MFS INVESTMENT MANAGEMENT
500 Boylston Street
Boston, MA 02116
Stephen E. Cavan
Senior Vice President, General Counsel and Secretary
December 18, 2002
Via e-mail: email@example.com
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. 33-8150.wp
Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys
Dear Mr. Katz:
Thank you for the opportunity to comment on the Commission's rule proposal regarding Professional Conduct Standards for Attorneys. I am a Senior Vice President and the General Counsel of MFS Investment Management, an adviser managing approximately $115 billion, $80 billion of which is in registered investment companies.
We appreciate the enormity of the task the Commission and its staff have been asked to complete in a very short time period. I'd like to compliment the staff on its comprehensive and thoughtful release, although I disagree with several important points.
Earlier in my career, as a member of the staff, I was responsible for advising the Commission in matters involving professional discipline under then Rule 2(e), and I have appeared as counsel of record on behalf of the Commission in these administrative proceedings. I understand that regulating attorney conduct before the Commission has historically been a very difficult and controversial area for the Commission. The proposed rule governing standards of professional conduct for attorneys that the Commission has issued in response to Congress's enactment of Section 307 of the Sarbanes-Oxley Act of 2002 continues to tread in that very difficult and controversial area of the law. But it need not. A great deal of the controversy regarding the proposed rule surrounds the requirement in the rule that there be "reporting out" duties on behalf of attorneys covered by the rule, whereby under certain circumstances an attorney would be required to report to the Commission when he or she reasonably believes he or she did not receive an "appropriate response" to evidence of a material violation within the issuer organization. The attorney would do so by making a "noisy withdrawal" and/or disaffirming certain tainted documents filed by the issuer with the Commission.
The Commission's proposed rule governing standards of professional conduct does not need to be as controversial as it is. Section 307 of the Sarbanes-Oxley Act required the Commission to "prescribe minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers" by mandating that those standards must include effective internal, up the ladder reporting by attorneys within the client organization. The reporting up the ladder requirement for attorneys should not be controversial. Because the attorney represents the issuer (his client) company as a whole and not primarily its individual directors, officers and employees, the myriad of attorney-client privilege and other attorney-client relationship issues that arise in the reporting out context do not exist in the internal reporting context. Moreover, because Congress required this type of reporting up within the issuer scheme, the Commission is, for the first time in its 68 year history, with clear statutory authority to issue rules implementing up the ladder reporting by attorneys. The Commission is proposing to stray well beyond its mandate from Congress, however, by -- in addition to setting forth proposed rules implementing reporting up the ladder within the client for attorneys -- also requiring the attorneys to report out to the Commission and to make a "noisy withdrawal" and disaffirm tainted documents under certain circumstances. Sarbanes-Oxley directs the Commission to establish rules governing the "minimum" standards of professional conduct, not to enact a more complete range of professional conduct standards.
I understand the very short time constraints with which you are faced. I encourage you to issue final rules by January 26, 2003, implementing the non-controversial up-the-ladder reporting requirements for attorneys only within the client that Congress required. If the Commission deems necessary, you could, of course, continue to study the more controversial aspects of the rule at greater length. Given the enormity of how the reporting out requirements would affect the attorney-client relationship and corporate governance overall, and how it would be such a tremendous change from the current state of the law and accepted practice, more time is required to consider the effects those aspects of the proposed rule would have before making them final.
Additionally, adopting the up the ladder requirements only within the client organization has the additional benefit of mooting the debate over the scope and protection of the attorney-client privilege, confidentiality agreements and waiver of that privilege. The Commission's position is questionable. For example, even though some (but not all) States permit reporting out in certain, limited circumstances, the proposed rule would mandate it under certain circumstances. And the position that confidentiality agreements with, and disclosure to, a third party nonetheless maintain privileges is just that, a Commission position. It may be an appropriate position to take in an adversarial adjudication before an independent tribunal. You might lose. It should not, however, be the foundation upon which rulemaking of general applicability is premised.
I believe there is a larger policy issue at stake here. Attorney-client privilege and the related waiver thereof, are rules of the courts designed to ensure the optimum functioning of the legal system. The Commission is a regulatory, investigative and law enforcement body. These Common Law and bar standards were designed to strengthen the bar so that we might interact with our clients to provide advice and guidance to support, among other things, the securities laws, not to make it easier for the government to utilize attorneys to build enforcement cases against our clients. Client cooperation must be anticipated to drop off, or cease, under such a system.
The Commission stated that it "does not want the rule to impair zealous advocacy, which is essential to the Commission's processes." The Commission further states that "[t]he Commission also does not want the rule to discourage issuers from seeking and obtaining effective and creative legal advice." (RIN 3235-AI72, Part IV(A)). I very much agree with these policy goals, and I am convinced that these are predicates to a strong bar, which is essential to the proper functioning of corporate governance generally and the securities laws, specifically. I suggest the reporting out provision of the proposed rule will harm the Commission's express stated desires. I believe that some corporate employees will not confide in counsel if they believe that the attorney, under some circumstances, might then report these matters to the Commission. Thus counsel would never have the opportunity to become involved, to offer advice and to play the constructive role in this process that we all desire.
Accordingly and for all of these reasons, I respectfully submit this comment letter and encourage the Commission to implement final rules on reporting up the ladder duties within the issuer organization for attorneys appearing and practicing before the Commission as required by January 26, 2003, but continue to study the effect of the reporting out requirements (for both attorneys and any Qualified Legal Compliance Committee) before taking action, if any, on that front.
Very truly yours,
/S/ Stephen E. Cavan