From: William Livingston [vitalith@earthlink.net]
Sent: Thursday, April 03, 2003 3:43 PM
To: rule-comments@sec.gov
Subject: File No. S7-45-02

Mr. Chairman and Honorable Commissioners:

You are soliciting comments on proposed rules setting standards of professional 
conduct for attorneys who appear and practice before the Commission on behalf of 
issuers. Release Nos. 33-9196; 34-47282; IC-25920 solicit comments in particular 
under Section 307 of the SOA concerning the rules adopted and the "noisy withdrawal" 
alternative.

This is a very significant rule in kind. It concerns the design of a viable method 
for transforming malpractice detection to damage deterrence. Since the recognition 
of illegal activity is common throughout the operational reality, one must be awed 
at the ability of organizations to muzzle the great abundance of cadet whistleblowers. 
As a lowly stakeholder, unless detection of this pervasive condition makes it all 
the way to preemption, what's left of my 401K is going to sustain another attack. 
I get no satisfaction from knowing that your 401K will get whacked too.

Now that the knowledge-forming phase of the rule-making process for Section 307 is 
drawing to a close, it is the time professionals place the subject matter into its 
larger framework and think future. It is the last step before release. The requisite 
is to make projections of the likely impact of the action on the stakeholders, 
soliciting commentary like this to reduce the field of ignorance, and assesses the 
prospects for attaining the stated goal. It is a milestone in the professional duty 
to preempt damage ("Do no harm.") and avoid wasting resources in the pursuit of the 
impossible. The grand issue in SEC hands is whether or not a viable, reliable pathway 
for preempting Enron-class damage has been provided.

Institutions of regulators and the regulated alike are deterministic systems. Given 
the system transfer functions, well-validated algorithms that organizations 
instinctively use for choosing action, the next state in time is a function of the 
current state and nothing else. We have the rule propositions and the reactions made 
to the propositions. The rest is automatic.

You have noticed the greatly reduced flow of solicited comments. This is a signal 
from your issuer clientele that the new rule will have negligible impact on business 
as usual. Your problem with such an outcome is that, meanwhile, business as usual 
has been busy generating a new wave of damage to your stakeholders that, by comparison, 
will rank the class of Enron as petty larceny. If you think you have designed an 
effective scheme for preempting damage, it better be shouting "wolf" right now.

Because it concerns method selection before the event of damage, this proposed rule 
is the one mandate of SarbOx that smacked down on the critical success factor of the 
regulatory universe. The rule also coincides with my area of professional expertise, 
attested by my published books on the subject (Amazon.com). It is sad to see this 
fleeting window of opportunity to preserve my 401K residues closing down with yet 
another victory of the regulated over the regulator. It is a pity that all the 
forthcoming waste and damage to your stakeholders inflicted by issuers will not be 
deterred. Everything you need to preempt the great harm now racing towards us, 
triggered when issuers dropped their liability insurance, is at hand.

The framework

The knowledge base you have available from the record shows that everything in the 
regulating universe that relies on history, prophecy and incentives - doesn't work. 
None of the derivatives of these conventional strategies of regulation, including 
reports, accounts, ledgers, metrics, red flags, certificates, resumes, credentials, 
plans, forecasts and punishments, works either. Your decades of repetitive experience 
affirm that regulation through the devices of history, prophecy and incentives failed 
to derail any of the giant wrecking machines set loose for years to menace society, 
such as S&L and Enron. The "answer" cannot reside in yet another shuffle of the same 
cards or roll of the same dice in this casino of failure. Note that all the corporate 
governance "guides" consist exclusively of artifacts of history and prophecy. What 
they comprise is a roadmap the unethical need to flourish.

If you need more than your own experience to validate, there are many parallels. The 
records of the US Sentencing Commission (Chapter 8 of their guidelines for organizations), 
ombudsmen, and the Council of Europe show identical results. There is nothing in the 
realm of incentives that hasn't been tried before and reported on. The USSC funded 
several excellent studies on punishment-based incentives and published the results in 
their 1995 symposium on CH 8.

As there are many regulators of commerce, there are also watchdog duties of the 
professions and the fiduciaries. The exclusive use of history, incentives and prophecy 
has not served these safeguards of society either. With such impairments, regulatory 
oversight reduces to consequences management. The class of Enron provided us with the 
latest price schedule for obtaining complicity from each discipline.

The value of reward-based incentives is fully recorded by the Council of Europe. It 
allows due diligence as a defense to an institution charged with an offense, civil or 
criminal, because in theory "the company which has exercised due diligence cannot be 
said to be morally blameworthy." However, the court assures itself that corporate 
trappings of compliance are not simply public relations ploys. The test is whether the
mechanisms are generally effective in practice, even if they have failed in the instant 
case. In ten years of operation, none have chosen to pass the test. So much for free 
liability insurance as an incentive.

Failure is not an option

Simple logic directs goal-seeking attention to the residuum. When the past and the 
future are eliminated from the arrow of time as the miserable failures they are, 
what is left is the now. What does history teach about regulation by the now? The 
ombudsmen know - success. The "now" is also future proof. Connect the now dots.

The reason forms of regulation by past and future fail, human nature being what it 
is, derives from intrinsic flaws in the integrity of historical accounts and prophecy 
that can be exploited for an interval of time sufficient to escape with the loot. It 
is the same old code and decode stalemate that can be found in several places in the 
regulation universe (e.g., the DEA). Stalemate is an engine for wasting resources 
while unlawful conduct flourishes. It keeps the regulator employed and buys time 
for malfeasance.

The reason the now time regime of regulation succeeds is because the associated 
natural law operates independent of variety in human nature. That is, goal-seeking 
activity (now) regulation does not depend upon the ethics or morals of the participants. 
In the "now" time slice, there is nothing to fabricate or cover up and deceit is 
impossible. When "now" activity is continuously law-abiding, there is no shielded 
span of time to raid the treasury.

Before we PEs can get our diploma from engineering school, we must demonstrate our 
knowledge and competency through examination and laboratory work that natural law 
provides for (only) two stable systems of method. The omnipresent force field of 
the universe features two attractors separated by a great distance. Everything in 
between is transient and short-lived at that. One method system governs activity 
choice by rules. The other system regulates itself by purpose. There is no third 
system to learn. If the subject realm is not rule-based, it is a goal-seeking 
enterprise. Class dismissed.

The derivation of this thesis in natural law is simple. The central principle for 
method is control theory. During our workshop for annual updating to the best 
professional preemption methodology (foreseeability), there is no need to refer 
to anything but the experience of the participants. The great blessing and the 
awful curse of natural law indifference is that it is nested and omnipresent - no 
exceptions. History must contain only examples of its collective influence and zero 
examples of the contrary. The UN and your family abide the same laws.

Regulating by "now"

Leaders of the regulated know full well that when you spotlight activity of the now, 
the code-decode game is over. As the USSC studies showed, management itself is keenly 
aware of law-violating activity as a norm. Illegal activity continues on because 
there is no route for an intelligent preemptive whistleblower to follow to achieve 
deterrence. The goal of "now" regulation is appropriate selection of method. If the 
issuer is choosing activities appropriate to the conditions of its mission, the law 
demands nothing more.

The professional knows that it is not a case where operating by rules is universally 
better that operating to purpose. His duty, the essence of professionalism, is 
appropriate selection of method to circumstance. Should the selected activity cause 
damage, the lawyer for the plaintiff will investigate what was done prior to the 
damage event to preempt it. The collision with civic duty comes in to play when that 
span of time was governed by the rules of business as usual when the circumstances 
called for professional damage preemption (the standard of care). Compared to the 
limits in capability 40 years ago, the duty of care today embraces immensely expanded responsibilities.

Since any plan of incentives to get an organization to select appropriate methods 
on its own initiative fails, the solution is simply to embed a method system for 
making appropriate selection of activity (to professional standards) and give it a 
cell phone. While complex in principle, the scheme is simple in execution.

The focus of professional informed-consent is the standard of care used by plaintiff 
lawyers in tort to benchmark activity of the defendant prior to the damage 
(foreseeability). In our workshop, this unity is derived from and scrutably connected 
to control theory and the Second Law of Thermodynamics. The derivation of methodology 
run through takes about thirty minutes and the reaction is always stunned silence. 
Each participant sees the engine of his unique experience clearly, bonnet off and 
chugging away, for the first time.

Benefits of the divided loyalty test to an issuer come in two stages. The first stage 
is what you learn when an issuer violently refuses to embed a damage preemption 
functionality operating to professional standards of care. Issuers are keenly aware 
of the untouchable veracity of the "now" system of corporate governance. You can 
determine at the outset the intent of the issuer to avoid compliance. There is a 
reliable precedent for this speedy classification.

Back in the 1980s when the "Total Quality Management" fad was popular with Deming 
and the Malcolm Baldrige Award gang, a feature of the TQM realm was to establish 
"Quality Circles." The groups were formed from regulars, embedded within the 
organization, and empowered to act professionally and autonomously to solve problems. 
As they were in Japan, quality circles in USA commerce were wildly successful - too 
successful. I served in several such groups. When management realized the preemptive 
whistleblowing power of the quality circle (now), it was exterminated.

The second stage of benefit to the regulator comes after the professional standard 
of care (now) group is activated. Nothing needs to be done to achieve infallible 
corporate governance. It has a cell phone to call your answering machine when and 
if it is being punished by business as usual. Unlike the ill-fated quality circle, 
management must not be free to interfere and you can count on the embedded group to 
alert you. While the professional now group, a classic skunkworks, should not expect 
any credit for preempting damage, neither should it be exposed to management whim. 
The adage "No good deed goes unpunished," is operational reality.

As long as the embedded "now" group is in service, the organization has no opportunity 
for mischief. Unlike the rule-based organization, a skunkworks is very sensitive to 
disturbance. Instant detection is why unprofessional conduct is impractical. At some 
time or another, everyone has been a member of a skunkworks.

The SEC is to be commended for providing this convenient format for solicited commentary. 
Thanks to your foresight, I have been able to record my efforts at preempting calamity to stakeholders in a public document. The irony in this arrangement has not gone unnoticed.

William L. Livingston, P.E.