Palmer & Dodge LLP

December 24, 2002

Via E-mail -

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary

Re: File No. S7-45-02
Release Nos. 33-8150; 34-46868; IC-25829
Implementation of Standards of Professional Conduct for Attorneys

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:

  1. The lawyer's obligation is grounded on his or her professional responsibility to the organizational client and therefore should apply only where there is an attorney - client relationship.

  2. As a standard of professional conduct rather than a measure of competency, the obligation should be premised on what the lawyer knows rather than on a hypothetical reasonableness standard, but recognizing, as the Model Rules do, that knowledge may be inferred from the circumstances (which means that the attorney cannot ignore the obvious). If not exactly the same, this standard comes close to a scienter based standard that includes recklessness.

  3. An SEC rule substantially consistent with Model Rule 1.13 would implement the mandate of Section 307 in a manner that would promote compliance because of its simplicity and consistency with existing state court ethical requirements.

  4. If the SEC rules materially depart from existing state court requirements by creating special rules for lawyers involved in securities law disclosure and compliance matters, it will be necessary to define a class of those lawyers aware of their responsibilities under SEC rules and in a position to implement the Section 307 rule requirements. To the extent the Section 307 rules are substantially consistent with existing professional requirements, there is less need to draw this distinction.

  5. The judgments that lawyers are required to make in the corporate and securities area are complex and often involve intensely factual determinations as to materiality. Accordingly, the professional judgment that Model Rule 1.13 allows lawyers to exercise in determining how best to proceed under the particular circumstances to satisfy their obligations to the organizational client is especially important to preserve in the Section 307 rules.

  6. There is an important relationship between the obligations of a lawyer to report up-the-ladder and the strength of the corporate governance systems in place both to encourage such reporting and to respond appropriately. The interests of investors are best protected when lawyer reporting operates in tandem with effective corporate governance. Accordingly, with effective up-the-ladder reporting coupled with strengthened corporate governance, there is less compelling reason for the Commission to go beyond the Section 307 mandated rulemaking to address reporting out (whether noisy withdrawal, disaffirmation of reports or permissive disclosure of client confidences).

    • By focusing on lawyer reporting within a corporation having an effective legal compliance function as part of its corporate governance system, the Commission can avoid dealing with the difficult issues involved in balancing the need to protect client confidences to ensure access to effective representation by counsel that promotes legal compliance on the one hand and the need to provide, whether on a mandatory or permissive basis, necessary exceptions in limited circumstances to protect an overriding public interest on the other. Avoiding impediments to the ability of lawyers to be at the table to counsel legal compliance, which is what lawyers do every day, is especially important in the securities law area where the cornerstone of our effective securities regulatory system is the self-enforcement that comes from the active role of lawyers counseling compliance.

    • The Commission also can avoid addressing the difficult issues arising from the uncertainty of any effort by the Commission to preempt inconsistent state law or court rules protecting client confidences and preserving the attorney - client privilege.

    • Existing state court rules, patterned on the Model Rules, address in specific ways the obligation of lawyers to withdraw from representation of a client and in some circumstances to disclose client confidences and take steps to prevent the lawyers' services from being used to assist a client commit a crime or fraud. The ABA is currently considering strengthening these rules.

The foregoing conclusions and judgments lead us to specifically suggest the following:

  • The Commission should adopt an up-the-ladder reporting rule as close to Model Rule 1.13 as possible. A suggested form is attached.

  • The Commission should urge the exchanges to include in their corporate governance listing standards a requirement that corporations establish and disclose legal compliance procedures that include reporting to a chief legal compliance officer and, if necessary, to the full board or a board committee (which may be an existing committee, such as the audit committee) comprised of independent directors.

  • The Commission should identify the need for all lawyers to comply with existing state court rules governing lawyer professional conduct and monitor the efforts of the ABA and the state courts to strengthen them.

  • Consistent with the foregoing, if an attorney withdraws for professional reasons or believes he or she has been discharged to prevent reporting of a material violation, the circumstances of that withdrawal or discharge, as a matter of professional responsibility to the client, should be brought to the attention of the appropriate body at the board level as the authority ultimately responsible to act for the client.

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:

  • Requirements that are based on existing professional conduct standards will promote compliance.

  • By permitting lawyers to exercise the professional judgement contemplated by Model Rule 1.13 and companies and law firms to establish tailored legal compliance procedures, each within the parameters of the Section 307 requirements, the purposes of Section 307 will be more effectively achieved.

  • The Commission's rules will avoid interfering with the attorney - client relationship and impeding the role lawyers play in ensuring legal compliance.

  • The Commission will meet the mandate of Section 307 while following the historic restraint it has exercised in the regulation of lawyer professional conduct which is necessary to avoid chilling zealous advocacy.

  • The Commission's actions will recognize the important interrelationship between lawyer reporting up-the-ladder to meet responsibilities to the client and strengthened corporate governance systems that include mechanisms to ensure legal compliance.

We hope these thoughts are helpful. If you wish to discuss this further, please contact Stanley Keller at 617-239-0217,, or David R. Pokross, Jr., at 617-239-0287,

Very truly yours,

Palmer & Dodge, LLP


cc: Hon. Harvey L. Pitt

Hon. Paul Atkins

Hon. Roel Campos

Hon. Cynthia A. Glassman

Hon. Harvey Goldschmid

Giovanni P. Prezioso
General Counsel

Alan L. Beller
Director, Division of Corporation Finance
and Senior Counselor to the Commission


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.

Related Definitions

(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

  • Conform §205.4 to Model Rule 5.1 as it relates to Part 205.

  • Conform §205.5 to Model Rule 5.2 as it relates to Part 205.


  • As provided in §205.6(a), but indicating, in place of §205.6(b), that violation of Part 205 may, depending on the circumstances, form the basis for a finding of "improper professional conduct" under section 4C(a) of the Securities Exchange Act and Rule 102(e) of the Rules of Practice.

* A "knowledge" standard is preferable because it is consistent with Model Rule 1.13, but if the Commission wanted to make clear that the standard goes beyond "actual knowledge," it could add a recklessness standard.