Nancy J. Moore
December 18, 2002
Jonathan G. Katz
Re: Proposed Rules: Implementation of Standards of Professional Conduct for Attorneys pursuant to Section 307 of the Sarbanes-Oxley Act of 2002
Dear Mr. Katz:
I am writing in response to the Commission's request for public comment on proposed rules issued by the Commission to implement Section 307 of the Sarbanes-Oxley Act of 2002. I am a professor of law at Boston University School of Law and have taught various courses on the law and ethics of lawyering for over 25 years. I served as Chief Reporter to the Ethics 2000 Commission, which drafted extensive amendments to the ABA Model Rules. In addition, I am chair of the MPRE Test Drafting Committee. I am also one of the signers of the letter drafted by Professor Richard Painter urging the SEC to adopt an "up-the-ladder" reporting requirement for lawyers representing public held companies.
With one exception, I support the comments of Professors Susan P. Koniak, Roger C. Cramton and George M. Cohen. In addition, I write to make several additional points that relate primarily to clarification in the drafting of the proposed rules and comments.
1. The Commission should defer regulating foreign lawyers who are licensed abroad and who do not either practice in the United States or communicate or file documents with the SEC.
The one exception I have to the comments of Professors Koniak, Cramton, and Cohen relates to the Commission's proposal to regulate foreign lawyers under an expansive definition of what constitutes practice and appearance before the Commission. I believe that it is important to gather further information regarding the practice of foreign lawyers with respect to securities work, particularly in its preliminary stages and in consultation with United States counsel, and to engage in further discussions with representatives of various foreign bar associations.
With regard to domestic law, it has been black-letter law that a lawyer licensed to practice in one state may give legal advice with regard to the law of another state without submitting to the jurisdiction of the other state for purposes of discipline. The ABA Model Rules were recently amended to assert disciplinary jurisdiction over lawyers not admitted by the host jurisdiction, but who provide (or offer to provide) legal services in that jurisdiction. (Rule 8.5(a)) Using current domestic law as an analogy to the problem that arises when a foreign lawyer gives a foreign client legal advice with regard to the law of the United States-but does not provide legal services in the United States-there is at least some question regarding both the authority and the desirability of asserting disciplinary authority over such foreign lawyers.
To illustrate my concern that the SEC may be sweeping too broadly in its efforts to regulate foreign lawyers, consider the following hypothetical. A foreign company is required to file documents with the SEC and retains United States counsel, either here or abroad. In preparing the documents, United States counsel finds it necessary to consult with foreign counsel (either employed or retained by the issuer) with regard to certain matters, e.g., the nature and significance of certain transactions handled by the foreign counsel. The foreign lawyer consulted may have little or no experience with either securities law, the SEC, or the requirements of United States ethics codes or other law. The lawyer may have evidence that United States counsel would understand to require reporting, but being unfamiliar with either securities law or the proposed (and hypothetically final) regulations, does not report such evidence. The foreign lawyer is now subject to discipline by the SEC. Although some might wonder why the foreign lawyer would care, since he or she is not practicing here, it is my experience that lawyers care very deeply about even potential discipline; moreover, an increasing number of foreign lawyers anticipate future practice in the United States and would be fearful of the consequence of any disciplinary proceedings against them. Moreover, even assurance that the SEC intends to act reasonably and would be unlikely to proceed against such a lawyer will not eliminate the fear that some foreign lawyers will have over being subject to the disciplinary authority of such an unfamiliar body.
Further consultation with foreign lawyers and representatives of foreign bar associations may help the SEC to craft more carefully tailored regulations as they apply to such lawyers. For that reason, the SEC should defer regulating foreign lawyers who are licensed abroad and who do not either practice in the United States or communicate or file documents with the SEC.
2. The Commission should clarify which state ethics rules have been preempted and should not preempt state rules that require more of securities lawyers than the Commission's rules.
I support the recommendations by Professors Koniak, Cramton, and Cohen with regard to preemption. I am particularly concerned that the Commission's regulations not preempt state ethics codes that prohibit lawyers from knowingly counseling or assisting a client's crime or fraud. (ABA Model Rule 1.2(d).) For example, even when the issuer refuses to take appropriate remedial measures, the Commission's regulations do not require in-house counsel to resign; nevertheless, state ethics codes prohibit such a lawyer from further participating in the matter itself, when the lawyer knows that the lawyer's participation would assist the client in criminal or fraudulent conduct. Similarly, even when the issuer refuses to take appropriate remedial measures, a reporting lawyer need not make a "noisy withdrawal" or make certain disclosures under certain circumstances (e.g., when a subordinate lawyer has reported to his or her supervisor or when a CLO has reported to a QLCC); nevertheless, when precluded from doing so by state ethics codes, such lawyers should not be permitted to further participate in the matter itself, when the lawyer knows that the lawyer's participation would assist the client in criminal or fraudulent conduct. For this reason, the Commission should explicitly state that it is not preempting state rules that require more of securities lawyers than the Commission's rules, including Rule 1.2(d).
3. The Commission should clarify that a Qualified Legal Compliance Committee (QLCC) has authority and responsibility to retain counsel for any advice with regard to its responsibilities under these rules.
Under Section 205.2(j)(4)(ii)(C), a Qualified Legal Compliance Committee is defined to include a committee that has the authority and responsibility "to decide whether an investigation is necessary to determine whether the material violation described in the report has occurred, is occurring, or is about to occur and, if so, to....[r]etain such additional expert personnel as the committee deems necessary." (Emphasis added.) I assume that lawyers so retained represent the committee itself (and not the issuer) and that the issuer must pay for the representation, but it might be helpful to so specify either in the regulations themselves or the commentary. More important, the committee should be authorized to retain counsel for purposes other than to conduct an investigation; for example, to assist the committee in deciding whether an investigation is necessary. To clarify this point, subparagraph ((4)(ii)(C) could be deleted and relocated to a new subparagraph (4)(iv).
4. The Commission should consider imposing stricter requirements for the independence of the non-audit committee members of a QLCC.
Under Section 205.2(j)(1), a QLCC must consist of at least one member of the issuer's audit committee and two or more board members who are not employed "directly or indirectly" by the issuer. (Additional requirements are imposed for registered investment companies.) If the goal is to insure the "independence" of the two additional board members, it may not be sufficient to limit the disqualification to current employment. Rather, the Commission should consider requiring that such board members not have been recently employed by the issuer; moreover, such board members should not be dependent on management of the issuer, e.g.,because they or companies with which they are affiliated conduct significant business with the issuer. The same comment would apply to Section 205.3(b)(4)(ii) and (iii).
5. The Commission should clarify the responsibilities of the chief legal officer (or the equivalent thereof) who does not refer a report to a QLCC.
Section 205.3(b)(3) sets forth the obligations of a chief legal officer (or the equivalent thereof) (CLO) who receives evidence of a material violation. That section details the obligations of the CLO if the issuer fails to take any remedial measure directed by a QLCC, including notifying the Commission that a material violation has occurred, is occurring or is about to occur, and disaffirming in writing certain documents submitted to the Commission. It is unclear in this section itself whether the CLO has similar obligations if the CLO has not referred the matter to a QLCC and the issuer has failed to take remedial measures as advised or directed by the CLO. This is a question of great importance to lawyers who represent issuers who have not adopted a QLCC, and I urge the Commission to clarify their responsibilities in this section.
6. The Commission should define "chief legal officer or the equivalent thereof".
Section 205.3(b)(1) requires lawyers under certain circumstances to report to "the issuer's chief legal officer (or the equivalent thereof)." Paragraph (b)(3) requires "the chief legal officer (or the equivalent thereof) to inquire into the evidence reported. Neither "chief legal officer" or "the equivalent thereof" are defined in the regulations themselves. The current commentary to paragraph (b)(3) suggests that chief legal officer means general counsel (presumably inside general counsel) and says expressly that the "equivalent" is "the chief executive officer," who would probably authorize outside counsel to conduct the inquiry. The definition of these terms is particularly important with regard to companies that do not have inside counsel. Given that the commentary will not be published except in the initial release accompanying publication of the final regulations, I strongly urge the Commission to define these terms in the regulations themselves, for the guidance of lawyers attempting to comply with their obligations under these rules.
I appreciate the opportunity to submit these comments to the Commission and look forward to seeing the final regulations.
Very truly yours,
Nancy J. Moore