William H. Simon
Saunders Professor of Law
Stanford Law School
Stanford, California 94305
December 13, 2002
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609
Via e-mail: firstname.lastname@example.org
RE: File No. 33-8150.wp
Proposed Rules on Standard of Professional Conduct
For Attorneys under section 307 of the Oxley-Sarbanes Act
Dear Mr. Katz,
I write to comment on the Commission's proposed rules on standards of attorney conduct.
I am a member of the Massachusetts bar and Saunders Professor of Law at Stanford University. I have taught and written about Professional Responsibility for the past twenty-five years and often consulted on such issues.
While many improvements can be made, I think the general tenor and approach of the regulations represents a valuable response to the problems Congress instructed the Commission to address. In particular, I want to make two points. First, without the type of strong intervention that Oxley-Sarbanes and the regulations contemplate, the existing system of attorney regulation would continue to be woefully inadequate to the needs of the securities markets. Second, this type of regulation is in no way inconsistent with plausible professional norms of confidentiality.
The proposed regulations are necessary to remedy two glaring and long-standing deficiencies in the enforcement of the professional responsibilities of lawyers.
First, lawyer practice before the Commission should be regulated by a uniform federal baseline. Such law practice is integral to implementation of the securities laws, and the securities laws create a national system. Whatever one thinks of the state disciplinary regimes for lawyers, the Commission is charged with enforcement of the securities laws, and it should not leave a realm of conduct with such a strong influence to the states. Moreover, the transactions that the Commission regulates are multi-state. A uniform standard is necessary for intelligible, coherent regulation. The choice-of-law provisions that determine which state's ethics rules apply to multi-state transactions are sometimes unclear, and even when they are clear, they are often arbitrary. (For example, they tend to default to the licensing jurisdiction, but there is no reason why this jurisdiction, rather than the one where the client is headquartered or chartered or with which the conduct has the strongest contacts, should be determinative.)
Second, neither the national bar nor any state has produced a clear resolution of the issues addressed by the Proposed Rules. The bar's major effort to address these matters is Model Rule of Professional Conduct 1.13, which nearly all the states have adopted in some variation. This rule, however, is notoriously ambiguous in many respects. To take just the most glaring example, it provides that reporting the misconduct of corporate agents to their superiors or the board is something that the lawyer "may" do. It is inconceivable that a lawyer for the corporation would not have a duty to make such a report in at least some situations. Yet, the rule is silent as to whether it intends to deny such a duty and, if not, as to when such a duty might arise. Although the rule was first promulgated in 1983, the matter remains as ambiguous in every jurisdiction today as it was then. (The American Law Institute's Restatement of the Law Governing Lawyers, section 96, largely tracks Model Rule 1.13 without making any contribution to reducing its ambiguity.)
Since the provisions on "noisy withdrawal" are most like to arouse objection, and the most likely ground of objection concerns confidentiality, let me explain why such concerns are not valid. Indeed, I believe that considerably more demanding reporting obligations would be consistent with the most plausible interpretation of corporate interests in confidentiality.
First, the confidentiality interests of the corporate client are not infringed by lawyer disclosure under the circumstances required by the rule. Everyone agrees in principle that the lawyer for a corporation represents the organization, not its officers or even the board. The organization speaks through agents, but the instructions of agents can be attributed to the organization only when the agent is acting within his or her authority. The Proposed Rules address a situation where the lawyer reasonably believes that agents are engaged in serious illegality and that officers or the board has failed to perform its duty to take legally required remedial action. In this situation, an instruction by an officer or even the board to a lawyer to remain silent cannot be regarded as authorized. Such officers or directors have no authority to assert the organization's confidentiality rights. In the absence of any agent with authority to instruct her, the lawyer has to make a decision as to whether it is in the interest of the client organization to waive confidentiality, and the Proposed Rules plausibly assume that it invariably will be.
Thus, it is a mistake to see the reporting obligation as compromising client confidentiality in the interest of some ulterior public value. The lawyer's duty to report is not only consistent with his duty of loyalty to the client, it arises from that duty. Under the circumstances, reporting seems most likely to be in the interests of the client. (I document and elaborate this point in an article to appear in January in the California Law Review, "Whom (Or What) Does the Organization's Lawyer Represent?: An Anatomy of Intraclient Conflict.")
Second, there is no reason to believe that the duties imposed by the Proposed Rules would substantially reduce desirable disclosures from corporate agents to corporate counsel. It is important to bear in mind that traditional confidentiality norms for corporate clients are not designed to maximize disclosure by corporate agents to corporate counsel. If they were so designed, they would give the privilege to the agent, rather than the corporation. In fact, however, the privilege belongs to the corporation, which means that well-informed agents know that what they tell corporate counsel is subject to disclosure to their superiors within the organization and by those superiors outside the organization. The possibility of such disclosure has always been substantial, for example, in situations where the agent has acted contrary to corporate policy, where insolvency brings in new management, or where a derivative plaintiff establishes grounds to preclude assertion of the attorney-client privilege under the doctrine of Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). Many of the situations in which the Proposed Rules would require outside disclosure are those in which the corporation would eventually be likely to waive confidentiality (or have it waived by the court in a derivative suit) under established doctrine.
Moreover, corporate agents have powerful incentives to seek legal advice even without confidentiality. By failing to do so, they lose the "advice of counsel" defense for claims of intentional wrongdoing, and they risk losing the protections of the "business judgment rule" for claims of carelessness. It is already clear that the monitoring requirements of Oxley-Sarbanes have increased managers' need for legal advice and, hence, the costs of not seeking it.
Third, the communications most likely to be deterred by the rules have no social value or legitimacy. These are communications seeking advice about how to conceal, destroy, or avoid creating evidence that might be material to future claims of corporate wrongdoing solely in order to preclude the availability of the evidence to claimants or the government. The government's criminal case against Arthur Andersen illustrated that lawyers are sometimes involved in designing or implementing policies that have this avowed purpose. Although the court found that some of the lawyer conduct in that case was illegal, there is a broad range in which such conduct is lawful. As Professor Stephen Gillers says, lawyers give this kind of advice "every day." (New York Times, July 18, 2002, A25) But while such advice is often legal, it is nearly always socially pernicious. Its main effect is to impede law enforcement. Just because some lawyers view it as part of their mission to provide such advice is no reason for the Commission to protect it. The Proposed Rules may deter requests for such advice, since such requests will sometimes trigger the duty to report upwards or to withdraw noisily, and these responses would defeat the point of the requests. But this limited deterrence ought to be counted as a benefit, rather than a cost.
Fourth, as the Commission correctly notes in its comments on the Proposed Rules, the required disclosure may be necessary for lawyers to comply with their duties under the laws of fraud, including the securities laws. A person who discovers that she has unknowingly assisted another's fraud is often under a duty to make disclosures needed to rectify the situation. See, e.g., Restatement 2d of Torts, section 551(c).
I strongly encourage the Commission to remain on the course it has take in the proposed rules.
William H. Simon
Saunders Professor of Law
Stanford, CA 94305