NAGASHIMA OHNO & TSUNEMATSU
Kioicho Bldg, 3-12, Kioicho, Chiyoda-ku, Tokyo, 102-0094, Japan Telephone: 81+3-3288-7000 Facsimile: 81+3-5213-7800 |
December 18, 2002
Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC, USA
20549-0609
| Re: | File No. 33-8150.wp - Implementation of Standards of Professional Conduct for Attorneys (the "Proposed Rule") |
Dear Mr. Katz:
We are Nagashima Ohno &Tsunematsu, a law firm in Tokyo, Japan, practicing Japanese law.
We are writing to express our concern as to the broad scope of the Proposed Rule. All attorneys practicing in our firm are members of the Japan Federation of Bar Associations (the "Federation") and the relevant local bar associations located in Tokyo. The Proposed Rule of the Securities and Exchange Commission (the "Commission"), if adopted in the proposed form, would impose obligations on attorneys licensed in non-U.S. jurisdictions ("Foreign Attorneys"). Our fundamental concern is that only attorneys qualified to practice law in the United States will have the resources and ability to comply with the obligations under the Proposed Rule. Therefore, we believe that Foreign Attorneys should be exempt from the Proposed Rule.
The application of the Proposed Rule to Foreign Attorneys and, in particular, attorneys qualified and registered to practice law in Japan ("Japanese Attorneys"), would in our opinion be highly inappropriate.
The reasons for our opinion are set out below.
Only the Federation and local bar associations in Japan should have the power to regulate and discipline Japanese Attorneys under the Practicing Attorney Law of Japan (Bengoshi-Ho: Law No.205 of 1949, as amended). However, under the Proposed Rule, the Commission would be given authority to supervise and discipline attorneys. If the obligations under the Proposed Rule are applied to Japanese Attorneys, the obligations would encroach on the powers and duties of the Federation and the relevant local bar associations in Japan.
We believe that the conduct of attorneys should be governed by rules implemented by the supervisory authority of the relevant jurisdiction (in Japan, the Federation) where such attorneys are licensed. This prevailing principle is recognized worldwide. The Federation, in conjunction with local bar associations in Japan, is the autonomous body responsible for the regulation of Japanese Attorneys. They are independent of the Japanese courts and government agencies, including administrative agencies. Only the Federation and individual local bar associations have the power to implement rules and regulations for Japanese Attorneys, including disciplinary action, pursuant to the Practicing Attorney Law of Japan. Neither the Japanese government nor any governmental entity has any disciplinary power over Japanese Attorneys, apart from their general authority with respect to criminal and other general administrative actions.
However, the intent of the Proposed Rule is to apply the Commission's rules to any person admitted to practice law in any jurisdiction, domestic or foreign, so long as such person falls within the Commission's definition of "appearing and practicing before the Commission". (See II. SPECIFIC OBSERVATIONS -Who are the attorneys "appearing and practicing before the Commission"? below.) This is inconsistent with the autonomy granted to the Federation and local bar associations under Japanese law and also the prevailing principle recognized worldwide.
In addition, attorneys should not be made subject to the ethics requirements of another jurisdiction without their prior knowledge and consent. While it is unfair that the Proposed Rule has the potential of subjecting Japanese Attorneys to inconsistent regulatory regimes, it is even more unfair that although Foreign Attorneys have no official standing to participate in the legislative process of the Sarbanes-Oxley Act of 2002 leading up to the promulgation of the Proposed Rule, Foreign Attorneys will become subject to its rules of professional conduct. If the Commission seeks to subject Japanese Attorneys to the rules under the Proposed Rule, the Commission should cause the U.S. government to enter into multi-lateral treaty discussions with the relevant foreign governments in order to effect such a result.
The Proposed Rule requires Foreign Attorneys to analyze, construe and apply U.S. laws even though they may not have the expertise and capacity to do so. We believe this is quite unreasonable and inappropriate.
For a Foreign Attorney to competently identify what constitutes a "material violation of the securities laws" or a "material breach of fiduciary duty," the attorney would need to be in a position to understand and advise, as an expert, on U.S. law. The underlying assumption of the Proposed Rule that every attorney in the world is knowledgeable of U.S. laws and similarly qualified to act in compliance with U.S. laws is wrong. Most Japanese Attorneys do not have sufficient knowledge of U.S. securities laws and regulations to accurately determine whether they or a Japanese issuer or its affiliates would be in violation of U.S. securities law, which would give rise to the reporting requirements under the Proposed Rule. Japanese Attorneys are not competent to determine whether a certain set of facts, or an omission of certain facts, violates U.S. law.
For example, the Proposed Rule includes various terms that have specific legal definitions under U.S. law. The meaning of the terms, "reasonably prudent and competent," "appropriate response" and "substantial injury" cannot be construed simply from an understanding of plain English. Only U.S. qualified attorneys could make such determinations, not Japanese Attorneys.
If the Proposed Rule is adopted, a Foreign Attorney would be required to evaluate whether its issuer-client has committed, is about to commit or is likely to commit a material violation of U.S. securities laws or fiduciary duties, even though the attorney is neither trained nor qualified to practice U.S. law. It is unrealistic and improper to expect Foreign Attorneys to be competent in U.S. law.
One of the most significant problems of the Proposed Rule results from the conflicting obligations which would arise under the simultaneous application of the Japanese and U.S. legal regimes with respect to attorney-client privilege.
Proposed Rule 205.3(d) requires that if an attorney who has reported evidence of a material violation does not receive an appropriate response to his or her report and the attorney reasonably believes that a material violation is ongoing or is about to occur and is likely to result in substantial injury to the financial interest or property of the issuer or of investors, then the attorney must disaffirm to the Commission any opinion, document, affirmation, representation, characterization, or the like in a document filed with the Commission that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading. Also, such attorney is required to withdraw from representing the issuer and give written notice to the relevant issuer and the Commission of the attorney's withdrawal, indicating that the withdrawal was based on professional considerations.
However, the obligation to report to the Commission would, in most instances, result in a breach of Article 23 of Chapter IV of the Practicing Attorney Law of Japan. Article 23 provides that:
A practicing attorney or a person who was previously a practicing attorney shall have the right and duty to maintain the secrecy of any facts which he came to know in the performance of his profession; provided, however, that this shall not apply when otherwise provided for by any statute.
Article 23 imposes a duty of confidentiality on all Japanese Attorneys requiring them to maintain the confidentiality of information obtained in the course of their duties unless otherwise required under a Japanese statute. This duty of confidentiality is regarded as one of the most important duties imposed on Japanese Attorneys and is regarded as a fundamental prerequisite for Japanese Attorneys to properly represent clients and provide legal services.
The Proposed Rule, if adopted in the proposed form, would require the Japanese Attorneys to disaffirm to the Commission any opinion, document, affirmation, representation, characterization, or the like in a document filed with the Commission that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading. In such case, such disaffirmation is tantamount as a practical matter to the specific disclosure of a violation or breach by the relevant issuer-client of any securities laws, fiduciary duty or similar violation, in which case the Japanese Attorneys who so disaffirmed will be construed to commit a violation of the confidentiality obligation imposed under Article 23 of Chapter IV of the Practicing Attorney Law of Japan. Furthermore, it would likely be construed to constitute a breach of such Article 23 if such Japanese Attorneys give notice of their withdrawal to the Commission, indicating that the withdrawal is for "professional considerations", because such indication of the "professional considerations" to the Commission would be, under the Proposed Rule in the proposed form, equivalent as a practical matter to an implied or explicit disclosure of the violation or breach by the relevant issue-client of any securities laws, fiduciary duty or similar violation without specific disclosure of the details thereof.
Exemptions from this duty are limited to those permitted by statute, not rules or regulations prescribed by an agency of the government. In addition, Japanese courts have only allowed exceptions to the attorney-client privilege in extremely limited circumstances, such as when disclosure would prevent a serious violent crime.
Japanese law does not expressly provide any exception to Article 23 which would permit a Japanese Attorney to submit a report under the Proposed Rule to the Commission without the client's express consent. Therefore, Japanese Attorneys would not be able to comply with the Proposed Rule without violating their duty of confidentiality under the Practicing Attorney Law of Japan.
The Proposed Rule provides that certain notifications by an attorney will not breach the attorney-client privilege, including Rule 205.3(b), 205.3(d)(3) and 205.3(e). However, these exemptions to the attorney-client privilege are limited to attorneys licensed or practicing in the U.S. They do not provide any relief to Japanese Attorneys as the Proposed Rule does not provide any exemption to the duties of confidentiality that Japanese Attorneys owe to their clients under Japanese law. Any exemptions provided to attorneys under U.S. law will be of no assistance to Japanese Attorneys.
Even if such an exception is made to the Japanese attorney-client privilege, it could lead to two counter-productive results. First, it may result in Japanese issuers becoming less forthcoming in disclosing potentially material adverse information to their attorneys. This is the very reason that, historically, the duty of confidentiality has been regarded as one of the most important duties imposed on Japanese Attorneys. Second, because Japanese Attorneys are uncertain as to what might constitute a violation of U.S. laws, they may take an even more conservative position by erring on the side of caution and disclosing information to the Commission which is not material. Therefore, even if exemptions were available to the Japanese attorney-client privilege, the intention of the Proposed Rule could still not be achieved.
In practice, Japanese Attorneys play only a support role in assisting U.S. attorneys with filings by Japanese issuers with the Commission. The central role is performed by U.S. attorneys. Japanese Attorneys simply assist the filing process as local law counsel of Japanese issuers. The services Japanese Attorneys render to Japanese issuers are usually inconsiderable in substance and the assistance would be made only within the physical boundaries of Japan. Therefore, the Proposed Rule should not be applicable to Japanese Attorneys.
For the reasons set out above, we strongly urge the Commission to exempt Foreign Attorneys from the Proposed Rule.
Based on the general observations referred to above, we set out below our specific comments and observations in response to the solicitation by the Commission of comments on Section 205.2 Definitions of the Proposed Rule.
Foreign Attorneys should generally be excluded from the definition of Proposed Rule 205.2(a)(4). As noted above, we believe the Proposed Rule should be revised to provide that it does not apply to Foreign Attorneys. However, should the Commission determine to apply the Proposed Rule to Foreign Attorneys, we encourage the Commission to revise the Proposed Rule to provide that legal services performed by Foreign Attorneys on behalf of their clients fall within the definition of "appearing and practicing before the Commission" if, and only if, Foreign Attorneys file documents with or physically appear before the Commission in the course of representing their clients.
As noted above, we believe the Proposed Rule should be revised to provide that it does not apply to Foreign Attorneys. However, should the Commission determine to apply the Proposed Rule to Foreign Attorneys, we encourage the Commission to revise the Proposed Rule to provide that an appropriate response means a response which is appropriate under the relevant law and practice of the foreign jurisdiction where the Foreign Attorney is licensed to practice law. The standard for what constitutes an appropriate response should also take into consideration the level of knowledge, experience and expertise that such Foreign Attorney should reasonably be expected to have in his or her home jurisdiction.
The reason for our view is that, as discussed above, Foreign Attorneys, including Japanese Attorneys, do not have sufficient practical knowledge of U.S. laws to determine what constitutes an "appropriate response" under the Proposed Rule. As such, it is not reasonable to require Foreign Attorneys to determine whether a response provided by an issuer-client pursuant to the requirements of the Proposed Rule constitutes an appropriate response under U.S. laws and practice.
What are the difficulties in applying Part 205 to law firms that operate in multiple jurisdictions or that are not admitted to practice law in the U.S., but do participate in the preparation of documents filed with the Commission? Are there different considerations in the application of Part 205 in this circumstance depending on whether the law firm in question is principally based in the U.S. or outside the U.S.?
Part 205 requires an attorney "to report a material violation of securities laws or breach of fiduciary duty or similar violation by the company or any agent thereof." Even if Japanese Attorneys are competent to evaluate the existence of a violation of Japanese securities law and Japanese fiduciary duty, Japanese Attorneys are not competent to assess the materiality of such violation of Japanese securities laws or breach of Japanese fiduciary duty as a matter of U.S. securities law.
Japanese Attorneys are not usually, and should not be required to be, experienced in practicing U.S. law in connection with their involvement in any filing by Japanese issuers of their disclosure documents with the Commission nor should Japanese Attorneys be expected to retain U.S. lawyers when advising Japanese issuers on such matters.
What are the difficulties in applying Part 205 to an issuer's in-house attorneys who are admitted to practice law in a foreign jurisdiction, including Japan, but are not admitted to practice law in the U.S. and who participate in the preparation of documents filed with the Commission?
Currently in Japan, the vast majority of issuers' in-house legal staff are not licensed to practice law in Japan, although this may change over time. Issuers' legal staff who are licensed to practice Japanese law face constraints similar to those of outside counsel licensed in Japan. Therefore, employees of an issuer's legal department who are admitted to practice Japanese law should not be required to determine, nor should they be required under Part 205 to know, whether under the Proposed Rule there is a material violation of U.S. securities laws, a breach of fiduciary duty or similar violation by the issuer or any agent thereof.
Are there mechanisms that satisfy the objectives of Part 205 that would apply the rules to a narrowed category of foreign-licensed attorneys?
We do not believe such mechanisms are feasible in Japan. As discussed above, the objectives of Part 205 are, among other things, to impose a "noisy withdrawal" requirement on Foreign Attorneys. This requirement is contrary to the fundamental legal framework governing the duties of all Japanese Attorneys, particularly conflicting with the duty of confidentiality imposed under Japanese law. Furthermore, we believe there is no particular category of Japanese Attorneys who are or should be required to know and be familiar with U.S. laws in order to practice Japanese law in Japan.
Is a Commission proceeding against an attorney that violated Part 205 of the Proposed Rule reconcilable with a disciplinary proceeding in the home jurisdiction?
The Federation and the relevant local bar associations are the only authorized bodies with supervisory and disciplinary power over the activities of the Japanese Attorneys under Japanese law, except for general authority of criminal actions and other general remedies under civil actions.
The Proposed Rule clearly contradicts the framework of the power granted to the Federation and the local bar associations over Japanese Attorneys.
Part 205.3 would require attorneys to perform certain acts based on their determination of "reasonableness," such as, attorneys shall take steps "reasonable," if they "reasonably" believe it is futile to report to the issuer or there is no response within a "reasonable" time, and retain documentation for a "reasonable" amount of time.
The Commission commented that the definition of "reasonable" or "reasonably" is taken from Rule 1.0(h) of the ABA's Model Rules of Professional Conduct.
Japanese Attorneys cannot reasonably be expected to know or adhere to U.S. laws and practice in providing legal advice to their Japanese issuer-clients in Japan. Furthermore, the ABA's Model Rules are not the legal standard in Japan that Japanese Attorneys must follow. Accordingly, Japanese Attorneys should not be subject to requirements to determine what is "reasonable" under U.S. jurisprudence and standards.
The Proposed Rule intends to provide that an attorney retained by the issuer shall withdraw forthwith from representing the issuer, indicating that withdrawal is based on professional considerations and within one business day, give written notice to the Commission of such withdrawal based on professional considerations.
This notification requirement under the Proposed Rule clearly contradicts the confidentiality obligation imposed under Article 23 of the Practicing Attorney Law of Japan. Japanese Attorneys should be exempt from the noisy withdrawal requirement.
Proposed Rule 205.3(d) seeks to obligate attorneys who withdraw from representing an issuer to disaffirm any opinion, document, affirmation, representation, characterization, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading.
This obligation on Japanese Attorneys to disaffirm breaches the confidentiality duties under the Practicing Attorney Law of Japan, as mentioned above.
For the reasons set out above, we request that the Commission exempt Foreign Attorneys from the attorney-reporting duties under the Proposed Rule.
Should you have any questions concerning this letter, please contact any of the undersigned, as we would welcome the opportunity to be of assistance.
Yours very sincerely,
Nagashima Ohno & Tsunematsu
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