Business Law Section
The State Bar of California
180 Howard Street
San Francisco, CA 94105-1639
April 7, 2003
Via E-Mail to: email@example.com
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: SEC File No. S7-45-02
Release Nos. 33-8186; 34-47282; IC-25920
Implementation of Standards of Professional Conduct for Attorneys
"Noisy Withdrawal" and An Alternative Approach
Dear Mr. Katz:
We comment on the above-referenced release ("Release") seeking further comment on the Commission's proposal for "noisy withdrawal" (the "Initial Proposal") in Exchange Act Release No. 46868, dated November 21, 2002 (the "November Release") to implement Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act"), and requesting comment on the alternative approach (the "Alternative Proposal") set forth in the Release.
These comments are provided on behalf of the Business Law Section of the State Bar of California (the "Business Law Section") by the Corporations Committee (the "Committee") of the Business Law Section. Please note that positions set forth in this letter are only those of the Business Law Section. As such, they have not been adopted by either the State Bar's Board of Governors, its overall membership, or the overall membership of the Business Law Section, and are not to be construed as representing the position of the State Bar of California. The Business Law Section is composed of attorneys regularly engaged in advising business enterprises in California; the Committee is composed of attorneys regularly advising California corporations and out-of-state corporations transacting business in California. Membership in the Business Law Section, and on the Committee, is voluntary and funding for activities of them, including all legislative activities, is obtained entirely from voluntary sources. There are currently more than 9,500 members of the Business Law Section.
- We reiterate our objection to the "noisy withdrawal" requirements of the Initial Proposal, for the reasons we have previously communicated to the Commission.
- We do not object to the requirements of attorney withdrawal in the circumstances set out in the Alternative Proposal, or to the requirement that the notice of such withdrawal be disseminated to incoming counsel, since the "hand-off" from one attorney to the next would not create a potential breach of attorney-client confidences. However, because many firms represent publicly traded clients on a variety of matters, not all of which relate to securities laws, we recommend that Rule 205's withdrawal provisions relate only to the specific matter that gives rise to the withdrawal.
- We reiterate our previously expressed concerns that "noisy withdrawal" in any form, including that set forth in the Alternative Proposal, is likely to impair the effective assistance of counsel. Issuers who are uncertain whether they can rely on counsel to act as their advocates on close questions may decline to confide such matters to counsel, to the detriment of both the issuer and the attorney-client relationship.
- If the Commission determines that Rule 205 must contain some form of "noisy withdrawal", we do not believe that Rule 205 should require an issuer to characterize the circumstances of counsel's withdrawal. Such characterization may compromise attorney-client confidences or otherwise conflict with relevant California law.
II. Discussion of Proposals
A. The Initial Proposal
In its Initial Proposal, the Commission proposed that if an attorney representing an issuer and appearing and practicing before the Commission (i) reports a purported material violation of the securities laws (other than to a Qualified Legal Compliance Committee ("QLCC")); (ii) does not receive an appropriate response, or has not received a response in a reasonable time, to his or her report; and (iii) reasonably believes that a material violation is ongoing or is about to occur and is likely to result in substantial injury to the financial interest or property of the issuer or of investors, then the attorney must (a) withdraw "forthwith" from representing the issuer, indicating that the withdrawal is based on "professional considerations"; (b) notify the Commission, within one business day of withdrawing, that the attorney has withdrawn based on professional considerations; and (c) promptly disaffirm to the Commission ("Disaffirmance") opinions and documents filed with the Commission or incorporated by reference in Commission filings that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be false or misleading (the "Disaffirmance Requirement"). An attorney employed by an issuer reporting a violation in similar circumstances would not have to quit but would have to comply with the Disaffirmance Requirement. Where counsel concludes that a material violation "has occurred and is likely to have resulted in substantial injury to the financial interest or property of the issuer or of investors," but is not ongoing (Proposed Rule 205.3(d)(2)), then the Initial Proposal permitted, but did not require, attorney withdrawal and Disaffirmance.1
As the Commission notes in the Release, the majority of those who commented on the "noisy withdrawal" provisions were critical of them. The Committee was one of those who criticized the noisy withdrawal provisions of the November Release by the Committee's letter of December 16, 2002. To summarize the Committee's comments on the original noisy withdrawal proposals, which the Committee repeats and reconfirms by this letter:
- The Initial Proposal is not supported by the text of Section 307 of the Act or the legislative history of Section 307.
- In light of the language of Section 307, and its legislative history, the Commission cannot preempt state law that prohibits an attorney, without client consent, from disclosing client confidences through a noisy withdrawal or Disaffirmance.
- While California lawyers are, under circumstances similar to those addressed by the Commission in the November Release, permitted to report up-the-ladder and withdraw from the representation of an entity-client, California lawyers are under a strong mandate to preserve client confidences. California Business & Professions Code § 6068(e) ("It is the duty of an attorney to do all of the following [. . .] to maintain inviolate the confidence and at every peril to himself or herself to preserve the secrets, of his or her client."); California Rule of Professional Conduct 3-600.
- We believe that requiring noisy withdrawal by counsel and the Disaffirmance of documents by counsel would inhibit attorney-client communication and undermine the right to effective legal counsel.
Since the submission of its letter of comments on the November Release, the Committee has had the occasion to review many of the letters of comment received by the Commission on the Initial Proposal. The Committee reiterates its objections to the Commission's Initial Proposal on noisy withdrawal and the Disaffirmance of documents, and urges the Commission to withdraw the Initial Proposal.
B. The Alternative Proposal
The Commission's Alternative Proposal on noisy withdrawal, set forth in the Release, is responsive to some of the commentary that was critical of the Initial Proposal. It would not require attorney notification to the Commission under any circumstances;2 it would not require the Disaffirmance of documents under any circumstances; and it heightens the standard that would trigger a withdrawal or a notice to a "substantial" evidence standard (Proposed Alternative Rule 205.3(d)(1)(iii)).
What the Alternative Proposal would require, instead, is that when an attorney, appearing and practicing before the Commission, withdraws from the representation of an issuer for professional considerations, or when an attorney employed by an issuer notifies the issuer that he or she believes that the issuer has not provided an appropriate response within a reasonable time to his or her report of evidence of a material violation under Rule 205.3(d), that the issuer, within two (2) business days of receipt of such written notice, report the notice "and the circumstances related thereto" on Form 8-K, 20-F or 40-F, as applicable. Proposed Alternative Rule 205.3(e).3
III. Committee Commentary on the Alternative Proposal
The Committee wishes to address the Commission's requests for comment on the Alternative Proposal regarding "whether alternative proposed section (d) is more compatible with existing state standards governing attorney conduct than the "noisy withdrawal" and disaffirmation requirements of [the Initial Proposal] and, if so, how;"4 and "whether it is inconsistent with the attorney-client privilege to require an issuer to report the circumstances related to an attorney's notice under [the Alternative Proposal], and whether an issuer should instead be permitted to report only the fact of the attorney's notice."5
In our comment letter of December 16, 2002, we cited California Rule of Professional Conduct 3-600. This Rule of Professional Conduct closely parallels the up-the-ladder and withdrawal provisions of the Alternative Proposal. Rule 3-600 provides, in relevant part:
"(B) If a member [of the California State Bar] acting on behalf of an organization knows that an actual or apparent agent of the organization acts or intends or refuses to act in a manner that is or may be a violation of law reasonably imputable to the organization, or in a manner which is likely to result in substantial injury to the organization, the member shall not violate his or her duty of protecting all confidential information as provided in Business and Professions Code section 6068, subdivision (e). Subject to Business and Professions Code section 6068, subdivision (e), the member may take such actions as appear to the member to be in the best lawful interest of the organization. Such actions may include among others:
"(1) Urging reconsideration of the matter while explaining its likely consequences to the organization; or
"(2) Referring the matter to the next higher authority in the organization, including, if warranted by the seriousness of the matter, referral to the highest internal authority that can act on behalf of the organization.
"(C) If, despite the member's actions in accordance with paragraph (B), the highest authority that can act on behalf of the organization insists upon action or a refusal to act that is a violation of law and is likely to result in substantial injury to the organization, the member's response is limited to the member's right, and, where appropriate, duty to resign in accordance with rule 3-700."
Our Rule of Professional Conduct 3-700 mandates attorney withdrawal when, inter alia, the member knows or should know that continued employment will result in a violation of the Rules of Professional Conduct. Withdrawal is permissible, inter alia, when a client seeks to pursue an illegal course of conduct, or insists that the member pursue a course of conduct that is illegal or that is prohibited under the Rules of Professional Conduct; or insists that the member engage in conduct that is contrary to the judgment and advice of the member; or where continued employment is likely to result in a violation of the Rules of Professional Conduct. Rule Prof. Cond. 3-700(B)(2), (C)(1)(b), (c) and (e), (C)(2).
However, we believe the withdrawal requirements of Rule 205 should specify that withdrawal extends only to representation on the matter concerning the material violation.
Many issuers engage a single law firm for a broad range of legal matters, such as securities work, general corporate work, litigation, labor, tax or other matters. Requiring a firm to withdraw from all matters relating to an issuer, even in the acute circumstances set out in Rule 205, could be draconian to both the issuer and the law firm. Other ethical rules by which attorneys are bound, including those that provide for mandatory withdrawal in certain circumstances, tend to be limited to "matter-specific" withdrawal. Accordingly, for a law firm, mandatory withdrawal should relate only to the matter triggering application of Rule 205, similar to the case under Rule 205 of an attorney who is an employee of the issuer.
B. Is "Noisy" Withdrawal Necessary?
We continue to be wary of the "noisy" component of the "noisy withdrawal" concept. By its shifting of the responsibility for reporting attorney withdrawal (or notice by an employed attorney) from counsel to the issuer, the Commission has responded to the concerns of the Bar that requiring counsel notification to the Commission of withdrawal and requiring Disaffirmance would put at risk the confidentiality of attorney-client advice and the effectiveness of counsel's representation of an issuer. The holder of the attorney-client privilege is the client, not counsel, and thus the client has the right and power to waive the privilege. California Evidence Code §§ 953,954.
However, as one commentator to the Initial Proposal noted:
In the vast majority of cases counsel enjoy the confidence of their clients and, given access to the facts by their clients, succeed in persuading their clients to refrain from actions that harm the investing public. If clients are afraid to confide candidly and completely in their counsel and instead proceed without the advice of counsel, the public will inevitably be harmed in some cases when it need not have been. Or clients may be prompted to avoid cautious and prudent counsel, with the same result. The basic force for conformance of business conduct to legal norms is a strong and independent Bar that enjoys the trust and confidence of its clients.6
Whether notice of attorney withdrawal to the Commission is required to be given by the issuer or by the attorney, the potential to inhibit client confidence is the same. As we stated in our prior communication, we request that the Commission consider seriously, as a policy matter, whether the provisions of the Alternative Proposal relating to issuer notice of attorney withdrawal are in fact required to effectuate the purposes of Rule 205 and the Act.
By itself, the Act specifically mandated only up-the-ladder reporting for attorneys. We believe that many of the ills that gave rise to the passage of the Act will be addressed by the up-the-ladder reporting requirement and the resulting intra-company transparency regarding management's actions and decisions. Other elements of Rule 205, such as the QLCC concept and the attorney withdrawal provisions, reinforce the individual professional and fiduciary obligations each attorney or decision-maker possesses, without impairing the attorney-client relationship. We are not convinced that the incremental benefit of adding "noise" to the withdrawal requirement is outweighed by the harm done to the principle of attorney-client confidence.
C. "Circumstances" of Withdrawal
Finally, the Committee is concerned by the requirement, in proposed alternative Rule 205.3(e), that an issuer report "the circumstances related" to an attorney notice given under paragraphs (d)(1), (2), or (3). We note that if notification to the Commission is limited to the fact of attorney withdrawal (or notice, in the case of an employed attorney), even if the notice specified as the reason for withdrawal "professional considerations," such notification may not by itself constitute a waiver of the attorney-client privilege in California. California Evidence Code § 912 (a privilege is waived if any holder of the privilege, without coercion, discloses a "significant part" of the communication); See Mitchell v. Superior Court, 37 Cal. 3d 591, 601-603, 208 Cal. Rptr. 886 (1984).
However, requiring disclosure of the circumstances of a withdrawal or a notice given by an attorney under Rule 205(d) may impinge on the attorney-client privilege and could put counsel in a difficult situation if he or she concludes that the circumstances reported by the issuer are inaccurate or incomplete (at a time when retained counsel no longer represents or has an attorney-client relationship with the issuer). As our Rule of Professional Conduct 3-600 makes clear, even in going up the ladder with evidence of a material violation, and in withdrawing, California counsel "shall not violate his or her duty of protecting all confidential information as provided in Business and Professions Code section 6068, subdivision (e)." Prof. Cond. 3-600(B).
Issuers who are concerned they may trigger an obligation to report the "circumstances" of an attorney withdrawal (or notice) may, under stress, be motivated to restrict communication with counsel so as to avoid the range of "circumstances" the issuer might have to report upon attorney withdrawal (or notice).
Accordingly, if the Commission, after it has considered all of the commentary on the Alternative Proposal, determines that it must include a notice of withdrawal in the final version of Rule 205, the Committee urges that any such notice not include a requirement to disclose the "circumstances" of attorney withdrawal.
Very truly yours,
Timothy G. Hoxie
Chair, Business Law Section
Keith Paul Bishop
Co-Chair, Corporations Committee
Co-Chair, Corporations Committee
|Keith Paul Bishop
Irell & Manella LLP
840 Newport Center Drive
Newport Beach, CA
Downey Brand LLP
555 Capitol Mall
92660 Sacramento, CA 95814
|James F. Fotenos
Greene, Radovsky, Maloney & Share LLP
Four Embarcadero Center
Suite 4000 Suite 2700
San Francisco, CA 94111
Steven K. Hazen|
Kelley, Drye & Warren LLP
777 South Figueroa Street
Los Angeles, CA 90017
Randall Brent Schai
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, CA 94104
Nancy Wojtas |
Cooley Godward LLP
Five Palo Alto Square, 3000 El Camino Real
Palo Alto, CA 94306-2155
Charles L. Crouch III, Esq.
Vice Chair, Business Law Section
Elaine Leadlove-Plant, Esq.
Secretary, Business Law Section
Jerome A. Grossman, Esq.|
Vice-Chair, Business Law Section
Susan M. Orloff
Business Law Section Administrator
The State Bar of California Business Law Section
Corporations Committee Members
As of the date of this letter, the Corporations Committee is composed of the members shown below, not all of whom necessarily endorse each and every recommendation and view expressed in this letter. Taken as a whole, however, this letter reflects a consensus of the members of the Corporations Committee.
|Keith Paul Bishop, Co-Chair
Bruce Dravis, Co-Chair
Nancy Wojtas, Vice-Chair, Legislation
David M. Pike, Vice-Chair, Education
Brian D. McAllister, Vice-Chair, Communications
James K. Dyer, Secretary
Curt C. Barwick
John C. Carpenter
Nelson D. Crandall
Teri Shugart Erickson
Timothy J. Fitzpatrick
James F. Fotenos
Steven K. Hazen
Mark T. Hiraide|
John H. Marlow
B. Keith Martin
Stewart Laughlin McDowell
Ethna M.S. Piazza
Randall Brent Schai
James R. Walther
Daniel J. Weiser
Neil J Wertlieb
Brian M. Wong
|1|| The Commission also includes in the Release, in the repetition of its Initial Proposal, Proposed Rule 205.3(d)(3), stating that any attorney notification of the Commission under Proposed Rule 205.3(d) "does not breach the attorney-client privilege." The Committee believes that, in light of the Commission's withdrawal of Proposed Rule 205.3(e)(3) (which would have stated that the sharing of information with Commission by an issuer, through its attorney, shall not constitute a waiver of any otherwise applicable privilege), regardless of what measure the Commission adopts on noisy withdrawal in the final rule, it would not be necessary or appropriate to include any statement that a notification to the Commission does not breach the attorney-client or other applicable privilege.
|2|| Proposed Alternative Rule 205.3(f) would permit, but not require, attorney notification of the Commission if an issuer has not reported to the Commission an attorney withdrawal or notice.
|3|| An issuer report to the Commission will also be required where an attorney gives notice that, but for court or administrative order or rule, the attorney would have withdrawn or provided notice (Proposed Alternative 205.3(d)(2)) or when an attorney notifies the issuer's chief legal officer (or equivalent) that he or she reasonably believes that he or she was terminated for reporting evidence of a material violation. Proposed Alternative Rule 205.3(d)(3).
|4|| Release at page 12-13.
|5|| Release at page 15.
|6|| Comment Letter to SEC by 77 Law Firms, December 18, 2002.