Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
(By electronic mail)
December 17, 2002
Re: PROPOSED RULES, PURSUANT TO SECTION 307 OF THE SARBANES-OXLEY ACT OF 2002 UNDER FILE NUMBER 33-8150.WP
Dear Mr. Katz:
I write in response to the Commission's request for public comment on its Proposed Rules for Implementation of Standards of Professional Conduct for Attorneys, 17 CFR Part 205 (the "Proposed Rules").
I comment on questions raised in the Commentary to the Proposed Rules and raise one additional question.
One need be neither a "qualified" (by a Bar) nor "hold himself or herself out as .. . . qualified to practice law" to influence a corporation's legal determinations. Legal experts who work in consulting firms may not be active members of a Bar and have consistently denied that they are practicing law. Isn't a potential response to the Proposed Rules that legal experts on securities law will organize in consulting firms, not continue as Bar members, and consistently write engagement letters denying that they are qualified to practice law?1
Unless the definition of attorney is revised, one result of these Proposed Rules might well be an ironic one. Instead of Enron's and Arthur Anderson's demises reducing demand for MDP's [Multi-Disciplinary Practice firms], the Proposed Rules will increase demand for such firms and stimulate new firms of non-practicing securities law consultants. Lawyers who give up professional activities and, e.g., work for investment banks, it seem to me, will be able to structure their relations with issuers to avoid satisfying the regulation's "attorney" definition.
The Commission has various options. First, the Rules' usage could be changed from "Attorney" to "Legal Expert." This would be in accord with the declared intention of promulgating a rule for 102(e). Rule 102(e) applies to legal experts, not just those "who practice law" as Bars (and courts) define that concept.2 The weaknesses of the legal profession's monopoly on legal services make it both appropriate and necessary not be tied down to "attorney." A second response would be to incorporate into the Rules the Virginia definition of legal practice, provided in note 33. Third, the Rules could specifically include auditing, investment banks and consulting firms as organizational sites of attorneys that are being regulated.3 Fourth, at the least, 205.2(c) could read: "who is or has been admitted …"
This proposed change should not be understood as expanding the scope of the Rules, but as properly limiting it. According to the definition of "appearing and practicing" (205.2(a)), that concept is limited to attorneys. The Commentary states: "The proposed definition of 'appearing and practicing' is broad enough to include attorneys who . . .. do not act in their capacities as attorneys, but who either transact business with the Commission or assist in the preparation of documents filed with or submitted to the Commission." (emphasis added) If so, under the proposed definition of "attorney," whether CEOs or CFOs would be "appearing and practicing" would depend on their legal qualifications. Is this right? Or should it depend on whether the CEOs or CFOs relied on their own legal expertise in corporate decision-making?
It these attorneys are not included, a response of some corporations will be to even further increase the numbers of legally trained individuals who work outside the legal department. In my experience, in large corporations, more legally trained individuals report to the CFO than the CLO. These legal experts may serve, for example, as tax managers, who are increasingly likely not to be accountants but legal experts,4 who neither are Bar members nor hold themselves out as qualified to practice law. Unless they are included as "attorneys" they will not be subject to the Proposed Rules, even if they assist in preparing documents to be filed with the Commission.
As important, if these legal experts are subject to the Proposed Rules, they and their corporations will have incentives to have their work supervised by the CLO or others in the legal department: If these legal experts are subordinate attorneys, they and their corporations attain the permissive obligations of 205.5. Under current corporate incentives, an increasing amount of legal work is supervised by neither the legal department nor outside law firms.5
In many corporations, legal departments are purchasing agents and gatekeepers for outside counsel.6 Contracts with outside counsel often state that outside counsel work under the "supervisory authority" of the CLO. Although this is clearly not the intent of the Proposed Rules, I do not see language that would prevent such outside counsel from claiming that they are subject to the permissive duties of 205.5(d), rather than the mandatory duties of 205.3(b).
And, my additional question:
205.3(b) 6) says such legal experts are deemed to be appearing and practicing when the violation has moved up the ladder under (b)(1), (b)(4) or (b)(5). The Proposed Rules, as I read them, are silent on whether legal experts retained after a violation has been reported under 205.3(c) are deemed to be appearing and practicing before the Commission. I think they need to be. There will be situations in which the QLCC rejects or limits their advice. There will be situations when legal experts should be subject to sanctions for their advice and tort liabilities insufficiently deter. A safe harbor for legal experts who have reported the violations to the QLCC and follow the QLCC's direction may be an appropriate recognition of the corporate entity. But attorneys who serve the QLCC must be authorized to contact the entire Board, if not the Commission, should the QLCC not issue appropriate remedial measures and/or sanctions. The Commission itself needs authority to sanction legal experts retained after a 205.3(c) report in order to insure the appropriateness of the remedial measures and/or sanctions authorized by the QLCC.
Clarifying the responsibilities of lawyers serving the QLCC is particularly important if the Commentary's estimate is understated and more than one-quarter of issuers will form a QLCC (VII (B)). I suspect this estimate is understated, at least because if I were advising an issuer, I would advise them to form a QLCC and issue rules that any material violations be reported directly to the QLCC. And if I were advising securities lawyers, I would advise them that formation of a QLCC is a prerequisite for their engagement.
If the Commentary's estimate is not reliable, then the Proposed Rules may impose significant additional costs. Nonetheless, I believe these additional costs are justified. I do not have the faith that the Proposed Rules place in board committees. I believe the current scandals demonstrate the frailties of Audit Committees and I have no reason to suspect that QLCCs will do a better job. Nonetheless, I support the Proposed Rules as a natural extension of current legal understandings and a development that must be pursued. It is an experiment that follows from our previous ones.
For this development to have a chance at being a success, I offer these comments and suggest an additional question for the Commission to address.
Thank you for your consideration and best wishes for the success of your efforts,
|Very truly yours,|
Robert Eli Rosen
Professor of Law
|1||The definition's inclusion of "or otherwise qualified" doe not include such attorneys for at least two reasons. The last general term in a list is interpreted as modifying the previous terms in the list, Ejusem generis, both of which refer to Bar procedures. As there are attorneys who are "qualified for limited" representations, the definition as it stands should be interpreted as referring to such lawyers as those who are "otherwise qualified."|
|2||17 CFR 201.102(e)(2) & (f)(2)|
|3||N.B.: Tax and compliance experts (many of whom are legally trained) have not yet exited the auditing firms, even though their value derives in large part from the sorts of conflicts of interests that the Commission should work to eliminate.|
|4||See Robert Eli Rosen, As the Big 5 Become Multi-Disciplinary Practices, Opportunities Abound for Tax Executives, 51 THE TAX EXECUTIVE 147 (1999).|
|5||See Robert Eli Rosen, "We're All Consultants Now": How Changing Client Organizational Strategies Influences Change in the Organization of Corporate Legal Services, ARIZONA LAW REVIEW (forthcoming).|
|6||See Robert Eli Rosen, The Inside Counsel Movement, Professional Judgment and Organizational Representation, 64 INDIANA LAW JOURNAL 479 (1989).|