December 16, 2002
Jonathan G. Katz, Secretary
RE: Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys;
Dear Mr. Katz:
We are pleased to submit this letter to the Securities and Exchange Commission (the "Commission") in response to the Commission's request for comments on its proposed rules implementing standards of professional conduct for attorneys, as contained in Release Nos. 33-8150; 34-46868; and IC-25829 (the "Proposing Release").
Overview and Summary
Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act") imposes on the Commission the requirement to issue rules setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in the representation of issuers, including a rule requiring "up the ladder" reporting. Proposed Part 205 (the "Proposed Rules") presented in the Proposing Release is the Commission's initial response to this Congressional mandate.
We appreciate that the Commission must issue rules by January 26, 2003 to comply with this mandate. However, we respectfully submit that the Commission has gone well beyond the specified requirements and intended purpose of Section 307. The Commission is proposing an unprecedented and far-reaching body of rules governing attorney conduct that we believe will in significant respects undermine and be counterproductive to the key objectives of the Act, including Section 307. The Proposed Rules will so fundamentally alter the relationship between issuers and their attorneys that the level of consultation - and thereby the vital flow of information - between issuers' senior management and business unit heads, on the one hand, and in-house and outside legal counsel, on the other hand, will inevitably and dramatically decrease. We believe that the consequences of this altered relationship will be:
We also believe that certain provisions of the Proposed Rules will jeopardize the ability of issuers to present an effective defense against actions, investigations and proceedings initiated by the Commission, other governmental agencies and private litigants. The Proposed Rules would require a lawyer retained to act as an advocate to act as a "whistle blower" - and to abandon the client in the midst of critical legal proceedings - if the lawyer believes the Commission Staff, rightly or wrongly, may view as a material violation conduct in which the client has engaged. Nothing in the text or the legislative history of Section 307 supports this radical approach.
We believe that lawyers fulfill a vital role in the administration of the securities laws and that this role will be seriously impaired by the Proposed Rules. Securities lawyers spend considerable time and effort working with clients to ensure that business and financing transactions are implemented in a manner that complies with the securities laws, the rules and regulations of the Commission, and the rules of the self-regulatory organizations. This counseling function is especially evident and valuable with respect to compliance with ongoing public disclosure requirements. Accordingly, and notwithstanding the recent high visibility situations that motivated passage of the Act, the investing public benefits importantly from the issuer-lawyer relationship. That relationship is built upon a number of unique features not found in relationships the issuer may have with other advisors. These include an ethical obligation to maintain client confidences - engendering a relationship between lawyer and client built on trust and open dialogue - and a duty of zealous advocacy.
In light of the special nature of the relationship between issuers and attorneys, and the benefits of that relationship to the public, any significant changes to the rules governing the attorney-client relationship should be the result of a careful, deliberative process. While the Commission and its Staff have clearly expended significant effort to develop the Proposed Rules, we believe the extremely short window for public comment and issuance of final rules (the deadline being dictated by Section 307) does not permit a deliberative process commensurate with the significance of the Proposed Rules. Accordingly, we believe that any final rule issued at this time should not reach beyond what is essential to address the requirements of Section 307 - and in a manner which minimizes the intrusion on a key mechanism for optimizing compliance with the securities laws, the issuer-attorney relationship. The Commission can then raise for further comment and consideration any more expansive proposals.
Toward this end, we offer below in this letter the text of a suggested rule. In our opinion, it satisfies the central objective of Section 307 of the Act - "up the ladder" reporting by responsible securities law practitioners1 who know of a real and seriously injurious securities law violation, fiduciary duty breach or similar violation.2 At the same time, while using the framework of the Proposed Rules, it eliminates or modifies certain aspects thereof to better harmonize the Proposed Rules with the essential elements of the attorney-client relationship, the benefits of that relationship to the investing public and the rights of issuers to effective assistance of counsel when faced with governmental investigations and proceedings.
We also offer a number of comments on specific aspects of the Proposed Rules. We believe these comments exemplify the ways in which the attorney-client relationship will be materially and adversely altered by the Proposed Rules and support the proposition that proposals beyond what is specifically required by Section 307 demand careful and deliberative scrutiny. Nevertheless, if the Commission determines to proceed on the basis of the Proposed Rules, the comments on specific items provide suggestions for improving upon the rules and correcting the more serious defects. Among others, we believe the following alterations to the rules should be made:
The Attorney-Client Relationship and the Public Interest
We believe that any meaningful discussion of the pros and cons of proposed rules regulating the conduct of attorneys must take place in a context that recognizes that the vast majority of the securities Bar practice in their field at high levels of integrity, competency and professionalism and are fully cognizant of, and fully abide by, their ethical obligations. It is this cadre of securities lawyers, functioning conscientiously and ethically in the trenches on a daily basis, that provides issuers with advice, assistance and judgment in complying with the requirements of the securities laws and managing the consequences of a compliance breakdown. Although these efforts garner far less news coverage than the alleged malfeasance by corporate executives in connection with certain highly publicized business failures, they are nonetheless vital to the proper functioning of our public markets. Accordingly, the relationships between issuers and their in-house and outside counsel serve not only the interests of the issuer, but also those of the Commission and the investing public.
In determining how best to implement Section 307, we urge the Commission to recognize that the ability of attorneys to realize the goal of properly guiding public company clients in the conduct of their affairs in conformity with the securities, corporate fiduciary duty and similar laws, and to address failures to conform to the laws when they occur, is entirely a function of the willingness of clients to consult with counsel and, in doing so, to provide counsel with full information and, when necessary, to engage in a robust dialogue and exchange of ideas. Full information is essential to the provision of quality legal services. Accordingly, structural mechanisms must be in place that encourage and facilitate the sharing of full information between client and attorney. The Proposed Rules should be evaluated in light of whether they support or weaken those mechanisms.
Open lines of communication between issuer and attorney are a function of the unique ethical obligations placed on attorneys - particularly the duties to protect client confidences and to serve clients' best interests as a zealous advocate and creative counselor. These ethical duties can be thought of more simply. Clients communicate freely with counsel because of trust - trust that the attorney is squarely in the client's corner, trust that the attorney will base his or her advice on what is best for the client regardless of the attorney's self-interest and trust that, subject to ethical rules, attorneys will protect client confidences. We believe the Proposed Rules undercut these key pillars of the attorney-client relationship and undermine the very fabric of trust on which that relationship is built.
Undermining Protection of Client Confidences. The lawyer's duty to protect client confidences may have the greatest nexus to the flow of information between attorneys and clients - and it is that duty to which the Proposed Rules do the most damage.
The attorneys' duty of confidentiality is often discussed in the context of the means by which that duty is protected, the evidentiary privilege for attorney-client communications - "the oldest of the privileges for confidential communications known to the common law."3 It has been long-recognized that
We believe a fundamental problem with the Proposed Rules is that they create a regulatory edifice culminating with the lawyer taking on the front stage center role of "whistle blower." The Commission states in the Proposing Release that "noisy withdrawal" will "virtually ensur[e] an immediate inquiry by the Commission." The Commission also states its view that noisy withdrawals will be rare because the threat of a noisy withdrawal will compel the issuer to take the necessary actions to prevent or rectify the material violation. The underlying premise seems to be that the client will provide important confidential information to its attorney, which the client knows the attorney can - and must, under certain circumstances - disclose externally regardless of the attorney-client privilege, and then the client fearing such disclosure will do the right thing.
We do not believe this is a realistic assessment. Rather, we believe that the prospect of these predicted effects will cause the Proposed Rules to result in a fundamental shift in the attorney-client relationship. Instead of being viewed as a trusted advisor counseling the client on how to reach the client's objectives within the parameters of applicable law, under the Proposed Rules the attorney will be viewed by the client as being sharply focused on his or her own self-interest (i.e., career protection), implicitly threatening to disclose client confidences to avoid the prospect of a Commission disciplinary proceeding against the attorney if the client does not follow the attorney's advice. Inevitably, the issuer's agents will reconsider obtaining legal advice that they would otherwise seek or, in seeking legal advice, will be much less forthcoming with necessary information. The result will be a securities Bar that will no longer be well placed to counsel as effectively regarding the requirements of the law and the consequences of non-compliance. In turn, compliance will decrease and confidence in the public markets will correspondingly diminish.
Undermining Duty of Loyalty. Because of the governmental "whistle blower"/"noisy withdrawal" requirements and the circumstances described under "Undermining Protection of Client Confidences" above, the Proposed Rules set up an attorney-client conflict dynamic that will have a significant impact on the duty of an attorney to consider only the client's interests in rendering advice.
Notwithstanding the Commission's statement that it does not seek to discourage creative counseling, the considerable uncertainty engendered by the Proposed Rules (including determining whether a material violation is occurring, whether the issuer has made an appropriate response, whether adequate documentation has occurred, and whether "noisy withdrawal" is required) and the real risk of being second-guessed by the Commission, all at the peril of an attorney's livelihood and reputation, may very well have a "chilling effect" on the nature of advice attorneys are willing to provide. This legitimate concern is exacerbated by the inherent nature of practicing securities law. The work of the securities Bar often involves making difficult judgments, which can be affected by subtle changes in facts and circumstances. Indeed, there are many instances in which equally ethical and experienced securities counsel may reach different conclusions about what the securities laws require.
The Proposed Rules create an environment in which these judgments can quickly become subject to defensive lawyering. For example, if an attorney concludes that he or she does not have an obligation to report "up the ladder" or make a "noisy withdrawal," the attorney is at risk that the Commission will disagree and commence a potentially career-ending enforcement proceeding against the attorney, and possibly his or her supervisory attorneys. There is a real risk in this circumstance that the attorney's free exercise of judgment will be inhibited.
Further, it appears unavoidable that once attorneys are second-guessed and become the subject of enforcement proceedings, other attorneys will grow only more conservative (as a function of self-protection) and the incidence of reports of evidence of material violations will increase, creating a vicious cycle in which issuers further limit the circumstances under which they seek legal counsel. We view the end result of this scenario as a much weaker securities Bar, less able to assure issuers that its own self-interest does not cloud its judgment on behalf of clients.
Undermining Duty of Zealous Advocacy. Separate from the counseling function of attorneys is the duty of zealous advocacy, particularly in defense against inquiries regarding or challenges to conduct. As noted above, the obligations imposed on attorneys by the Proposed Rules would fundamentally impair this function. In the defense arena as in the counseling arena, the issues of trust and open communications between client and attorney are equally important to the private Bar's role in administering the securities laws.
The Legal Profession and the Public Interest
We are concerned that the Proposed Rules will impair the relationships between subordinate and supervisory attorneys and result in a decrease in the quality of legal advice. Generations of lawyers have developed essential skills and judgment as a result of the criticism, advocacy and exchange of ideas that occur in a mentor-mentee or teacher-student relationship. Junior lawyers must be free to ask questions of more senior lawyers, and more senior lawyers must be willing to respond to those questions. However, the prospect of the supervisory lawyer having to document every instance where a junior lawyer raises a question of evidence of misconduct with which the senior lawyer disagrees must surely result in a decrease of the natural give-and-take and free flow of ideas that is at the foundation of legal training. As a result, the level of collegiality, cooperation and teamwork among lawyers will most certainly be adversely affected, again diminishing the quality and effectiveness of the securities Bar.
Further, we are concerned that the Proposed Rules - particularly the broad definition of "appearing and practicing before the Commission" - will have a chilling effect on the willingness of "non-core" attorneys to provide assistance and/or legal advice to issuers and on issuers' willingness to seek counsel from such non-core attorneys. As the Commission well understands, the securities lawyer often functions as the "hub" of the wheel. The spokes reach out to those lawyers of differing specialties on whom the securities lawyer must rely, such as tax, environmental and intellectual property counsel, as well as foreign counsel (both in the case of foreign issuers and U.S. multinationals). Imposing the obligations contained in the Proposed Rules on this group of attorneys - who often will not be well-situated to make materiality judgments - unnecessarily expands the scope of the rules beyond the universe of attorneys central to the role of the private Bar in counseling on matters of securities law.
The Need for Further Consideration
The prospective impact of the Proposed Rules on issuers, the securities Bar and the public markets is profound, and their adoption requires the utmost care and deliberation. While we appreciate the effort undertaken by the Commission and its Staff to develop the Proposed Rules under tight time constraints, we believe the Proposed Rules require further discussion between the Commission, issuers and the Bar. We are also cognizant of the fact that Congress has provided the Commission with a January 26, 2003 deadline for the issuance of final rules. In order to comply with Congress' directive, while at the same time providing a deliberative process commensurate with the significance of the Proposed Rules, we propose that the Commission adopt at this time final rules addressing the core requirements of Section 307 and raise for further comment and consideration any proposals that go beyond what is necessary to satisfy the Congressional requirements.
An Alternative Proposal
Set forth below is a suggested rule that we believe accomplishes the Congressional intent of Section 307 and attempts to harmonize the Commission's Proposed Rules with the vital attributes of the attorney-client relationship, the public policies furthered by those attributes and the rights of issuers to effective assistance of counsel when faced with governmental investigations and proceedings.
The suggested rule is presented as an integrated proposal. Its separate components may or may not adequately address the concerns described in this letter if used in a different final rule.
The following is the text of our suggested rule:
Section 205.1 Purpose and Scope
Consistent with Section 307 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7245, the Commission is adopting rules setting forth minimum standards of professional conduct for attorneys appearing and practicing before it in the representation of an issuer.
Section 205.2 Definitions
For purposes of this Part, the following definitions apply:
(a) Appearing and practicing before the Commission shall have the meaning in Rule 102(f) of the Commission's Rules of Practice and includes, but is not limited to:
(i) Transacting any business with the Commission, including communication with Commissioners, the Commission, or its staff;
(ii) Representing any person in connection with such person being a party to, or the subject of, or a witness in a Commission administrative proceeding;
(iii) Representing any person in connection with any Commission investigation, inquiry, information request, or subpoena; and
(iv) Preparing or participating in the preparation of any registration statement, periodic report or other writing that will be filed with, or incorporated by reference into any document that will be filed with, the Commission or its staff.
(b) Appropriate response means a response to evidence of a material violation reported to an appropriate officer or officers of an issuer that the attorney reporting such evidence believes is timely and:
(i) Is sufficient to support the stated belief on behalf of the issuer, by the officer(s) to whom evidence of a material violation was reported, that no material violation has occurred, is occurring or is about to occur; or
(ii) Involves measures being taken which are reasonably appropriate and timely in the circumstances (including making disclosure and adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), taking into account, among other factors, the goal of avoiding substantial injury to the issuer's financial interests or property, or to investors.
(c) Attorney means any individual who is, or holds himself or herself out as, admitted, licensed or otherwise qualified to practice law in any U.S. domestic jurisdiction.
(d) Breach of fiduciary duty means the breach of any fiduciary duty imposed by corporate common or statutory law (or the equivalent law relating to a different form of business enterprise) in the jurisdiction of organization of an issuer on officers, directors (or their equivalents), employees or agents of the issuer owed to the issuer or its stockholders (or their equivalents).
(e) Evidence of a material violation means facts and circumstances known to an attorney which have caused the attorney to believe that a material violation has occurred, is occurring or is about to occur; provided, however, that an attorney not acting in good faith (including an attorney acting in a reckless manner) shall be deemed to have such belief if the facts and circumstances known to him or her would cause a reasonable attorney of comparable skill, training and experience to reach such conclusion. By way of example, and without limitation, the following circumstances shall not be deemed evidence of, or require an attorney to conclude that he or she has evidence of, a material violation:
(i) A consultation occurs in which an attorney tells an officer or employee of an issuer that the perceived or apparent facts relating to an existing or proposed circumstance or action suggest or indicate that a material violation has or may have occurred, is or may be occurring, or is or may be about to occur, but the attorney is unable to conclude, without additional or confirmatory evidence, that such a violation has occurred, is occurring or is about to occur;
(ii) A consultation occurs in which an attorney tells an officer or employee of an issuer that the law regarding a proposed course of action is unsettled and that there is some possibility that a court might hold in the future that the action violated the securities laws;
(iii) An officer or employee actually pursues a course of action despite being advised by an attorney that the course of action has been held illegal in some states, in none of which the issuer does business, even if the attorney thinks there is a reasonable argument that other courts would also be likely to find it illegal;
(iv) An officer or employee tells an attorney that he or she intends to pursue a course of action that the attorney thinks is illegal where the issuer does business, because the officer or employee might reconsider and not do what he or she said he or she would do; or
(v) In general, an attorney believes that an officer or employee may pursue an illegal course of action but is not certain that the officer or employee will actually do so.
(f) In the representation of an issuer means (1) being expressly engaged, retained, employed or assigned, whether directly or through a law firm, as an attorney practicing securities law to provide legal services for an issuer specifically in connection with addressing a particular potential material violation, or in connection with a matter during the course of which the attorney determines that a material violation has occurred, is occurring or is about to occur and (2) functioning in fact as the senior responsible securities law attorney in connection with such violation or matter; provided, that, by way of example, and without limitation, "in the representation of an issuer" shall not include (1) the activities of attorneys for other parties providing some service at the request or for the benefit of the issuer where there is no express engagement, retention, employment or assignment of such attorneys by the issuer, (2) the activities of attorneys whose primary functions are with respect to subjects or circumstances other than the application of the Federal or State securities laws to the issuer, notwithstanding that such attorneys know that advice they are giving may or will be included in documents filed with or submitted to the Commission (but with continuing applicability to such attorneys, including attorneys counseling with respect to the fiduciary duties of directors or officers, of the ethical requirements and rules of practice referenced in Section 205.6(a) below), or (3) the activities of attorneys who are subordinate to other attorneys with respect to the matter at issue, whether the subordinate attorney is employed by the issuer, employed by or a partner (or equivalent) in an outside law firm where the senior responsible counsel for the issuer relating to the matter is a partner (or equivalent) or employed, or employed by or a partner (or equivalent) in another outside law firm.
(g) Issuer means an issuer (as defined in Section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the securities of which are registered under Section 12 of that Act (15 U.S.C. 78l), or that is required to file reports under Section 15(d) of that Act (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933 (15 U.S.C. 77a et seq.), and that it has not withdrawn.
(h) Material violation means (1) any (A) violation of Federal or State securities law, (B) breach of fiduciary duty or (C) violation of other laws which are similar to securities law or laws regulating the responsibility of officers and directors (or equivalents) of issuers to stockholders (or equivalents) which (2) (A), if disclosed, in light of the total mix of information otherwise available to investors, would be viewed by a reasonable investor as significantly altering such mix of information in connection with making a contemporaneous decision to buy or sell securities of such issuer and (B) involves substantial concurrent or prospective injury to the issuer's financial interests or property or to investors; provided, however, that no information relating to the assessment of the legality or propriety of conduct shall be deemed material where the principal underlying facts and circumstances regarding the conduct have been publicly disclosed.
(i) Qualified legal compliance committee means a committee of the board of directors of an issuer (which may be the issuer's audit committee) that:
(i) Consists solely of three or more directors who are not employed, directly or indirectly, by the issuer; and
(ii) Is authorized to (A) investigate any report of evidence of a material violation by the issuer or an agent thereof, (B) retain such outside counsel or other expert personnel or advisors as the committee deems necessary and (C) recommend to the board of directors, based on their business judgment, appropriate remedial measures to prevent or rectify any material violation.
(j) Report shall mean an oral, written, e-mail or electronic description of the facts and circumstances as believed by an attorney to constitute, and of the basis for the conclusion by the attorney that such facts and circumstances constitute, evidence of a material violation; provided, however, that if a report is being submitted pursuant to Sections 205.4(c) or 205.4(d) below, such report shall be in written, e-mail or electronic form.
Section 205.3 Issuer as Client
An attorney appearing and practicing before the Commission in the representation of an issuer represents the issuer as an organization. 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.
Section 205.4 Professional Standards
(k) An attorney appearing and practicing before the Commission in the representation of an issuer shall, upon determining that there is evidence of a material violation by the issuer or an agent thereof, report such evidence of a material violation to the chief legal counsel (or the equivalent thereof) or to both the chief executive officer and the chief legal counsel of the issuer (or the equivalents thereof) forthwith (unless the attorney chooses instead to report the evidence of a material violation pursuant to paragraph (d) of this Section 205.4).
(l) Following receipt of a report of evidence of a material violation under paragraph (a) of this Section 205.4, the chief legal counsel of the issuer (or the equivalent thereof) shall cause such inquiry to be made into the evidence of a material violation as he or she believes is necessary to determine whether the material violation described in the report has occurred, is occurring or is about to occur. If the chief legal counsel believes the material violation described in the report has not occurred, is not occurring and is not about to occur, he or she shall so advise the reporting attorney. If the chief legal counsel believes that the material violation described in the report has occurred, is occurring or is about to occur, he or she shall take (and thereafter report to the board of directors), or recommend to the board of directors, what he or she believes to be appropriate remedial measures to prevent or rectify such material violation, and shall report such actions to the reporting attorney. In lieu of causing an inquiry under this paragraph (b), the chief legal counsel may refer a report of evidence of a material violation to a qualified legal compliance committee, the audit committee of the board of directors of the issuer, another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors and shall notify the reporting attorney of such referral.
(m) If the attorney who has made the report under paragraph (a) of this Section 205.4 believes that the chief legal counsel or chief executive officer (or the equivalents thereof) has not provided an appropriate response to the evidence of a material violation, the attorney shall report the evidence of a material violation to a qualified legal compliance committee, the audit committee of the board of directors of the issuer, another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.
(n) In any case an attorney may report the evidence of a material violation as provided in paragraph (c) of this Section 205.4.
(o) An attorney who (i) reports evidence of a material violation to, or is notified that the chief legal counsel or chief executive officer (or the equivalents thereof) has referred a report of evidence of a material violation to, a qualified legal compliance committee, the audit committee of the board of directors of the issuer, another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer or to the board of directors or (ii) has received an appropriate response, has satisfied all the requirements of this Section 205.4.
Section 205.5 Sanctions
(p) A violation of this Part by an attorney appearing and practicing before the Commission in the representation of an issuer shall subject such attorney to all disciplinary measures available under Rule 102 of the Commission's Rules of Practice as shall be determined to be applied to such attorney pursuant to such Rule, and disciplinary action under such Rule shall be the exclusive sanction or remedy for any such violation.
(q) With respect to attorneys appearing and practicing before the Commission on behalf of an issuer, "improper professional conduct" under section 4C(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78d-3(a)) means intentional, knowing or reckless conduct that results in a violation of any provision of this Part.
(r) An attorney appearing and practicing before the Commission who violates any provision of this Part is subject to the disciplinary authority of the Commission, regardless of whether the attorney may also be subject to discipline for the same conduct in a jurisdiction where the attorney is admitted or practices.
Section 205.6 Additional Provisions
(s) The Commission assumes, and is relying on the assumption that, all other ethical requirements and rules of practice otherwise applicable under the law of the jurisdiction in which they are admitted to practice and the Commission's Rules of Practice will continue to apply to attorneys, including, without limitation, the obligation (1) of attorneys faithfully to represent their organizational clients, including where necessary to counsel the appropriate representative of the organization concerning significant violations of law, (2) the obligation of attorneys to report significant violations of law to their supervising attorneys, and (3) the obligation of supervising attorneys (through their firms) to provide appropriate guidance to subordinate attorneys as to this obligation.
(t) In connection with the application of this Part, (1) there shall be no imputation of knowledge between attorneys, including in the same law firm, (2) an attorney shall be entitled to rely on the records of the issuer and upon information (including opinions, appraisals, reports and statements) received from third parties (including other attorneys in his or her law firm and the issuer's officers, directors, employees, agents and outside advisors) unless he or she knows that such information is unreliable and (3) an attorney shall have no duty to investigate or determine a particular state of facts or legal conclusion.
(u) No belief formed or action taken or omitted to be taken by an attorney in good faith and required or permitted by this Part shall constitute a breach or violation of any rules of conduct applicable to the attorney, except (1) an action taken which may (but is not required to) be taken under this Part but is prohibited by an applicable rule of conduct of the jurisdiction in which he or she is admitted to practice and (2) an action omitted to be taken which may (but is not required to) be omitted under this Part but is required to be taken by such an applicable rule of conduct.
(v) Neither compliance nor noncompliance with this Section shall give rise to any claim or cause of action on the part of any party against the attorney or organization of which the attorney is a part, except for a proceeding by the Commission against an attorney for noncompliance with this Part.
(w) Any report under Section 205.4 (or the contemporaneous record thereof) or any response thereto (or the contemporaneous record thereof), and any other contemporaneous information, may be used by an attorney in connection with any investigation, proceeding, or litigation in which the attorney's compliance with this Part is in issue.
Proposals for Specific Changes
Although we hope that the Commission will be persuaded to adopt substantially as proposed the suggested alternative rule described above, set forth below are specific issues relating to the Proposed Rules and our suggested revisions to address these issues.
1. Proposed § 205.2(c): Limit the Definition of "Attorney" to Those Persons Qualified to Practice Law in a U.S. Jurisdiction
We believe that imposing on foreign attorneys the obligations under the Proposed Rules would conflict with foreign rules of professional conduct and is unnecessary to achieve the goals of Section 307 of the Act. Limiting the definition of "attorney" to those lawyers licensed in U.S. jurisdictions will alleviate these conflicts. In our experience, the vast majority of foreign private issuers, well aware of the complexities of U.S. securities laws and the judgment calls often required under those laws, regularly consult with experienced U.S. securities counsel. Accordingly, this revision will avoid the unfairness of subjecting foreign lawyers to the Proposed Rules without compromising the effectiveness of the rules.
2. Proposed § 205.2(e): Change the Definition of "Evidence of a Material Violation" to Require a Good Faith Belief
We note that our comments below address two significant definitions - "reasonably believe" (which should be deleted) and "material violation" (which should be changed) - that are used within the proposed definition of "evidence of a material violation."
We believe that an objective test fails to address appropriately the practicalities of the provision of legal advice under the securities laws. Imposing a hindsight, purportedly objective test of the "correctness" of judgments made by securities lawyers on a daily basis - with the lawyer's career and reputation at risk - is bound to chill severely the lawyer-client relationship. Attorneys regularly face "mixed" questions of law and fact. For example, the law may be clear, but the application of the law to the facts in question may not. The advice may also change as the factual record is developed. The attorney should be able, in making a determination of whether evidence of a material violation exists, to look at the facts presented to the attorney and the law and engage in an appropriate exercise of judgment. We believe that if an attorney forms a judgment based on the facts and circumstances actually known by him or her, and does so in good faith and not in a reckless manner, he or she should not be subject to having his or her judgment second-guessed.
3. Proposed § 205.2(f): Change the Definition of "In the Representation of an Issuer" to Apply Only to Those Persons in a Recognized Attorney-Client Relationship with the Issuer and to Exclude Non-Securities Law Counsel
We believe the proposed definition of "in the representation of an issuer" is overly broad, not manageable and would undermine the attorney-client relationship as ordinarily understood by skilled, experienced and ethical professionals. All legal, professional and ethical obligations of an attorney are rooted in the attorney-client relationship. Thus, at the outset of any inquiry regarding the professional obligations of an attorney, a determination must be made as to who his or her client is and is not. This bedrock concept is shattered by capturing within the scope of the proposed definition collateral or tertiary relationships, which may involve acting merely "at the behest, or for the benefit of an issuer, whether or not employed or retained by the issuer." Such a definition would even capture activities for which the issuer clearly is separately represented by other counsel (or, in any event, where it is clearly understood that the particular attorney is not representing the issuer).
Examples of relationships and activities that could be deemed to be "in the representation of an issuer" as currently proposed, but in which the issuer is not the attorney's client include:
Other activities that the proposed definition would inappropriately capture include special counsel that a client may choose to "run something by" but is not primary counsel for the particular securities matter at issue and litigation counsel providing an audit letter to the issuer's auditors for purposes of performing the audit.
Even from a practical perspective, how may an attorney accommodate his or her current practice and professional responsibilities with the proposed definition? Will attorneys representing another party in a matter, who provide some benefit or assistance to the issuer, need to enter into elaborate joint engagement letters and obtain numerous conflict waivers in order to avoid charges of unethical conduct? What if the attorney's actual client refuses to accept such terms? Clearly these uncertainties and the burdens they will create were not intended, and are not required to protect the investing public. That protection is most appropriately enhanced by focusing on those attorneys who are in fact engaged as issuer's counsel with respect to the particular securities matter at issue - a finite and readily discernible group of attorneys in any given situation.
We also emphasize that many provisions of the Proposed Rules simply do not work with the broad definition of "in the representation of an issuer." The Act and the Proposed Rules appear to be intended only to regulate and guide an attorney-client relationship in a manner consistent with commonly understood principles. For example, Section 205.3(b)(1) of the Proposed Rules, regarding the duty to report evidence of a material violation, provides that "[a]n attorney does not reveal client confidences or secrets by communicating information related to the attorney's representation of an issuer to the issuer's officers or directors." This is a straightforward statement only in the case of counsel with whom the issuer has an attorney-client relationship. In all other cases, counsel for another client may very well be revealing client confidences and secrets if he or she is required to report material violations to issuers that are not the attorney's client. There is nothing in the Act that suggests that Section 307 was designed to deputize all lawyers to become general watchdogs with respect to issuers with whom they have no professional obligations. Accordingly, we believe that all reporting obligations should be restricted to an attorney's own client.
Further, we believe that in almost all cases the information available to non-securities lawyers will be limited to the matters within such lawyer's area of expertise. Accordingly, such counsel will not be in a position to make the determinations required of counsel under the Proposed Rules. As discussed above, the inclusion of "non-core" attorneys within the scope of the definition could have a chilling effect on such non-core attorneys' willingness to provide assistance to clients and on clients' willingness to seek the assistance of specialized counsel, both to the detriment of issuers and the administration of other areas of the law.
In sum, the definition of "in the representation of an issuer" should be restricted and limited to bona fide and clearly established attorney-client relationships formed in accordance with long-standing principles of practice, rules of professional responsibility, and state statutory and common law, and should exclude attorneys whose primary functions relate to subjects or circumstances other than U.S. securities laws.
4. Proposed § 205.2(h): Conform the Definition of "Material" to the Supreme Court's Definition in the TSC and Basic Cases
We believe the proposed definition of "material" is unclear and inconsistent with the interpretation of the term "material" as used by the courts and attorneys in the securities law context. While the Commission states that its definition is "derived from Supreme Court precedent," the definition in the Proposed Rules is in fact significantly different from the Supreme Court's formulation. We propose that greater certainty would be achieved by a definition consistent with TSC Industries, Inc. v. Northway, Inc.5 and Basic, Inc. v. Levinson:6 "conduct or information the disclosure of which would be viewed by a reasonable investor as significantly altering the total mix of information available."
5. Proposed § 205.2(i): Change the Definition of "Material Violation" to Require Substantial Financial Injury and to Exclude Events or Circumstances if the Principal Underlying Facts are Publicly Disclosed
We believe the definition of "material violation" is unduly broad in light of the legislative history of Section 307 of the Act and in light of the significant events that occur upon becoming aware of evidence of a material violation.
As described above, the requirement, if imposed as contemplated by the Proposed Rules, to report "up the ladder," particularly when viewed in the context of the lawyer's implicit or explicit threat to make a "noisy withdrawal" (or even a "silent withdrawal"), is a significant and fundamental alteration of the attorney-client relationship, which we believe is not in the public interest. Accordingly, the standard for triggering "up the ladder" reporting must be sufficiently high so that the alteration of the attorney-client relationship results only when the evidence of a material violation is coupled with a good faith belief that the violation is resulting or will result in substantial injury to the overall financial interests or property of the issuer or to investors. This will limit the instances in which intrusion into the attorney-client relationship is necessary.
Although we note the discussion in the Proposing Release rejecting a higher standard than the Commission proposed to trigger "up the ladder" reporting, we believe such a higher threshold is wholly consistent with the legislative history of Section 307 of the Act. That the legislation was directed towards violations of great consequence was also indicated by the frequent references by the sponsors of Section 307 to the Enron and WorldCom matters, which involved allegations of misconduct resulting in billions of dollars of losses.
We propose that the definition of "material violation" be revised to mean "a material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation, in each case, which has occurred, is ongoing or is about to occur and is resulting or will result in substantial injury to the financial interests or property of the issuer or to investors."
In addition, there should not be any triggering "material violation" when the principal underlying facts and circumstances relating to the possible violation have been publicly disclosed. At that point, the board of directors of the issuer, the Commission and the plaintiffs' Bar have ready access to the information, obviating the need for "up the ladder" reporting or "noisy withdrawal."
6. Proposed § 205.2(j): Explicitly Allow the Audit Committee to Be Designated as the "Qualified Legal Compliance Committee"
We believe that many of the responsibilities placed on the qualified legal compliance committee (the "QLCC") overlap with the responsibilities of issuers' audit committees. Although some issuers may wish to separate the work of the QLCC from their audit committee, we believe that other issuers may prefer to have their audit committee function as the QLCC. Accordingly, we propose that the definition of QLCC be revised to state explicitly that an issuer may designate its audit committee to serve as the QLCC.
7. Proposed § 205.2(l): Delete the Definition of "Reasonably Believes" or Provide Additional Guidance
In light of the proposal that evidence of a material violation be determined on a good faith basis, we believe the definition of "reasonably believes" should be deleted. Alternatively, in order to provide guidance to attorneys in assessing their responsibilities, the Commission should include in notes or instructions to the final rules the following principles, which would go a long way toward increasing the certainty of attorneys who are assessing their responsibilities under the reporting regime:
8. Proposed § 205.3(b): Heighten the Standard for Triggering a Duty to Report Evidence of a Material Violation and Narrow the Documentation Requirement
Subsection (b)(1). As discussed above, we believe the bar for Commission rule-mandated "up the ladder" reporting should be raised by revising the definition of material violation to include that such a violation has occurred, is occurring or is about to occur and is resulting or will result in substantial injury to the overall financial interests or property of the issuer or to investors. Alternatively, the Commission could incorporate the "substantial financial injury" standard directly into the text of Section 205.3(b) and throughout the Proposed Rules wherever they refer to a material violation.
In addition, the Commission's reporting regime would further benefit from making explicit in the rules certain propositions set forth in the Proposing Release but not incorporated specifically into the Proposed Rules themselves. The Commission should thus make clear that the duty to report "up the ladder" does not arise:
The Commission should add to these scenarios that the duty to report "up the ladder" does not arise from a consultation in which an attorney tells an officer or employee of an issuer that the perceived or apparent facts relating to an existing or proposed circumstance or action suggest or indicate that a material violation has or may have occurred, is or may be occurring, or is or may be about to occur, but the attorney is unable to conclude, without additional or confirmatory evidence, that such a violation has occurred, is occurring or is about to occur.
Subsection (b)(2). We believe that the documentation requirements contained in this subsection are overbroad and impractical. To the extent the requirements of the Proposed Rules mandate documentation by counsel at every step in the process of going "up the ladder," it should be modified. Documentation is unduly burdensome, fosters attorney-client conflict and is likely to have the effect of greatly inhibiting discussions between clients and their counsel. In our view, any documentation obligation should commence only when counsel has made the decision to go "up the ladder" to the board of directors or a committee of the board. At this point, counsel will have determined that the matter warrants this extraordinary action and documentation is consistent with this determination. The decision regarding documentation before the board or board committee stage should be left to the discretion of the attorney in his or her professional judgment.
The prospect of counsel sending a written report "up the ladder" to the board of directors or a board committee should be sufficient motivation for the recipient of the initial report to focus on the underlying "evidence of a material violation" and fashion an appropriate response, whether or not the initial report by counsel is in writing. With regard to the possibility that the reporting attorney will be satisfied with the response of the issuer and not maintain a written record of the basis for that conclusion, on balance, this should be left to the professional judgment of the attorney.
Since the Proposed Rules are violated simply by not documenting a decision, irrespective of whether a "material violation" is ultimately found to have occurred, prudent counsel would have to assume that written records need to be kept any time a client or a subordinate attorney raises an issue which potentially involves a material violation, no matter how unlikely or abstract the violation might be. Therefore, counsel will have no choice but to spend burdensome amounts of time documenting internal and external conversations regarding issues which, in the normal course of practice, absent the Proposed Rules, would not necessitate such documentation. This result is undesirable and will further interfere with the flow of information between issuers and their counsel.
A further, significant adverse effect of the documentation requirement is that it places counsel to the issuer in the untenable position of having to protect himself or herself while trying to advise his or her client. This is not required by the Act and represents an unwarranted intrusion into the process by which counsel develops an understanding of a client's situation and renders legal advice. Attorneys for issuers often review numerous alternatives based on hypothetical circumstances with clients and colleagues in order to make professional judgments, which are subject to change without notice. Attorneys could not participate effectively in this process if each new proposal or change in circumstances required counsel to evaluate whether a document describing the evolving facts and issues in light of all possible outcomes (which would be reviewed in hindsight) was necessary, not to protect the client, but to protect counsel.
As an alternative, the Commission could require that counsel's written documentation of his or her report to the board of directors or a board committee include a summary of his or her report to the CEO and/or chief legal officer ("CLO") and the response, or lack of response, thereto. Under this alternative approach, if the matter is satisfactorily resolved at the CEO/CLO level, no documentation will be required; however, in the event that counsel receives an inappropriate or delayed response from the CEO and/or CLO, counsel's written documentation of its required report to the board or a board committee will contain a summary of such earlier communication. Since counsel has the obligation to go "up the ladder" if he or she is not satisfied with the response of the CEO and/or CLO, all disagreements with the issuer's CEO and/or CLO regarding potential material violations that are not resolved will be documented by counsel. This result seems consistent with the apparent objective of the documentation rule as proposed, as all significant disagreements will be documented by counsel.
Subsection (b)(3). We believe that subsection (b)(3) should be revised to address a scenario not currently addressed by the Proposed Rules. Subsection (b)(3) provides that a CLO may, in lieu of causing an inquiry into evidence of a material violation, refer a report of evidence of a material violation to the QLCC. Neither subsection (b)(3) nor Section 205(c) describe the reporting attorney's or CLO's obligations to communicate with one another after the CLO has referred the report to the QLCC. We propose that the CLO be required to advise the reporting attorney of that referral and thereafter have no additional obligation to the reporting attorney. (As discussed below, we believe that such referral should relieve the reporting attorney of any further obligations to assess the issuer's response and take any action under Section 205.3(d)).
9. Proposed § 205.3(c): Treat Reports to the QLCC the Same, Whether from the Reporting Attorney or the CLO
We believe that Section 205.3(c) should be modified to provide that if the CLO refers a report of evidence of a material violation to the QLCC, and so notifies the reporting attorney, the reporting attorney will be deemed to have satisfied his or her obligation to report evidence of a material violation within the issuer, is not required to assess the issuer's response to the reported evidence of a material violation, and is not required to take any action under Section 205.3(d) regarding the evidence of a material violation.
Whether the QLCC is notified by the reporting attorney or by the CLO, the matter is in the hands of a committee of independent directors. To the extent the Commission is concerned that a CLO may provide a false notice of referral to the reporting attorney, the rule could be further modified to provide that upon a referral to the QLCC from the CLO, the QLCC shall provide an acknowledgement of such referral to the reporting attorney so that the attorney has a record that his or her report has been lodged with the QLCC. In any event, whether the source is the reporting attorney or the CLO, the QLCC will ultimately have the same responsibility to notify the Commission if the issuer fails to take remedial action directed by the QLCC.
As we have suggested elsewhere, we believe that Section 205.3(c) better implements the Congressional intent behind Section 307 of the Act than do Sections 205.3(b) and (d) taken together.
10. Proposed § 205.3(d): Noisy Withdrawal Is Unnecessary, Is Not Required by Section 307 and Should Be Eliminated; Alternatively It Should Be Significantly Narrowed
For the reasons discussed above, we believe the "noisy withdrawal" provisions of the Proposed Rules are inappropriate and inconsistent with the public interest. Noisy withdrawal is neither required by the text of Section 307 of the Act nor provided for in the legislative history of that provision. We believe that the amendment adding Section 307 was considered in the context of the other significant changes being adopted in the Act and proposed by the major securities markets to enhance the power and independence of issuers' audit committees and boards of directors. In this context, the legislative history indicates that Congress only intended that Section 307 ensure that "attorneys are responsible for fully informing their corporate client of evidence of material violations of Federal securities laws."7 More was not considered necessary or desirable.
Given the enhanced corporate governance requirements established by the Act and proposed by the major securities markets, the "noisy withdrawal" requirements are unnecessary, particularly when they will "rarely" be triggered and will have a profound negative impact on the attorney-client relationship. We believe that the "noisy withdrawal" requirements (whether mandatory or optional) would undermine the goal of having the private Bar guide public companies in their compliance with securities laws. As indicated previously, we believe that the coercive nature of the proposal as currently drafted will, contrary to the Commission's hopes, discourage issuers from seeking and obtaining effective legal advice.
In addition, as noted above, we believe that audit committees should be seen as the equivalent of QLCCs. Audit committees are made up of independent directors (subject to limited exemptions that may be granted by the Commission pursuant to their authority under Section 301 of the Act) and can be given the same powers and responsibilities as QLCCs. Further, under the rules proposed by the New York Stock Exchange and the Nasdaq Stock Market, boards of directors will soon consist of a majority of independent directors. As a result, a report of evidence of a material violation by an attorney "up-the-ladder" to a QLCC, the audit committee, or the full board of directors will be made known to some or all of the independent directors. In that event, it appears that the goals of Section 307 have been achieved and noisy withdrawal, or even the threat of noisy withdrawal, is not necessary.
If the Commission nevertheless retains the noisy withdrawal provisions, we believe that there are four ways in which the more negative aspects of the rules should, at a minimum, be mitigated.
First, noisy withdrawal should apply only to securities laws violations. The determination of the existence of a breach of fiduciary duty is a subject of the law of the jurisdiction in which the issuer is organized and is not an appropriate area for Commission determinations.8 Although breaches of fiduciary duty are required by Section 307 to be subject to the "up the ladder" requirements, it does not automatically follow that they must be part of the noisy withdrawal rules. It would be extremely problematic if the Commission were to exercise its disciplinary authority based on a Commission determination that there was a breach of fiduciary duty. These matters should be left to existing enforcement mechanisms in the jurisdiction of organization of the issuer.
Second, public disclosure of facts that may constitute a material violation should be an exception to a lawyer's obligation to effect a noisy withdrawal (and, as described above, should be an exception to an attorney's reporting obligation). There is no need for the lawyer to noisily withdraw where the principal underlying facts and circumstances have been publicly disclosed and the information is readily available to the board of directors, the Commission and the plaintiffs' Bar.
Third, the noisy withdrawal requirement should not apply to any attorney (or his or her firm) that is engaged to advise a client in response to a Commission inquiry, investigation or proceeding. Applying the requirement in this circumstance could seriously and adversely affect an attorney's ability to represent effectively a client that is subject to such a circumstance. The requirement would breed doubts at the heart of the relationship between client and attorney at the very time when a client is in need of the best possible advice and the lawyer has the greatest need for complete information to provide such advice. At that critical stage, a client would be concerned that information provided to the attorney will put the attorney in the position of having to choose between acting as an advocate for the client and as a "whistle blower" in the attorney's own defense. At the same time, an attorney would be concerned that a failure to go to the Commission could invite future criticism (or even a disciplinary action). Such a concern on the part of an attorney may lead to earlier communications with the Commission, possibly compromising the client's defense.
Finally, if the noisy withdrawal provisions are to be retained, we believe that it would be beneficial for the Commission to define what is meant by the requirement that an attorney disaffirm any "opinion, document, affirmation, representation, characterization, or the like in a document filed with or submitted to the Commission, or incorporated into such a document." Does this mean that the attorney needs to be specific as to the matter which he or she believes is untrue? If that is the case, it would seem to be inconsistent with the Commission's desire to minimize the need to disclose client confidences under those circumstances. Once again, this provision puts the attorney's self-interest at odds with his or her client's interest, because a long "laundry list" of deficiencies would serve to protect the attorney once the attorney determines to make a noisy withdrawal; even if one or more items on the "laundry list" were later found to be insignificant, the client's interests could well be seriously harmed by such allegations of deficiencies.
11. Proposed § 205.4: Eliminate the Concept of Supervisory Attorneys or Conform their Responsibilities to Model Rule 5.1
We believe that Section 205.4 is overbroad, impractical and will result in an undue administrative burden. Further, we believe that the proposed regulations in Section 205.4 will interfere with the collaborative process, within law firms, within law departments and between attorneys and clients, that is necessary to provide effective counsel to issuers. For these reasons and the problematic drafting of each of the provisions, as discussed below, we propose that Section 205.4 be eliminated from any final rule.
We believe that the definition of "supervisory attorney," as contained in Section 205.4(a), is overly broad and problematic in its application. We recommend that the definition be narrowed to apply only to the supervisory attorney within a law firm or law department who is directly responsible for the supervision of a subordinate attorney in connection with the representation of the issuer in the specific matter, regardless of whether the attorney supervises such subordinate attorney in other unrelated matters. Further, the definition should make clear that an attorney is not considered to be supervising an attorney at another organization or firm under any circumstances.
With respect to the first sentence of Section 205.4(b), which requires that each supervisory attorney make "reasonable efforts to ensure that a subordinate attorney" complies with the proposed rule and other applicable Commission rules and regulations, we are concerned that this requirement will not achieve the purposes of the provision in an efficient manner. This provision only focuses on a one-to-one relationship between a single supervisory attorney and a single subordinate attorney. In a law department and, particularly, in a law firm, the supervisor/subordinate structure is not always clear. Moreover, the provision would impose a requirement on multiple supervisory attorneys with respect to each subordinate attorney. Instead, we recommend that the provision (if retained) be revised, consistent with Model Rule 5.1 of the ABA Model Rules of Professional Conduct ("Model Rule 5.1"), to require that the partners of a law firm that appear and practice before the Commission and the supervisory attorneys in a law department that appear and practice before the Commission shall make reasonable efforts to ensure that the firm or law department has in effect measures giving reasonable assurance that other attorneys in the firm or department that appear and practice before the Commission comply with the rule and other applicable rules and regulations. The Commission should also confirm that steps taken by a law firm or law department to satisfy the applicable state versions of Model Rule 5.1 will satisfy the "reasonable efforts" requirement. We believe that a supervisory attorney should not be considered to be in violation of this requirement so long as the law firm or law department has adopted and implemented procedures intended to ensure compliance with this requirement.
If the Commission implements the foregoing recommendation, we believe that the second sentence of Section 205.4(b), which states that a supervisory attorney appears and practices before the Commission if his or her subordinate attorney so appears and practices, can be deleted, as the foregoing compliance mechanism will achieve the purposes of the provision. To the extent the second sentence is retained, we believe it to be problematic in appearing to subject an attorney not appearing and practicing before the Commission to compliance with Part 205. A subordinate attorney may have several supervisory attorneys, some or all of whom may not otherwise meet the proposed definition of "appearing and practicing" before the Commission. Thus, the extension of Part 205 through the second sentence in Section 205.4(b) is an inappropriate and unwarranted extension of the authority granted to the Commission under Section 307 of the Act to establish standards of conduct only for those attorneys who appear and practice before the Commission in the representation of an issuer.
Section 205.4(c), which obligates the supervisory attorney to comply with the reporting requirements of Part 205 when he or she receives a report of evidence of a material violation from a subordinate attorney, is also troublesome in its application because of the broad definition of a supervisory attorney in subsection (a) and the lack of clarity of what constitutes "evidence of a material violation." We believe the obligation in subsection (c) should be limited to the supervisory attorney in a law firm or law department who has primary responsibility for the representation of the issuer in the matter.
Moreover, the provisions of Section 205.4(c) and Section 205.4(d) - requiring a supervisory attorney to document the basis for his or her belief that a subordinate attorney's report does not present evidence of a material violation - should be amended (or, in the case of Section 205.4(d), eliminated) to more narrowly focus only on a true "report" of a material violation to distinguish from the normal give-and-take between attorneys regarding legal issues. An issuer's business actions and proposed arrangements frequently present complex and unique legal issues that require that attorneys consult other attorneys within a law firm or department regarding such actions or arrangements. In such a consultation, an attorney (particularly one with less knowledge about the specific or general subject) will sometimes express concern that an action or proposed arrangement may be a violation of a securities rule or regulation. A more knowledgeable attorney will either modify a proposed action or arrangement to comply with the securities laws or will confirm that, in fact, an action already taken or a proposed arrangement does not violate the securities law in question. Neither such situation should be deemed to constitute a "report of a material violation" requiring a written record of each such situation. To do so would impose an unreasonable administrative burden on tens of thousands of attorneys, without achieving any regulatory purpose.
We anticipate that this provision, as currently drafted, will have a chilling effect on subordinate attorneys who will hesitate to raise issues of potential material violations or act as devil's advocate if the result will be that the supervising attorney will be required to create documentation memorializing the conversation and the legal reasoning supporting the conclusion that the subordinate attorney was incorrect. A consequence of this is that the training and development of subordinate attorneys is likely to be significantly impeded. An immediate consequence is that this rule will inhibit discussions among counsel regarding the propriety of an issuer's ongoing or impending actions and how best to advise the issuer on the matter. This result does not benefit the issuer or the investor, as counsel will not be in a position to make the best and most informed decision. For these reasons, Section 205.4(d) should be eliminated from the final rule.
12. Provide a Safe Harbor
We believe that a "safe harbor" provision would be beneficial. We believe that attorneys may face significant litigation, and perhaps disciplinary proceedings, regarding their compliance with the proposed rules. As described above, the proposed rules potentially create a conflict between the interests of attorney and client and we believe that the threat of litigation will only exacerbate that conflict. Accordingly, the safe harbor should provide that (1) no belief formed or action taken or omitted to be taken by an attorney in good faith and required or permitted by Part 205 of the Commission's rules shall constitute a breach or violation of any rules of conduct applicable to the attorney and (2) neither compliance nor noncompliance with any provision of Part 205 of the Commission's rules shall give rise to any claim or cause of action on the part of any party against an attorney or the organization of which the attorney is a part, other than an action or proceeding by the Commission against an attorney for noncompliance with a provision of Part 205.
Provide a Reasonable Transition Period
In the event the Commission adopts final rules regarding standards of professional conduct for attorneys substantially similar to the Proposed Rules, or any set of rules containing a "noisy withdrawal" provision, we suggest that effectiveness of such final rules be delayed for at least 180 days, while encouraging earlier compliance as a best practice during this period. A transition period of less than 180 days, we believe, will be insufficient for many law firms and legal departments to put in place the procedures necessary to comply with such significant changes to the practice of law.
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We appreciate this opportunity to comment on the Commission's proposal, and would be most pleased to discuss any questions the Commission or its Staff may have with respect to this letter. Any such questions may be directed to Peter Allan Atkins (212-735-3700), Colleen P. Mahoney (202-371-7900) or Michael P. Rogan (202-371-7550).
cc: Hon. Harvey L. Pitt, Chairman