Steven K. Hazen, Esq.
Kelley, Drye & Warren LLP
777 South Figueroa Street
Los Angeles, CA 90017
November 25, 2002
Via E-Mail: firstname.lastname@example.org
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Attn: Mr. Jonathan G. Katz
Thank you for this opportunity to provide comments on the above-referenced release and proposal which would have the effect of adding new Rule 13b2-2(b) to Regulation 13B-2 under the Securities Exchange Act of 1934, as amended. The sole focus of this letter is to highlight one particularly problematic area of dissonance between the scope of the proposed rule and the actual text of Section 303(a) of the Sarbanes-Oxley Act of 2002 ("S-OA"). Specifically, the latter clearly provides that with respect to certain financial statement audits the proposed rule is to proscribe certain actions taken
"... for the purpose of rendering such financial statements materially misleading." [emphasis added]
Actions which cannot be shown to have been taken for such purpose are thus not covered by S-OA Section 303(a) and the authorization contained within it for the Commission to promulgate rules which would make conduct "unlawful."
Unfortunately, the proposed rule does not effectuate the purpose standard and in at least two aspects has affirmatively abandoned it:
- The text of proposed subsection 13b2-2(b)(1) applies to a person who "knew or was unreasonable in not knowing" that an action would render financial statements materially misleading. Regardless of whether "not knowing" is reasonable, the mere absence of such actual knowledge would mean that the purpose requirement of S-OA has not been met. If the Commission believes that the proposed rule must include situations in which "not knowing" is in fact "unreasonable," such provision would need to specify other indictors which demonstrate that the purpose requirement has otherwise been met. As a threshold, that would probably require two different provisions: (a) one applicable to situations in which such knowledge is present and thereby demonstrates such purpose, and (b) one applicable to situations in which the actor's state of knowledge alone does not indicate such purpose but other indicators might.
- The release containing the text of the proposed rule includes a litany of things which "might constitute improper influence" for purposes of the proposed rule. See, text in part II.B. of the release introducing the third specific question posed: "Should the types of conduct that might constitute actions to fraudulently induce ...."
Five of the six items on the list demonstrate a clear awareness of the drafters that such actions must evidence actual "purpose," and they do. The second item on that list, however, does not in any manner at all demonstrate the proscribed purpose. Whether the rule itself ultimately includes a listing of types of proscribed conduct or such list simply continues to be expressed in the final release itself, care should be taken that the types of activities do, in fact, demonstrate the requisite purpose component.
The issuing release itself contains two critical acknowledgements which, by any standard of intellectual integrity, demonstrates that the proposal would have benefited from more thought and greater care before it was issued and will benefit from significant modification before a final rule is promulgated and a final release regarding it is issued:
- The last set of questions in part II.B. specifically notes that S-OA Section 303(a) includes a purpose element. Does the proposed rule and the release actually solicit comments as to whether rules adopted by the Commission should in fact adhere to the law?
- The text of the release providing the above-described litany of types of conduct which would be subject to the provisions of Rule 13b2-2(b) notes that they "generally would be subject to other provisions of the securities laws and the Commission's regulations ...." The release continues by asserting that the proposed rule would "provide an additional means to address" the conduct in question. Does the Commission actually believe that its time is well-utilized in duplicating regulatory coverage? Taking that approach has the unfortunate impact of creating an impression that the purpose of issuing new rules is to deflect attention from whether the existing rules were themselves adequately enforced by those responsible for doing so. The latter would not enhance investor confidence; it would diminish it.
Thank you for your consideration.
Very truly yours,
Steven K. Hazen