Munger, Tolles & Olson LLP
Simon M. Lorne
writer's direct dial:
April 7, 2003
Via e-mail: firstname.lastname@example.org
Re: File No. S7-45-02
Ladies and Gentlemen:
This letter is submitted in response to the Commission's request for comments contained in Securities Act Release No. 8,150, "Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys" (Nov. 21, 2002) (the "November Release") and in Securities Act Release No. 8,186, "Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys" (Jan. 29, 2003) (the "Proposing Release") and the proposed rules relating to notification to the Commission upon the resignation of counsel (the "Proposed Rules") described in and a part of the Proposing Release.
In writing this letter, I do so individually, and not on behalf of my law firm (whose letterhead I use for purposes of identification only), any of my or our clients, or any other organizations with which I am or may be associated.
For two primary reasons, I find the objectives underlying the Proposed Rules inappropriate, and therefore cannot support any of the different formulations suggested. I do, however, offer a suggested alternative, less broad in scope, that might provide the Commission and the public with many of the benefits of the Proposed Rules.
Policy-Grounded Concerns with the Goals of the Proposed Rules. Regardless of the specific approach used-"noisy withdrawal," company 8-K obligation, a combination of both, or possibly other approaches-the suggested goal of the Commission in the Proposing Release is essentially to require that if a lawyer believes that a client is engaged in improper conduct, and cannot obtain, from the highest authority within the corporation, a response that is to the lawyer's satisfaction, the Commission should be made aware of the situation.
The impact of any such rule is not likely to be that lawyers will in fact report instances of wrongdoing. Rather, it is likely to be that clients, concerned with the newly-defined role and obligation of the lawyer, will defer to the lawyer's conclusions rather than those of management-quite possibly reached after consultation with other counsel-and will follow the lawyer's conclusions even when management, and possible other counsel, do not agree with the lawyer's analysis.
This transfer of decisional authority from business executives to outside lawyers is not desirable. Lawyers face a very different set of risk-reward parameters from those their clients face. They do not benefit particularly from decisions that advance the business interests of their clients, but they do face meaningful risk of expense and even liability in the context of what some court in some case may conclude to have been a client transgression. Even if lawyers were not constitutionally averse to risk, these risk-reward parameters would create a significant bias against accepting risk. Effectively giving the lawyers decisional authority separates decision-making from the consequences of decision-making; in that sense, it is contrary to the fundamental underpinnings of a market-driven, capitalist system.
I also believe-although reasonable minds do differ on this issue, and neither has any convincing empiric evidence-that such a proposal is likely to lead to less rather than more effective counseling. The arguments have been made many times, and are contained in other comment letters: lawyers seek to encourage client conduct that is compliant. Their ability to do so is dependent upon complete and unfettered access to information. Mandating disclosure of adverse information will inevitably lead clients to repose less confidence in their lawyers. Indeed, it should encourage lawyers to avoid receiving such information. Without information, lawyers will not be able to play an effective role in encouraging beneficial conduct. That is not an environment that is conducive to what should be the long-term goals of the Commission.
A potential alternative. As alternative approach, that would need to be developed further to be considered, might be the following: mandate that every issuer designate a "securities counsel of record," an individual lawyer or a law firm, who would have ready access to the board and the audit committee (or a qualified legal compliance committee if such a committee were to exist at the issuer). The expected nature of such a role-access to information, review of filings, etc.-would be one of the elements requiring consideration, as would other aspects of the nature of the role. I would, for example, contemplate that such a counsel would serve as counsel to the issuer, with no further public obligations-beyond those specified in the rule-than currently exist for an issuer's counsel in the relevant jurisdiction. For most issuers, there is already a firm serving in that capacity, and the only effect of the mandate would be publicly identifying that counsel. I might then suggest that the Commission mandate also that whenever an issuer changes its securities counsel of record, an 8-K report be filed containing no information other than that the securities counsel of record has changed, and identifying the new securities counsel of record. If there are other facts and circumstances that appear to warrant further inquiry, the Commission's staff could then make such an inquiry.
I do not mean to suggest that I would necessarily endorse such an alternative approach myself. I do, however, believe it would be a considerably more sound approach to the issue, and might achieve some of the Commission's goals. It is, in my view, an alternative worth exploring rather than adopting an approach that is, in my view, as fundamentally unsound as that in the Proposing Release.
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I appreciate the opportunity to provide these suggestions, and would urge the Commission to consider this issue with the extraordinary care and caution that it deserves.
cc: Hon. William H. Donaldson
Hon. Paul Atkins
Hon. Roel Campos
Hon. Cynthia A. Glassman
Hon. Harvey Goldschmid
Alan L. Beller
Senior Counsel to the Commission and
Giovanni P. Prezioso