Telecom Corporation of New Zealand Limited
M J VERBIEST
18 December 2002
Mr Jonathan G Katz
Dear Mr Katz
PROPOSED RULE: IMPLEMENTATION OF STANDARDS OF CONDUCT FOR ATTORNEYS
Background - Telecom New Zealand
Telecom Corporation of New Zealand Limited ("Telecom") is New Zealand's largest listed company, and is also listed on the Australian and New York stock exchanges. Telecom is committed to excellence in corporate governance, and is widely regarded as a leader of good governance practice in New Zealand.
Telecom is concerned that aspects of the proposed rules of conduct for lawyers might ultimately prove counter-productive to the development of best practice international corporate governance.
Telecom supports principles underpinning Sarbanes-Oxley
Like many foreign private issuers, Telecom supports and endorses the principles of excellence in corporate governance that underpin the introduction of the Sarbanes-Oxley Act 2002, and the SEC's efforts effectively to implement its provisions.
While many aspects of the Act and resulting rules will no doubt improve the quality of disclosure by public companies and instill greater confidence in US capital markets, Telecom is concerned that elements of the proposed rules regarding professional conduct of attorneys could inhibit this objective, and may affect the ability of companies to receive the best legal advice.
Proposed rules over-reach in respect of foreign lawyers
As currently drafted, the proposed rules seek to apply certain standards on non-US lawyers, particularly as to knowledge of US laws, that they may simply be incapable of meeting. If widely-drawn factual circumstances are met, a non-US lawyer practising far removed from securities laws, let alone US-securities laws, may be fixed with an obligation to meet a test (as to `material violation' of US law) for which they have no training, nor in which they are authorised to practise. This would, in our respectful opinion, be inappropriate.
Proposed rules inhibit ability of lawyers to encourage compliance
A superficial response might suggest that the effect of the proposed rules for most companies such as Telecom (who value the contribution of lawyers helping them understand and meet their reporting obligations, and who cannot envisage breaching any of its obligations such as to trigger its lawyers' actions under the proposed rules) should, in a practical sense, be relatively minor - such companies will still use lawyers, will still encourage them to provide their advice fearlessly, and will still enable them to report `up-the-ladder' in any event.
The new rules, however, might perversely and inadvertently inhibit lawyers and their clients from fully complying with their reporting obligations if they become less willing to engage in full and frank discussion of the issues. Currently, lawyers and their clients can engage in vigorous confidential debate as to the appropriate course when faced with challenging factual circumstances. Yet under the proposed rules, such debate will be stifled if lawyers are perceived as in effect having a veto power through the threat of `noisy withdrawal' and the debate itself ultimately being made public, irrespective of whether the lawyer's opinion might subsequently be proved wrong.
From a corporate perspective, the public impact and brand damage of such potential disclosure would likely, and may very significantly, outweigh the company's ability ultimately to `set the record straight'. As a result, we are concerned that these tendencies could take root even in compliance-minded companies such as Telecom.
From a broader market perspective, public confidence in capital markets would hardly be advanced when non-US lawyers, in the genuine but mistaken belief that they have identified a violation of US law, in which they are not qualified, may be required to `expose' companies that might be found in fact to have done nothing wrong.
At a very practical level too, companies with a strong compliance and governance culture might also adversely be affected if the proposed rules encourage the occasional `bad apple' manager to limit information-flow to a company's lawyers. It may prove more difficult for such companies to detect improper activity at the earliest stage.
Ironically, it is the behaviour of the very companies that rules should be designed to detect, those who have less of an ingrained compliance culture, that the proposed rules may instead create an environment potentially limiting the ability of lawyers to receive information that might enable them to detect such behaviour.
In short, company lawyers, particularly in-house lawyers, are an important element of the `checks and balances' that companies use to help detect inappropriate activity, yet the policing role required of lawyers under the proposed rules could strain lawyer-client relations, inhibiting the prospect of full and frank disclosure that would best enable lawyers to detect and effectively address improper behaviour.
Proposed rules inhibit ability for companies to obtain best legal advice
If information flows are constrained and companies deterred from fully involving lawyers, this would constrain the receipt of fully informed, adequate and appropriate legal advice. For a company, as with any client, to receive the best legal advice, it needs to be able to make full and frank disclosure to its lawyers.
Overall, the proposed rules would diminish the effectiveness of the lawyer-client relationship, to the detriment of companies' ability to obtain the best legal advice to facilitate compliance, and of using its lawyers effectively to help detect and address improper corporate behaviour.
In our opinion the real issue is ultimately that of facilitating the continued principled development of effective corporate governance, in which lawyers play an important role, rather than necessarily focusing on lawyers as a substitute for good governance, particularly as doing so raises serious conflicts that may be counter-productive to Sarbanes-Oxley principles. We appreciate, however, the constraints of the Commission's mandate.
Telecom reiterates its support for the principled development of excellence in corporate governance, and respectfully invites the Commission to implement rules that do not inadvertently conflict with that overriding goal.