome Comisky & McCaully LLP comment letter to the Proposed Rules, dated November 27, 2002) support the additional requirement of proposed Section 205.3(d) that a reporting attorney withdraw, provide notice of the withdrawal and, possibly, disaffirm involvement in written matters filed with or submitted to the Commission.
This "noisy withdrawal" requirement, and the resultant breach of the attorney-client privilege, is simply unjustified. We do not believe that the requirement that an attorney need only advise the Commission that he or she has withdrawn based on professional considerations is sufficient to avoid vitiating the attorney-client privilege.
With the exception of the requirements to withdraw and notify the Commission of the withdrawal, the "up the ladder" reporting requirements will, to the extent issuers and their counsel do not already engage in vigorous internal debate over matters involving corporate conduct, be beneficial. Requiring an attorney to report his or her disagreement over a proposed course of action to the Commission will, however, be counterproductive and may lead to attorneys becoming less involved or aware of contemplated corporate actions. In these difficult times, it is critical that the attorney-client relationship be preserved so that lawyers can assist their clients fully in complying with applicable law.
Our concerns over the obligation in the Proposed Rules to effect a noisy withdrawal are exacerbated by the number of difficult determinations that would have to be made by an attorney in deciding whether he or she has an obligation to notify the Commission. Even assuming an attorney knows that he or she is "appearing and practicing" before the Commission in the representation of an issuer, as defined in proposed Sections 205.2(a) and (f), he or she must, in order to avoid possible sanctions under propose Section 205.6, correctly answer several questions:
(1) Is or might there be a "material violation of the securities laws, a material breach of fiduciary duty or a similar violation requiring the attorney to report under proposed Section 205.3(b)(1)?
(2) If so, did the chief legal officer or the chief executive officer respond "appropriately" with a proper investigation and remedial action plan or within a "reasonable period of time" to the report of that material violation in accordance with proposed Section 205.3(b)(3)?
(3) If not, did the audit committee or board of directors respond appropriately to the report of the material violation required under proposed Section 205.3(b)(4)?
(4) If not, does the attorney "reasonably" believe that the material violation is "likely to result" in "substantial" injury to the issuer or its investors?
(5) In deciding what, if anything, to disaffirm, is the work product "materially false or misleading"?
In most circumstances, there will be no clear answers to these questions. Different attorneys, including those well versed in securities and disclosure law issues, may very well come to different (and reasonable) conclusions based on the same set of facts. The easy way out, particularly for an outside counsel who understandably will be concerned about his or her ability to represent other clients before the Commission, would be to notify the Commission. While the desire to protect one's livelihood is understandable, the risk to issuers of damage to their reputations through such disclosures that may be improper is too great to justify a "noisy withdrawal" and disaffirmation that not required by Sarbanes-Oxley.
Proposed Sections 205.2(a)(4), 205.2(c) and 205.2(f)
Proposed Section 205.2(a)(4) includes among those deemed to be practicing and appearing before the Commission any attorney, regardless of practice area, who participates in or gives opinions regarding any written material included among filings with the Commission, such as material contracts included as exhibits to Form 10-K. The Commission is correct in its statement in the release accompanying the Proposed Rules that attorneys play an important and expanding role in internal processes, in the governance of issuers and in ensuring compliance with applicable reporting and disclosure requirements. Many in-house attorneys and outside counsel, however, have no involvement with an issuer other than to advise with respect to their particular practice area (e.g., a workers compensation attorney who manages or litigates workers compensation cases, a patent attorney who prosecutes and files patents, a contracts attorney who drafts supply agreements, etc). These attorneys may be called upon to provide information or documentation to be included in an SEC filing. They may, for example, provide workers compensation information as a component of overall litigation exposure, or they may have drafted or provided advice regarding a material supply agreement. As a result, these attorneys would become subject to the Proposed Rules.
Proposed Section 205.2(c) also includes licensed attorneys who have made career choices to leave the practice of law, and to engage in other pursuits, such as serving the issuer as a human resources, finance or corporate development professional. Each of these employees may from time to time become involved (sometimes intimately) in the preparation of materials to be filed with the Commission. In most instances, however, none of these employees would be involved as counsel to the issuer providing legal advice.
We believe it would be appropriate to narrow the breadth of attorneys covered by these Proposed Rules to those attorneys who have significant and material substantive input into the preparation of filings by the issuer with the Commission in their capacity as an attorney for an issuer. Furthermore, we would suggest that participation in the preparation of any document submitted with a filing, such as a material supply agreement required to be included as an exhibit to a Form 10-K because it is a material contract, should be excluded from the types of activities which would give rise to a determination that an attorney so participating would be practicing and appearing before the Commission.
Attorneys Having Both "Supervisory" and "Subordinate" Reporting Relationships
Under the Proposed Rules, subordinate attorneys have personal responsibility to report evidence of perceived material violations of securities laws, or breach of fiduciary duty or similar violations, to their supervisory attorney. A subordinate attorney complies with proposed Section 205.3 upon reporting the matter to his or her supervisor without any obligation to further report "up the ladder." In many cases, an attorney who is not the chief legal officer will serve in both subordinate and supervisory roles. Does such an attorney comply with proposed Section 205.3 simply by reporting the matter to his or her supervisor, as provided by proposed Section 205.5(c), or must such attorney actually comply with the proposed Section 205.3 obligations imposed on supervisory attorneys by proposed Section 205.4(c)? The Proposed Rules should be clarified to provide that such an attorney has fully complied with proposed Section 205.3 by reporting the matter to his or her supervisor.
If you have any questions regarding our comments, we would be pleased to discuss them with you.
Very truly yours,
|/s/ Mark Hennessey || 216.523.4107|
|/s/ William F. Hogsett || 216.523.4112|
|/s/ David M. O'Loughlin || 216.523.4111|
|/s/ Gregory A. Smith || 216.523.4081|
|Attorneys in the Eaton Corporation Law Department