Palmer & Dodge LLP
December 24, 2002
Via E-mail - firstname.lastname@example.org
Securities and Exchange Commission
Re: File No. S7-45-02
Ladies and Gentlemen:
This letter is submitted by Palmer & Dodge LLP to comment on the proposals of the Securities and Exchange Commission contained in Release Nos. 33-8150; 34-46868; IC-25829 dated November 21, 2002 to implement Section 307 of the Sarbanes - Oxley Act of 2002 regarding standards of professional conduct for attorneys. Rather than commenting in detail on the proposals, we address how the underlying purpose of Section 307 can inform its implementation and bring some clarity and simplicity to this complex issue.
The thrust of Section 307, which resulted from the Edwards amendment that had its roots in the March 28, 2002 forty professors' letter, is to ensure that lawyers fulfill their professional responsibility to the corporation, as the organizational client, by reporting material violations up-the-ladder within the corporation, ultimately, if necessary, to the level of the board of directors as the highest authority in the corporation in a position to take action in response. By doing so, lawyers protect the interests of the corporation's shareholders and other applicable constituencies. This, in fact, is the obligation that lawyers for corporations have under prevailing professional conduct rules of the state's highest courts, which historically have regulated lawyer ethical conduct. These rules are patterned on the ABA Model Rules of Professional Conduct, specifically Rule 1.13 regarding representation of the organizational client. Section 307 requires that this professional obligation be established by SEC rulemaking as a standard of federal law for lawyers for public corporations, with somewhat greater specificity regarding the up-the-ladder reporting obligation.
This underlying purpose for the Section 307 rules leads us to the following conclusions:
The foregoing conclusions and judgments lead us to specifically suggest the following:
We believe that the Commission's taking these actions to implement Section 307, particularly given the limited time frame allowed by Congress for adoption of an up-the-ladder reporting rule, will have the following benefits:
We hope these thoughts are helpful. If you wish to discuss this further, please contact Stanley Keller at 617-239-0217, email@example.com, or David R. Pokross, Jr., at 617-239-0287, firstname.lastname@example.org.
cc: Hon. Harvey L. Pitt
Hon. Paul Atkins
Hon. Roel Campos
Hon. Cynthia A. Glassman
Hon. Harvey Goldschmid
Giovanni P. Prezioso
Alan L. Beller
Suggested Rule Provisions
§ 205.3 Issuer as client.
(a) Representing an issuer. An attorney appearing and practicing before the Commission in the representation of an issuer represents the issuer as an organization and shall act in the best interest of the issuer and its shareholders and other applicable constituents. That the attorney may work with and advise the issuer's officers, directors, or employees in the course of representing the issuer does not make such individuals the attorney's clients.
(b) Duty to report evidence of a material violation. (1) If, in appearing and practicing before the Commission in the legal representation of an issuer, an attorney for the issuer knows [or is reckless in not knowing]* that a material violation of federal securities law, a material breach of fiduciary duty or similar material violation related to the representation by the issuer or by any officer, director, employee, or agent of the issuer has occurred, is occurring, or is about to occur, the attorney shall proceed as is reasonably necessary in the best interests of the issuer, including (i) to the extent necessary reporting on a timely basis any evidence of the material violation to the issuer's chief legal officer or chief executive officer or the issuer's board of directors or a committee of the board comprised solely of independent directors (which may be the audit committee or another existing committee of the board) which has responsibility for the oversight of legal compliance matters, and (ii) if the attorney reports a material violation to the chief legal officer or the chief executive officer of the issuer and reasonably believes that such officer has not provided an appropriate response or has not responded within a reasonable time, reporting any evidence of the material violation to the issuer's board of directors or an independent committee specified in clause (1). An attorney does not reveal client confidences or secrets or privileged or otherwise protected information by communicating such information related to the attorney's representation of an issuer to the issuer's officers or directors.
(2) An attorney who follows reasonable legal compliance procedures established by the issuer or the attorney's law firm that conforms to the requirements of paragraph (b) of this section satisfies his or her obligation under this section.
(a) "Appearing and practicing" - a definition may not be necessary if the requirements are substantially consistent with existing Model Rule 1.13. If a definition is needed, it should provide that: "Solely for purposes of this Part 205, appearing and practicing before the Commission shall mean having significant responsibility for an issuer's compliance with United States federal securities law, including satisfaction of registration, filing and disclosure obligations, or having overall responsibility for advising an issuer on legal compliance or corporate governance matter under the law of the United States or any state or territory thereof." In addition, nothing in the rules shall relieve an attorney from performing his or her obligations under applicable state court rules of professional conduct.
(b) "Appropriate response" - as defined in §205.2 but using the Model Rules definition of "reasonably believes."
(c) "Attorney" - as defined in §205.2.
(d) "Breach of fiduciary duty" - any breach of fiduciary duty recognized under common law in the United States or any state or territory thereof involving financial harm to the issuer that has not been adequately disclosed.
(e) "Evidence of a material violation" - a definition may not be necessary under the construct of §205.3, but if one is needed, it should refer to information that leads the attorney to reasonably believe (as defined in the Model Rules) that a material violation has occurred, is occurring, or is about to occur.
(f) "In the legal representation of an issuer" - acting in any way on behalf of an issuer that results in creation of an attorney - client relationship, whether employed or retained by the issuer.
(g) "Issuer" - as defined in §205.2.
(h) "Material" - conduct or information relating to or having an effect on the financial position of the issuer that there is a substantial likelihood a reasonable investor would consider important in making an investment decision, taking into account the total mix of information available to the investor.
(i) "Material violation" - not necessary.
(j) "Qualified legal compliance committee" - not necessary.
(k) "Reasonable or reasonably" - as defined in §205.2 (and Model Rule 1.0).
(l) "Reasonably believes" - as defined in Model Rule 1.0(i), meaning the attorney believes the matter in question and the circumstances are such that the belief is reasonable.
(m) "Report" - as defined in §205.2.
(n) "Chief legal officer" - the general counsel of an issuer or another person or persons designated by the issuer as having primary legal compliance responsibilities, who may but need not be an attorney or an employee of the issuer.
(o) "Knows" - as defined in Model Rule 1.0(f), meaning actual knowledge of the fact or matter in question, with a person's knowledge able to be inferred from the circumstances.
(p) "Similar violation" - a violation that the attorney reasonably recognizes as substantially similar to the specified violations.
Supervisory and Subordinate Attorneys