Federation of Law Societies of Canada
December 16, 2002
Jonathan G. Katz
Dear Mr. Katz:
Re: Proposed Rules of the US Securities & Exchange Commission:
The Federation of Law Societies of Canada (the "Federation") is pleased to provide its comments on the US Securities & Exchange Commission Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys ("the proposed Rules"). In particular the Federation responds to the Commission's request for comments on the application of the proposed Rules to foreign law firms, including whether foreign law firms and foreign lawyers should be exempt from their application.
The Federation of Law Societies of Canada
The Federation is the coordinating body of the 14 governing bodies of the legal profession in Canada. Our member Law Societies are statutorily charged, pursuant to the legislation in each province and territory of Canada, with the responsibility of governing Canada's 82,000 lawyers in the public interest. An important role of the Federation is to express the views of the governing bodies of the legal profession on national and international issues. Because of the significance of the application of the Commission's proposed Rules, the Federation is responding to the Commission's invitation for comments.
The Legal Profession In Canada
In Canada, the regulation of the practice of law and of the legal profession is a matter of provincial or territorial jurisdiction. Provincial or territorial statutes vest a provincial or territorial law society or equivalent with the responsibility to regulate lawyers, and membership in a law society is required to practice law. Each law society is mandated to govern lawyers in the public interest by insuring the independence, integrity and honour of its members and establishing standards for the professional conduct and competence of its members. Each law society promulgates rules of conduct that speak to the fundamental ethical duties and obligations of a lawyer.
The Federation has had an opportunity to review submissions to the Commission prepared by the Law Society of Upper Canada (Ontario), one of its member bodies. The Federation endorses the comments made by the Law Society of Upper Canada and encourages the Commission to give full consideration to the points raised therein.
1. Extra-Territorial Application of the Proposed Rules
The Federation strongly urges the Commission to reconsider the purported application of the proposed Rules to non-US lawyers. The primary concern is that certain parts of the proposed Rules will place lawyers in Canada in conflict with the ethical or professional standards of their governing bodies. The Federation is very concerned about the potential for "dual regulating authorities", especially where one of the putative regulating authorities is that of a foreign state.
2. The "Up-the-ladder" Reporting Requirement and "Noisy Withdrawal"
In general, an "up the ladder" reporting requirement is not a troubling concept. In Canada, provincial or territorial rules of professional conduct require a lawyers in Canada to report to the client circumstances which the lawyer believes are, or may result in, illegal acts by the client. However, as has been pointed out by other organizations, it is impractical and unfair to expect a Canadian lawyers, who may not be qualified to practise law in the United States, to make judgments as to whether SEC registrants have committed material violations of American law.
The required and, in some circumstances, the permissive "noisy withdrawal" would obligate a lawyer in Canada to violate his or her duty of confidentiality and loyalty to a client. So far as we are aware, there is no concept of a "noisy withdrawal" in any of the rules of conduct of the Canadian law societies nor has such a concept been recognized by the courts in Canada. Either type of noisy withdrawal would conflict with the duties of loyalty and confidentiality, both of which are fundamental to the lawyer and client relationship. In Canada, those duties may be "violated" only to prevent a future serious crime by a client.
Provincial or territorial rules of professional conduct in Canada would require a lawyer who believes that a client is engaging in illegal activity that does not fall within the exception to confidentiality described above, to advise the client to immediately refrain from the activity. However, in keeping with the lawyer's duties of loyalty and confidentiality to the client, the lawyer is forbidden from communicating the reason for the withdrawal to any person external to the lawyer and client retainer, subject only to the future serious crime exception.
Because of the extraordinarily broad definition of "appearing or practising before the Commission" as set out in the proposed Rules, it would appear that a Canadian lawyer providing advice to a Canadian client on matters of Canadian law is caught by the definition if the client is listed for trading on an American exchange or otherwise fell within the jurisdiction of the Commission by virtue of operations in the United States. Leaving aside for the moment the impracticality of a Canadian lawyer advising a client with respect to violations of American law, the Federation is very concerned that, if a Canadian lawyer is aware of an ongoing violation of the law by a client, the proposed Rules may require the lawyer to effect a "noisy withdrawal". By effecting a "noisy withdrawal", the Canadian lawyer would violate fundamental ethical and professional obligations of a lawyer in Canada, for which that lawyer may be the subject of professional sanction by his or her law society.
The Commission, therefore, has no need to promulgate rules requiring Canadian lawyers to report material violations of law to a client, or to withdraw from a retainer in the event the client continued to act contrary to the law after receiving the lawyer's advice, as Canadian rules of professional conduct already require such action. The law societies (or equivalents) in each of the provinces and territories are already mandated by statute to enforce these rules of conduct.
3. The Independence of the Legal Profession
An independent bar is fundamental to a system of justice based on the rule of law. The professional obligation of lawyers to protect and guard the confidences of clients, and to maintain the privileged nature of all communications related to instruction or advice between the lawyer and the client against all parties external to the lawyer and client relationship, including the State, is integral to the independence of the legal profession. In Attorney General of Canada v. The Law Society of British Columbia (1982) 137 D.L.R. (3d) 1, the Supreme Court of Canada stated that:
In R. v. McClure  1 S.C.R. 445, the same Court stated:
A lawyer's role as the guardian of lawyer-client confidentiality and privilege is of fundamental importance to the right of a client to retain counsel independent of all parties, including the State. The Federation believes that the right to independent counsel is a constitutionally protected right in Canada. To that end, the Federation has commenced proceedings against the Attorney General of Canada raising this very issue in a challenge to sections of the Canadian money-laundering legislation concerning reporting obligations to the federal government. Canadian courts have, to date, determined that whether the independence of the legal profession is a constitutionally protected right in Canada presents a serious constitutional question, and have enjoined the application of those reporting obligations to lawyers pending the trial of the issue. The proposed Rules requiring "noisy withdrawals" compel the disclosure of information in the hands of lawyers which is subject to client confidentiality or privilege. The proposed Rules are inconsistent with Canadian concepts of the independence of the legal profession in Canada.
As stated earlier in these comments, the Federation agrees that a lawyer's professional obligation to a client require the lawyer to advise a client of any material violations of law of which the lawyer is aware. Promulgating a rule to reinforce that obligation would not, we believe, compromise lawyers in Canada so long as the lawyer had no obligation to advise the client of a material violation of a law of which he or she could not be expected to know. However, any proposed Rules by the Commission should be limited to a lawyer's disclosure to the highest authority in the client organization. The proposed Rules should not require or permit a lawyer to bring to the attention of a state regulatory authority any matters which would violate that lawyer's duty of loyalty or confidentiality to the client. If the Commission believes that it is necessary to promulgate rules requiring American lawyers to effect a "noisy withdrawal", the Commission should exempt non-US lawyers from that requirement. In Canada, the "noisy withdrawal" would require a lawyer to violate his or her professional or ethical duties. That would be inconsistent with the regulatory regimes established for the legal profession in this country.p
Several of the Federation's member law societies are discussing the concerns raised by the Commission with their relevant provincial securities commissions to assess the need for local action. Some provincial law societies and securities commissions have discussed the possibility of developing more direct working relationships on matters of mutual interest. In some provinces, these organizations are discussing the possibility of rule changes, in part to address concerns such as those raised by the Commission in its preamble to the proposed Rules. These efforts show that the legal profession's regulators in Canada are working to ensure that there are clear rules for Canadian lawyers on conduct involving corporate malfeasance.
The Federation trusts that these comments will assist the Commission in its effort to adopt rules that accomplish the goals set out in the Sarbanes-Oxley Act of 2002 within the broader scheme of the administration of justice.