Attorneys' Liability Assurance Society, Inc.,
A Risk Retention Group (ALAS)
on the U.S. Securities and Exchange Commission's
Proposed Rule on Lawyer Conduct,
17 CFR Part 205
File No. 33-8150.wp
December 18, 2002
TABLE OF CONTENTS
IDENTIFICATION AND EXPERIENCE OF ALAS
COMMENTS ON SPECIFIC PROVISIONS OF THE PROPOSED RULE
- SECTION 205.3(d)(1)(i), MANDATORY WITHDRAWAL,
NOTICE AND DISAFFIRMANCE BY OUTSIDE COUNSEL
FOR ISSUERS, SHOULD BE DELETED FROM THE RULE
- The Requirements of Section 205.3(d)(1)(i) Exceed
the Language of Sarbanes-Oxley Section 307
- Section 205.3 Is Inconsistent with Withdrawal Rules in Most States
- The Scope of Withdrawal Required by Section 205.3(d)(1)(i)
Far Exceeds the Mandate of Sarbanes-Oxley Section 307
- Section 205.3(d)(1)(i) Will Subject Withdrawing and Reporting
Attorneys to Liability Claims for Doing What the Rule Requires
- Section 205.3(d)(1)(i) Will Not Likely Deter or Expose
Securities Law and Other Violations
- F. Eliminating Mandatory Withdrawal and Outside
Reporting Solves the Most Serious Problems with the
Commission's Proposed Rule
- THE ATTORNEY STATE OF MIND REQUIREMENTS FOR
REPORTING UP-THE-LINE AND FOR DETERMINING AN
"APPROPRIATE RESPONSE" SHOULD BE CLARIFIED
- The Term "Becomes Aware" in Section 205.3(b)
Should be Changed to "Knows" and a Definition of "Knows"
Similar to the Model Rules Definition Should Be Added
to Section 205.2
- The Definition of "Evidence of a Material Violation"
in Section 205.2(e) Should Be Changed
- The Definition of "Reasonably Believes" in
Section 205.2(l) Should be Changed
- PARAGRAPHS (a) AND (f) OF SECTION 205.2, CONTAINING
DEFINITIONS OF "APPEARING AND PRACTICING BEFORE THE
COMMISSION"AND "IN THE REPRESENTATION OF AN ISSUER,"
SHOULD BE CHANGED
- Narrowing the Definition Will Result in More
Reasonable Applicability of the Rule
- Application of the Rule to Foreign Attorneys
- Specialized Applicability of the Rule
- A SAFE HARBOR SHOULD BE PROVIDED FOR
ATTORNEYS WHO MAKE REPORTS REQUIRED BY THE RULE
- THE RULE SHOULD CONTAIN AN EXPRESS PROHIBITION ON PRIVATE ENFORCEMENT
- THE PROPOSED RULE PUTS REPORTING ATTORNEYS IN JEOPARDY OF DISCIPLINARY PROCEEDINGS AND POSSIBLY CIVIL CLAIMS WITHOUT EFFECTIVE PROTECTION
- The Rule's Effort to Avoid Impairment of the Attorney-Client Privilege Resulting From Reports Required by the Rule Will Be Unavailing
- The Rule's Attempt to Preempt State Attorney Conduct Rules And State Law Duties of Attorneys to Their Clients Exceeds the The Scope of Section 307
- SECTION 205.2(d), DEFINITION OF "BREACH OF FIDUCIARY DUTY," SHOULD BE EXPANDED TO INCLUDE "OR SIMILAR VIOLATION" AND SHOULD BE CLARIFIED
- SARBANES-OXLEY SECTION 307 DOES NOT AUTHORIZE SECTION 205.6(a)'S ATTEMPT TO CONVERT RULE VIOLATIONS BY ATTORNEYS INTO `34 ACT VIOLATIONS
- THE QLCC PROVISIONS AND CERTAIN OTHER PROVISIONS OF THE PROPOSED RULE ARE PARTICULARLY MERITORIOUS
- Qualified Legal Compliance Committees (QLCCs)
- Definitions of "Material" and "Material Violation"
- The Issuer as Client
- Responsibilities of Supervisory and Subordinate Attorneys
IDENTIFICATION AND EXPERIENCE OF ALAS
The Attorneys' Liability Assurance Society, Inc., A Risk Retention Group (ALAS), is an association of more than 260 large United States law firms that provides professional liability insurance coverage to approximately 54,000 attorneys practicing in the United States and abroad. Most ALAS Member Firms are medium-sized to large law firms (average size firm: 200 attorneys) that regularly represent organizational clients, including public companies, in a wide range of legal matters. These matters include securities offerings and civil, criminal and administrative proceedings involving federal and state securities laws and regulations. Among other activities, ALAS provides to its insured attorneys legal ethics and liability avoidance counseling. We respond to an average of almost 2,000 requests for such advice each year. ALAS participates in the defense of professional liability claims against its insured attorneys and law firms. Over its 23 year existence, ALAS had dealt with over 14,000 professional liability matters involving attorneys.
ALAS's Loss Prevention Counsel were actively involved in the American Law Institute's ten year project to prepare and publish the Restatement Third, The Law Governing Lawyers and the ABA Ethics 2000 Commission's five year reconsideration and revision of the Model Rules of Professional Conduct (completed in 2002). Four ALAS Loss Prevention Counsel were members of the Members' Consultative Group for the Restatement, and attended virtually every ALI session at which the Restatement was considered. They also were members of the Advisory Council to the ABA Ethics 2000 Commission, frequently testified at hearings of the Commission, and attended every meeting of the Commission that was open to the public. All of them write and speak frequently on the subjects of legal ethics and attorney liability. Several chair state or local bar association legal ethics and professional responsibility committees, and two have taught legal ethics for a number of years at Northwestern University School of Law.
With the passage of Section 307 of the Sarbanes-Oxley Act, Congress has required the Commission to adopt rules of professional conduct for attorneys appearing and practicing before it. It has also mandated that these rules be adopted within a matter of weeks, even though they raise profound issues of federalism and address subjects with which the legal profession has been grappling for decades. In this context, we respectfully submit that the wisest course is for the Commission to proceed with caution. Certainly at this stage, it is not necessary for the Commission to attempt to expand its legislative mandate and adopt rules on such subjects as noisy withdrawal and reporting, that are not required by the legislation, and fly in the face of the applicable legislative history. Nor do we believe it is wise for the Commission to use these regulations as a means to superimpose an entirely new federal regulatory scheme on the legal profession, or fundamentally to alter the nature of relationships between attorneys and clients that have been at the heart of the profession for decades.
We recognize that the impetus for Section 307 has been the recent series of well-publicized corporate failures, and a sense that action, or inaction, by attorneys somehow contributed to major losses by investors. We do not believe that this perception is accurate, or that it generally reflects the conduct of clients or their attorneys. But beyond that, ours remains an adversary system, with the public ultimately best served by zealous attorney advocacy. This in turn requires a degree of trust and confidence between attorney and client, as well as counsel willing to advocate positions that have a basis in law and fact. Even a series of rules purportedly limited to a specialized administrative process can have far broader implications throughout the profession.
We fear that a number of the Commission's proposals will impair these bedrock principles. We are particularly concerned that a requirement that attorneys violate obligations of confidentiality through noisy withdrawal, and then report their actions to a federal regulatory agency, will forever alter the nature of the attorney-client relationship, not to mention undermining the carefully crafted rules governing attorney conduct in 50 states and the District of Columbia. We also fear that these requirements, when combined with the state-of-mind definitions in the Commission proposal that would trigger them, will present conscientious counsel with any number of unresolvable dilemmas. For example, if counsel maintains what he believes are client confidences, he could well face claims by third parties, who will seek to use the Commission's rules as the basis for the standard of care in civil litigation. Yet, if counsel acts in accordance with Commission rules that are at odds with state ethics requirements or common law, he will inevitably face traditional tort claims by his former client, encouraged by a plaintiffs' bar whose primary objective is something other than the protection of investors. Perhaps the most significant impact of the Commission's proposals may be to discourage attorneys from advising securities clients, and discouraging clients from seeking their advice in the first place.
Attorneys are citizens. They have the obligation, as reflected in the Model Rules of Professional Conduct, and by operation of law, not knowingly to participate in illegal activity by any client. It does not follow, however, that attorneys must also serve as policemen, or enforcement agents, with the practical obligation to use confidences entrusted to them to investigate client activity, or report outside the client organization. In considering rules under Section 307, we urge the Commission to keep these principles in mind.
We attempt in these comments to recognize those portions of the proposed rule that we believe have merit, but also to bring to the Commission's attention aspects of the proposal that are, in our judgment, unwise, unworkable, or unlikely to result in the investor protection intended by the Commission. We also comment on a number of aspects of the proposed rule that, in our view, unfairly create "traps for the unwary attorney." We focus our comments on those aspects of the Commission's proposed rule that present the greatest risk of generating unwarranted professional liability claims against attorneys. Because ALAS insures only outside attorneys practicing in private law firms, as opposed to employed or inside attorneys, and has direct experience only with claims against such attorneys, we limit our comments here to provisions of the proposed rule that affect such outside attorneys.
COMMENTS ON SPECIFIC PROVISIONS OF THE PROPOSED RULE
1. SECTION 205.3(d)(1)(i), MANDATORY WITHDRAWAL,
NOTICE AND DISAFFIRMANCE BY OUTSIDE COUNSEL
FOR ISSUERS, SHOULD BE DELETED FROM THE RULE
Proposed Change: Delete paragraph (d)(1)(i) of Section 205.3 entirely, renumber the remaining paragraphs of paragraph (d) accordingly, and delete references, if any, to that paragraph elsewhere in the rule.
Rationale: As described in more detail below, proposed paragraph (d)(1)(i) of Section 205.3 is ill-advised for many reasons. First, it is contrary to the intention of the sponsors of Sarbanes-Oxley Section 307. Second, mandatory withdrawal, where the attorney him- or herself is not violating the law or legal ethics rules, is inconsistent with withdrawal rules in most U.S. jurisdictions and, therefore, will create confusion among practicing attorneys. Third, even if some form of mandatory withdrawal remains in the rule, the proposed scope of withdrawal is far broader than is justified by Sarbanes-Oxley Section 307. Fourth, it will subject an attorney who withdraws and "reports out" to liability claims that the attorney harmed or breached duties to the corporate client, to the client's shareholders, and to officers or employees of the client who claim to have been adversely affected by the report. Fifth, it will not achieve the additional protection the Commission intends because it will result in some clients excluding their outside attorney from discussions that might prompt the attorney to begin the up-the-line reporting process. Alternatively, mandatory disclosure outside the company will cause some outside attorneys to withdraw prematurely from any representation in which they sense a possibility that they might ultimately be required to withdraw and report their clients to the Commission.
A. The Requirements of Section 205.3(d)(1)(i)
Exceed the Language of Sarbanes-Oxley Section 307
Nothing in Section 307 requires the Commission to adopt the language it is proposing in Section 205.3(d)(1)(i). Moreover, the principal sponsors of the amendment that became Section 307, along with Senator Sarbanes himself, made clear on the Senate floor that they intended Section 307 not to authorize the Commission to promulgate such a rule. Senator Enzi told the Senate:
The amendment I am supporting would not require the attorneys to report violations to the SEC, only to corporate legal counsel or the CEO, and ultimately, to the board of directors.
148 Cong. Rec. S6555, col. 3 (July 10, 2002)(emphasis added). To make certain this point was absolutely clear, Senators Sarbanes and Edwards discussed what obligations the amendment creates for attorneys.
MR. SARBANES. . . . It is my understanding that this amendment, which places responsibility upon the attorney for the corporation to report up the ladder, only involves going up within the corporate structure. He doesn't go outside the corporate structure. . . . Is that correct?
MR. EDWARDS. Mr. President, my response to the question is the only obligation that this amendment creates is the obligation to report to the client, . . . There is no obligation to report anything outside the client - the corporation.
MR. SARBANES. I think that is an important point. I simply asked the question in order to stress the fact that that is the way this amendment works. This has been a very carefully worked out amendment. I engaged in an exchange with the distinguished Senator from North Carolina, and the Senator from Wyoming, Mr. Enzi, the cosponsors of this amendment. I know how careful they have been in trying to craft the amendment and in bringing it here.
148 Cong. Rec. S6557, cols. 2-3 (July 10, 2002)(emphasis added).
Thus, proposed paragraph (d)(1)(i) of Section 205.3 is directly contrary to the intention of the co-sponsors of the amendment that became Sarbanes-Oxley Section 307, and to the intention of the principal sponsor of the Sarbanes-Oxley Act. These senators are the only members of Congress to address this issue on the floor during the legislative process.
B. Section 205.3(d)(1)(i) Is Inconsistent
with Withdrawal Rules in Most States
Mandatory withdrawal by attorneys is governed by state versions of ABA Model Rule 1.16. That Rule specifies only three situations in which it is mandatory for an attorney to withdraw from a client representation: (1) where the attorney is discharged by the client; (2) where the attorney's physical or mental condition impairs the attorney's ability; and (3) where continued representation will result in the attorney's violating the rules of professional conduct (such as by knowingly assisting a client crime or fraud) or violating other law. See Model Rule 1.16(a) and Comment . According to ABA Formal Opinion 92-366, withdrawal also would be mandatory under Model Rule 1.2(d) if, but only if, as a result of the client's use of theattorney's services to perpetrate a crime or fraud, the attorney's continued representation would constitute knowing assistance in the client's crime or fraud.
If a client, as opposed to the attorney, either has used or is using the attorney's services to perpetrate a crime or fraud, or persists in conduct that will have that result, Model Rule 1.16(b)(2) and (3) permit, but do not require, the attorney to withdraw unless, as noted above, continued representation would amount to knowingly assisting the client's crime or fraud. The overwhelming majority of states follow Model Rule 1.16 in specifying when attorney withdrawal is mandatory, and when it is permissive.
Thus, Section 205.3(d)(1)(i)'s requirement of withdrawal when an attorney fails to receive an appropriate client response to the suggestion of a material violation is inconsistent with the rules of most states, and will lead to confusion among attorneys for issuers as to their duties to their clients. The Commission should consider that the legal ethics rules in many states may already require attorney withdrawal and disaffirmance, if the attorney's prior work will be or is being used by the client in perpetrating an ongoing or future crime or fraud. In such a situation, noisy withdrawal may be required in order for the attorney to comply with the mandate in every state's ethics rules that the attorney not knowingly assist a client's crime or fraud. ABA Formal Opinion 92-366.
As to disclosure of confidential client information to prevent client criminal conduct, thirty-seven states already permit such disclosure, ten prohibit it, and only four require it. (See authorities cited in note 69 of Release No. 33-8150.) Thus, a rule that requires such disclosure, even under the rubric of "noisy withdrawal," for not receiving a timely and appropriate response to the attorney's prior report, would conflict with the legal ethics rules of many states, subjecting attorneys to conflicting regulatory mandates.
C. The Scope of Withdrawal Required by Section 205.3(d)(1)(i)
Far Exceeds the Mandate of Sarbanes-Oxley Section 307
When read together with the Commission's commentary, proposed Section 205.3(d)(1)(i) appears to require attorneys subject to the paragraph to withdraw from all representations of the issuer, not just from the representation that generated the attorney's up-the-line report, or from all representations involving the Commission. Why should an attorney or law firm that must withdraw from a securities law representation under (d)(1)(i) be required also to withdraw from defending the issuer in state common law tort claims? Why should he also be required to withdraw from employment law, environmental, real estate, or dozens of other matters that have no or little relationship to the securities law representation covered by the proposed rule? Inaddition, required withdrawal from litigation matters without court approval will subject attorneys to violations of court and ethical rules. The Commission offers no rationale for such a sweeping withdrawal requirement. The disruption and financial harm to issuers and their shareholders from such a broad withdrawal requirement will be substantial.
Even if the Commission determines to retain some form of mandatory withdrawal in its final rule, it should limit the required withdrawal to the representation that gave rise to the up-the-line report. Because of the potential harm to issuers and their shareholders that would be caused by requiring attorneys to withdraw from all representations of the issuer, many of which will be unrelated to any possible securities law violation or the purposes of Sarbanes-Oxley Section 307, there is no rational justification for such a requirement.
D. Section 205.3(d)(1)(i) Will Subject Withdrawing and Reporting
Attorneys to Liability Claims for Doing What the Rule Requires
A subject on which Release 33-8150 barely touches is the exposure of attorneys covered by the proposed rule to liability claims from clients or others who allege to have been damaged by an attorney's withdrawal, reporting to the Commission, and disaffirmance of prior submissions. Based on ALAS's experience, the basis for such claims will be not only that the attorney violated the applicable state rules of professional conduct, but also that the attorney violated duties to the client of loyalty and confidentiality imposed by agency law in every state. Even if the Commission can preempt state legal ethics rules that are inconsistent with requirements of the proposed rule, as suggested in Section 205.1, it cannot exempt attorneys from liability to their clients for their actions. In addition, an attorney complying with paragraph (d)(1)(i)'s requirements to withdraw, report out and disaffirm may be sued by corporate officers or employees who claim that their careers or reputations have been harmed by the attorney's conduct, or by shareholders who claim that the attorney's withdrawal or report adversely affected the corporate client and the value of its stock.
Consider the attorney in a particular situation who is unsure about the application of Section 205.3(d)(1)(i). If this attorney makes no disclosure and, after all the facts and circumstances are revealed, the attorney should have given notice and withdrawn, the attorney may face claims by third parties for failure to comply with the rule. Alternatively, if the attorney does report and withdraw and later is found to have been wrong in his or her suspicions, the attorney risks claims by the client. Consequently, mandatory withdrawal in Section 205.3(d)(1)(i) could result in liability regardless of what course an attorney chooses based solely on a retrospective attribution of the attorney's knowledge rather than on any improper attorney behavior. As a result, the significant liability exposure risks, along with the other reasonsSection 205.3(d)(1)(i) is inadvisable, outweigh any possible benefit of that section of the rule.
E. Section 205.3(d)(1)(i) Will Not Likely Deter or
Expose Securities Law and Other Violations
Even if one could overcome the prior objections, a mandatory attorney disclosure requirement is unlikely to deter or expose unlawful client conduct.
Although in most cases, attorneys and their clients share open and candid discussions as a result of the assurance of confidentiality, removing that assurance has the potential for disrupting this important dynamic. It is in this context that attorneys can be most effective in counseling their clients to do the right thing. Mandatory disclosure of any kind, even in the limited circumstances proposed in paragraph (d)(1)(i), will cause some clients to exclude outside attorneys from their deliberations whenever sensitive issues arise that might ultimately result in mandatory withdrawal and disaffirmance by the outside attorney. In such cases, the attorney will have no opportunity to counsel the client about the risks of its proposed conduct, or to attempt to persuade the client to abandon any proposed unlawful conduct, because the attorney will not even be in the room, not be consulted as frequently, and will receive only selective information from the client.
In other cases, experienced, highly ethical, risk-averse attorneys will respond to mandatory withdrawal, reporting and disaffirmance requirements by trying to ensure that they never become involved in a situation where such action is required. At the first hint of problematic client conduct, long before anyone could even argue that the attorney "became aware" of "evidence of a material violation," these attorneys will voluntarily withdraw, motivated in part by an instinctive revulsion at the prospect of "blowing the whistle" on a client, and in part by a desire to avoid liability exposure for breach of fiduciary duties of loyalty and confidentiality and other possible liability claims (see above). Thus, at the very time the issuer client and its management most need the advice of experienced, trusted and prudent counsel, they will be deprived of it. Based on our experience in counseling attorneys who encounter problematic client behavior, early "quiet" withdrawal will unquestionably be the response of many attorneys to a mandatory "noisy" withdrawal requirement. In many cases that might be the course that ALAS might recommend to its insured attorneys in order to minimize liability risks to the attorney. Such early withdrawal, however, frequently will be disruptive and costly to the issuer and its shareholders with no commensurate benefit to the investing public.
F. Eliminating Mandatory Withdrawal and Outside Reporting
Solves the Most Serious Problems with the Commission's Proposed Rule
In summary, the mandatory withdrawal, reporting out and disaffirmance requirements of Section 205.3 (d)(1)(i) are the proposed rule's most serious weaknesses. They produce conflicts with existing state legal ethics rules, state common law principles of attorney fiduciary duty to clients, state common law rules of attorney liability to third parties, and with most attorneys' instinctive reluctance to harm their clients. They also will render the up-the-line reporting requirement of Section 307 far less effective than it would otherwise be because they will deter some clients from involving outside attorneys in their decision-making process, and will deter some attorneys from remaining involved to advise and counsel clients on how to comply with the law. All of these problems will be avoided if the Commission simply limits its proposed rule to what Congress intended in enacting Section 307: up-the-line reporting within a client organization, with no requirement for withdrawal, outside reporting or disaffirmance.
2. THE ATTORNEY STATE OF MIND REQUIREMENTS FOR
REPORTING UP-THE-LINE AND FOR DETERMINING
AN "APPROPRIATE RESPONSE" SHOULD BE CLARIFIED
(A) The knowledge standard for attorney reporting in paragraph (b) of Section 205.3 should be changed from "becomes aware" to "knows" and a definition of "knows" similar to the Model Rules definition should be added to Section 205.2;
(B) the definition of "evidence of a material violation" in Section 205.2(e) should be changed to "information that leads the attorney in question reasonably to believe . . .;"
(C) the definition of "reasonably believes" in paragraph (l) of Section 205.2 should be changed to conform to the definition in the Model Rules, which will also clarify when attorneys have or have not received an "appropriate response" to a prior report.
Rationale: The two critical questions for attorneys under Section 307 are (1) when must the attorney report up-the-line "evidence of a material violation"? and (2) when must the attorney report to the issuer's board because the CLO or CEO of the issuer has not "appropriately respond[ed]" to a prior report by the attorney? To assist attorneys covered by the rule to answer these questions, the state of mind requirements in the proposed rule should be as clear aspossible. They should adopt terminology and definitions that are the commonly understood meaning of the words being used, and should incorporate the same state of mind definitions already applicable to attorneys under the ABA Model Rules and most state rules of professional conduct.
An attorney's approach to answering these critical questions requires a two step process: (1) receiving facts and information, and (2) applying the attorney's legal knowledge, experience (including familiarity with the client and client personnel involved), and the intangible but essential quality of judgment to the facts and information the attorney possesses. We deal with the first step of this process, acquisition of information, in point A below. In points B and C we discuss the second step in the process, the attorney's application of legal knowledge, experience, and judgment to the known facts to reach a conclusion as to whether there is evidence that would lead a reasonable lawyer to conclude that there was, is or will be a material violation. It is important to recognize that the facts the attorney must assess are often incomplete, changing, and extremely complicated and, therefore, not susceptible to black and white analysis. In addition, the assessment step may involve unsettled legal principles. For these reasons, this assessment step is so complex, and so dependent on the legal knowledge, experience and judgment of the particular attorney concerned, that the Commission's effort to employ a totally "objective" standard to define the attorney's duty is ultimately bound to fail. These delicate lawyer judgments simply can not be fairly evaluated by a totally objective standard.
A. The Term "Becomes Aware" in Section 205.3(b) Should Be
Changed to "Knows" and a Definition of "Knows" Similar to
the Model Rules Definition Should Be Added to Section 205.2
Under Section 205.3(b) of the proposed rule, an attorney is required to make an up-the-line report when he or she "becomes aware" of evidence of a material violation. The phrase "becomes aware" is not a defined term in the ABA Model Rules and, we believe, is never or rarely used in them. The terms "knowingly," "known," and "knows" are defined in Model Rule 1.0(f) to mean "actual knowledge of the fact in question. A person's knowledge may be inferred from circumstances." Official Comment  to Model Rule 4.2 further elaborates on the concept of "knowledge" by noting that since "actual knowledge can be inferred from the circumstances[,] ... "the attorney cannot evade [the rule] by closing eyes to the obvious."
The term "knowledge" also is used in many sections of the Restatement Third, The Law Governing Lawyers. Comment g to Section 94 of the Restatement discusses in detail the subject of "an attorney's knowledge of the wrongful nature of a client's conduct." And the Reporter's Note to Section 94 contains almost a full page of case citations and other authorities that supportthe discussion in Comment g. Thus, the meaning and application of the term "knows" are far more certain and easily ascertainable by attorneys than the phrase "becomes aware" in proposed Section 205.3(b).
Changing the phrase "becomes aware" to "knows" will make no substantive change in the mental state proposed in paragraph (b). In common usage, the meaning of "awareness" is the same as "knowledge." Thus, changing "becomes aware" to "knows" in proposed Section 205(b) will conform the mental state required by the rule to that recognized, explained and understood in both the Model Rules and the Restatement, with no change of substance.
A definition of "knows" should be added to the proposed rule to further clarify the attorney state of mind requirement. An appropriate definition of "knows" that combines various references in the Model Rules would be:
The term "knows" means actual knowledge of the fact in question, not information that merely could be imputed to the attorney. Actual knowledge can be inferred from the circumstances. An attorney cannot evade knowledge by closing his or her eyes to the obvious.
B. The Definition of "Evidence of a Material
Violation" in Section 205.2(e) Should be Changed
The proposed definition of "evidence of a material violation" in Section 205(e) is "information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur." This definition reflects two problems that will confound attorneys attempting to comply with the statute. The first problem is that the phrase "would lead an attorney reasonably to believe" is ambiguous. Does it mean "would lead every attorney reasonably to believe," or does it mean "would lead some attorneys reasonably to believe?"
The second problem with the definition of "evidence of a material violation" is that it appears intended to incorporate the definition of "reasonably believes" in Section 205.2 (l), which, as the Commission's commentary acknowledges, has been intentionally changed from the Model Rule (and ordinary meaning) definition to make it a totally objective standard that purposely ignores the actual belief of the attorney whose "reasonable belief" is at issue. The problem with that definition is discussed in Point 2. C below.
The ambiguity with the proposed definition of "evidence of a material violation" is that it appears to describe only what one attorney could reasonably believe, without negating the possibility that other attorneys reasonably could believe something entirely different. A client's proposed conduct might lead one attorney, acting reasonably, to conclude that a material violation had occurred, was occurring or would occur in the future. Another attorney, also acting reasonably, might be led to the conclusion of no violation. The proposed definition does not allow for this possibility.
Take an example of an issuer that declines, against counsel's advice, to include a particular fact in a disclosure statement. The omission of the fact might fall anywhere along a spectrum from a clear securities law violation, through a gray area where reasonable attorneys could disagree, to the other end of the spectrum where all reasonable attorneys would agree that the omission, although contrary to counsel's recommendation, is clearly not a violation of law. We all can conclude that omissions in the "clear violation" category should be subject to reporting, and that omissions in the "clearly not a violation" category should not have to be reported. But what about omissions as to which reasonable attorneys disagree? The Commission's proposed definition appears to say that if "an attorney" acting reasonably could conclude that the omission was a violation, it must be reported, even if the attorney doing the evaluation does not draw that conclusion or another attorney, also acting reasonably, reaches a different conclusion.
It seems obvious that if a reasonable attorney, acting reasonably, could conclude that the omission is not a violation, then an attorney who does so conclude should not be required to report that omission as "evidence of a material violation."
The best way to solve this problem is to use the common sense meaning of "reasonably believes," which is also the definition found in Model Rule 1.0(i): that the attorney believes that the omission is a violation and that the belief is reasonable. To reflect this standard, the definition of "evidence of a material violation" in Section 205.2(e) should be changed to "information that leads the attorney in question reasonably to believe that a material violation has occurred, is occurring, or is about to occur." This formulation includes the converse proposition, that if the attorney believes there is no violation, and that belief is reasonable, the attorney is not required to report.
C. The Definition of "Reasonably Believes"
in Section 205.2(l) Should be Changed
The second problem with the proposed definition of "evidence of a material violation" is that it is probably intended to incorporate the definition of "reasonably believes" in paragraph (l) of Section 202. We say "probably" because the actual language in the definition of "evidence of a material violation" is "reasonably to believe," rather than "reasonably believes." (This uncertainty would be eliminated if paragraph (l) stated that it was defining both "reasonably believes" and "reasonably to believe," which may have been the intent of the drafters.)
If we assume that the proposed definition of "evidence of a material violation" was intended to incorporate the proposed definition of "reasonably believes," the problem with the paragraph (l) definition becomes immediately apparent. It is, as the Commission's commentary notes, a totally objective standard. (The commentary states that the definition in Section 205.2(l) is based on Model Rule 1.0(i), but "modified to eliminate any implied subjective element.") It describes what every reasonable attorney must believe (if not, the attorney would not be acting reasonably), rather than what a particular attorney, acting reasonably, could or does believe. But this is a tortured definition of "reasonably believes" precisely because it omits the subjective belief of the attorney in question. It is inconsistent with the meaning of "reasonably believes" as used in ordinary speech, and with the definition of "reasonably believes" in Model Rule 1.0(i), which has been adopted in almost all states. That definition is "that the attorney believes the matter in question and that the circumstances are such that the belief is reasonable."
Because Section 205.2(l)'s proposed definition of "reasonably believes" is contrary both to the ordinary meaning of that phrase, to the meaning it has in the Model Rules, and to the attorney conduct rules of most U.S. jurisdictions, it will confuse and confound attorneys and others trying to interpret, apply and comply with the proposed rule.
Under the QLCC reporting procedure in proposed Section 205.3(c), an attorney who has reported evidence of a material violation to an issuer's QLCC is not required to receive or evaluate the appropriateness of the issuer's response. (ALAS supports the Commission's proposed QLCC procedure. See point 9.A below.) However, when an attorney's initial report is to the issuer's CLO or CEO under Section 205.3(b), the attorney will face a second critical question: has the issuer made an appropriate and timely response to the report? The answer determines whether the attorney has to fulfill the duty under Section 205.3(b)(4) to report further to the issuer's audit committee, to an independent board committee, or to the board itself. Like the threshold issue of whether the attorney knows of evidence of a material violation, the exact nature of this second issue is determined by the definitions in Section 205.2, particularly thedefinition of "reasonably believes" in Section 205.2(l).
Section 205.2(b) defines "appropriate response" to mean a response "that provides a basis for an attorney reasonably to believe" that there is no material violation, or that the issuer has taken remedial measures. Section 205.3(b) contains four paragraphs - paragraphs (4), (5), (7) and (8) - that describe the obligations of an attorney who has or has not received an "appropriate response" from the issuer. The meaning of each of these paragraphs, in turn, depends on the definition of "reasonably believes."
For the reasons discussed above, even the most conscientious attorney's efforts to comply with the rule's requirement to determine whether an "appropriate response" has been received will be confounded by the convoluted and confusing definition of "reasonably believes" in Section 205.2(l). The Commission can clarify both the standard for initial attorney reports and the standard for determining whether the issuer has provided an "appropriate response" by adopting a definition of "reasonably believes" that corresponds to the ordinary meaning of the words, and is consistent with how that term is used in other attorney regulatory contexts.
3. PARAGRAPHS (a) AND (f) OF SECTION 205.2, CONTAINING
DEFINITIONS OF "APPEARING AND PRACTICING BEFORE THE COMMISSION"
AND "IN THE REPRESENTATION OF AN ISSUER," SHOULD BE CHANGED
Proposed Change: Narrow the applicability of the proposed rule by changing the definition of "appearing and practicing before the Commission" in Section 205.2(a) and the definition of "in the representation of an issuer" in Section 205.2(f) as follows:
(1) attorneys who "appear and practice before the Commission" should be defined as the term "practicing before the Commission" is currently defined in Commission Rule of Practice 102(f); and
(2) "in the representation of an issuer" should be defined as: attorneys who are "retained or employed by, or knowingly act at the direction of, an issuer with respect to legal matters."
Rationale: The extraordinarily broad scope of the definitions proposed in Sections 205.2(a) and (f) would make the rule applicable to thousands of unsuspecting attorneys who never deal with the Commission, never advise their clients on disclosure or other federal securities law issues, and never "represent" an issuer in the ordinary sense of that word. These definitions stretch beyond the breaking point the phrase "appearing and practicing in any waybefore the Commission in the representation of an issuer," Section 307's mandated scope of the rule.
A. Narrowing the Definition Will Result in More
Reasonable Applicability of the Rule
In contrast to the common sense Rule 102(f) definition, the definition of "appearing and practicing" proposed in Section 205.2(a) would make the rule applicable to many attorneys who will have no idea that they are covered, who never participate in any Commission proceeding, who never file or consent to the filing of any document with the Commission, who have no relationship with or access to the issuer's CLO, CEO or board of directors, who have no basis for evaluating the information in order to form a reasonable belief about a possible violation, and who, therefore, have no practical way to make reports required by the rule or, even if they did report, to evaluate the appropriateness of any response from the issuer. Moreover, they have no "client" from whose representation the attorney can withdraw. Other comments to the Commission, including those of Professor Thomas D. Morgan, will provide the Commission with examples of some of the absurd results possible under these proposed, over-broad definitions.
B. Application of the Rule to Foreign Attorneys
The Commission has specifically invited comment on whether the new rule should apply to foreign attorneys. ALAS believes, particularly if the definitions of "appearing and practicing before the Commission" and "in the representation of an issuer" remain as broad as in the proposed rule, foreign attorneys should clearly not be included. Such attorneys will be even less likely than those licensed in this country to be aware of the rule and of the fact that it may apply to them. Enforcement of the rule against foreign attorneys will be difficult, if not totally impractical. Attempted overseas enforcement will create regulatory and perhaps even diplomatic concerns involving foreign governments. And the resources that the Commission will expend in attempting foreign enforcement can be far better used at home. In any case, this is not a decision the Commission needs to make now. It should defer any decision on including foreign attorneys under the rule until there has been more time to consider and assess the consequences of doing so.
C. Specialized Applicability of the Rule
The current definitions of "appearing and practicing" and of "in the representation of an issuer" run a serious risk that a court will hold them invalid either because they far exceed the scope of statutory language that authorizes the rule, or because they are so convoluted and counter-intuitive that they are "arbitrary and capricious," or both. In the meantime, the definitions will create uncertainty and consternation among both issuers and attorneys who do any legal work that relates - no matter how remotely - to an issuer.
If the Commission seeks to include particular attorneys who may indirectly render securities law advice to issuers, the better course is to have a general definition that is reasonably related to the plain meaning of the statutory language, and then to include special, particularized provisions applicable to attorneys representing an issuer's affiliates or agents, or representing constituents of the issuer such as its board of directors, audit or other board committees, or individual officers or directors, and who knowingly render securities law advice to the issuer.
4. A SAFE HARBOR SHOULD BE PROVIDED FOR
ATTORNEYS WHO MAKE REPORTS REQUIRED BY THE RULE
Proposed Change: A "safe harbor" provision should be added to the proposed rule to protect from civil liability and disciplinary sanctions attorneys who make reports in the good faith belief that the reports are required by the rule. The language in 15 U.S.C. §78j-1(c) is an obvious model. The safe harbor should also provide that the Commission does not intend its proposed rule to be an indirect basis for civil liability by using it to define the standard of attorney conduct in civil claims or disciplinary complaints against attorneys for legal malpractice, breach of fiduciary duty, or other alleged misconduct.
Rationale: As Congress recognized in providing a safe harbor to auditors in 15 U.S.C. § 78j-1(c), any requirement that a professional make reports that may be adverse, or may cause harm, to the professional's client must include a provision that gives the professional protection from liability claims and disciplinary charges arising out of the conduct mandated by the rule. The reasons that justify such a safe harbor provision are (1) professionals have fiduciary obligations of confidentiality and loyalty to their clients, which are necessary for them to provide their professional services, but which also - when breached - subject professionals to far greater than normal exposure, including possible punitive damages, for breach of fiduciary duty; (2) professionals are subject to professional discipline if they are found to have breached the rules of professional conduct applicable to them; and (3) professionals who report their clients risk negative publicity, impairment of client relations, and other adverse economic consequences thatmay effectively end their professional careers. For these reasons, a requirement that a professional inform on his or her client simply will not work, as a practical matter, unless the professional has protection from civil damage and disciplinary liability. The reason is that in assessing the consequences of compliance with the rule that include liability exposure, many professionals will choose to avoid a reporting obligation by early withdrawal from the representation (see point 1.E above).
5. THE RULE SHOULD CONTAIN AN EXPRESS
PROHIBITION ON PRIVATE ENFORCEMENT
Proposed Change: The rule should include in Section 205.6 a paragraph expressly stating that only the Commission may enforce the rule, that the rule affords no private party a right of action against any attorney allegedly subject to the rule for injunctive relief, damages or any other remedy, and that no shareholder or other private party may bring an action to enforce attorney compliance or punish alleged non-compliance with the rule.
Rationale: The Commission's commentary on Section 205.6 of the proposed rule acknowledges what the legislative history of Section 307 makes unmistakably clear: Congress did not intend in Section 307 to create any private right of enforcement or other private remedy. However, once the Commission's final rule is adopted, its commentary and the legislative history of Section 307 will be far less accessible than the text of the rule itself. To avoid unfounded private actions against attorneys based on their alleged non-compliance with the rule, which actions may disrupt or impair the attorney's relationship with the client and generate substantial defense costs before they are dismissed, the rule should state explicitly that only the Commission, and not any private party, may enforce the rule or seek remedies for an attorney's alleged non-compliance with it.
6. THE PROPOSED RULE PUTS REPORTING
ATTORNEYS IN JEOPARDY OF DISCIPLINARY
PROCEEDINGS AND POSSIBLY CIVIL
CLAIMS WITHOUT EFFECTIVE PROTECTION
Two aspects of the proposed rule attempt to protect issuers and their attorneys from being subject to the conflicting mandates of the rule on the one hand and state laws and rules on the other. One attempts to preserve the issuer's attorney-client privilege despite attorney disclosures that might otherwise waive it. The other attempts to preempt state laws and rules that may expose attorneys to sanctions for conduct mandated by the rule. Unfortunately, as describedbelow, the Commission's power to accomplish these goals is doubtful. Therefore, the prudent course would be for the Commission to minimize the extent to which the proposed rule conflicts with state laws and rules governing attorney conduct.
A. The Rule's Effort to Avoid Impairment of the
Attorney-Client Privilege Resulting From Reports
Required by the Rule Will Be Unavailing
The proposed rule purports to preserve the attorney-client privilege for privileged information that is included in a report required by Section 205.3(d)(1)(i) by stating that "the notification to the Commission prescribed by this paragraph (d) does not breach the attorney-client privilege."
The proposed rule commentary argues that because any disclosure constitutes a "noisy withdrawal" within the meaning of Comment  to Model Rule 1.6, there will be no waiver of the privilege. But it does not say what authority the Commission has to affect privilege determinations by various state and federal courts and agencies that routinely make privilege decisions by applying the rules of evidence to issues arising in proceedings pending before them. It is unlikely that a federal agency's assurances that the privilege will endure despite disclosure will be honored even by federal courts, let alone state courts or agencies. In re Columbia/HCA Healthcare Corporation Billing Practices Litigation, 293 F.3d 289, 302-03 (6th Cir. 2000). A majority of federal circuit courts of appeal have refused to permit assertion of the privilege after it has been disclosed "selectively," even where a governmental agency has purported to assure continuation of the privilege. Id. at 294-302.
B. The Rule's Attempt to Preempt State Attorney Conduct
Rules and State Law Duties of Attorneys to Their Clients
Exceeds the Scope of Section 307
Summary Comment: The proposed rule's attempt to preempt the state standards of conduct for attorneys is not authorized by Section 307, and goes far beyond what is necessary to carry out the purposes of that section. Particularly because the proposed rule is overly broad in its coverage, overreaching in its scope and inconsistent with, or prohibited by, state rules of attorney conduct or state law fiduciary duties of attorneys to clients, this attempted preemption is likely to fail.
Rationale: Section 205.1 of the proposed rule states:
"Where the standards [of professional conduct for attorneys] of a state where an attorney is admitted or practices conflict with this part, this part shall govern."
The Commission's commentary on proposed Section 205.1 offers no indication of the supposed basis or authority for this attempted preemption of standards that have historically been set and enforced by the states. Neither Section 307 nor Polydoroff v. ICC, 773 F.2d 372 (D.C. Cir. 1985), cited in footnote 29 of the release, expressly authorizes any such preemption.
The absence of express authority in Section 307 for the Commission to supersede state rules and laws governing attorney conduct is not surprising. The intention of the sponsors of Section 307 was that the attorney conduct standards established by the Commission would be consistent with the rules of professional conduct, at least in one important respect: the statutorily mandated up-the-line reporting within a client organization. Section 307's sponsors made abundantly clear that they did not expect or intend the Commission to mandate attorney notice of possible client misconduct outside the client organization (see point 1.A above). Thus, the most important aspect of the proposed rule that conflicts with state rules and laws governing attorney conduct was not even contemplated by Section 307's sponsors.
But other aspects of the proposed rule, such as Section 205.3(e)(2)'s purported authorization to attorneys to disclose confidential client information without client consent, will also conflict with attorney conduct rules of a number of states. In the absence of express statutory authority to supersede such state laws and rules, and because the Commission cites no authority in the release, it is unlikely that the Commission has such power. In other contexts, federal courts have been skeptical about the authority of federal officials or agencies to supersede the authority of the states to regulate attorney conduct. In United States ex rel. O'Keefe v. McDonnell Douglas Corp., 132 F.3d 1252 (8th Cir. 1998), the court struck down the Attorney General's effort to exempt federal prosecutors from compliance with state counterparts of Model Rule 4.2, the "no contact" rule, precisely because there was no statutory or other authority for the purported exercise of such power. Quoting Bowen v. Georgetown University Hospital, 488 U.S. 204, 208 (1988), the court stated: "It is axiomatic that an administrative agency's power to promulgate legislative regulations is limited to the authority delegated by Congress."
This is not to say that the Commission may not promulgate a narrowly drawn rule to regulate the conduct of attorneys actually appearing before, filing documents with, and otherwise dealing directly with the Commission. The point is that in the absence of express statutory authority, the more broadly the Commission attempts to regulate, in terms of both applicability of its proposed rule and the extent to which that rule appears to conflict with state laws and rules governing attorneys, the more likely it is that the attempted regulation will be struck down. Where, as here, the option of regulating more narrowly will fully comply with the mandate of Section 307, and will accomplish the goals set forth by Congress and the Commission, that should be the course the Commission chooses.
7. SECTION 205.2(d), DEFINITION OF "BREACH OF
FIDUCIARY DUTY," SHOULD BE EXPANDED TO INCLUDE
"OR SIMILAR VIOLATION" AND SHOULD BE CLARIFIED
Proposed Change: Expand the definition of "breach of fiduciary duty" in proposed Section 205.2(d) to include a definition of the statutory phrase "or similar violation," and limit breaches and violations covered by the rule to breaches of duties owed to the issuer.
Rationale: A significant part of the concern caused by Section 307 of the Sarbanes-Oxley Act is attributable to the vagueness and vast breadth of the statutory phrase "breach of fiduciary duty or similar violation." The Commission needs to include significant guidance on this broad statutory phrase. Such guidance is essential to provide fair notice to attorneys of exactly what kinds of breaches and violations they are expected to report. The Commission should provide such notice in the final rule by including a definition of the statutory language that is rationally related to the protection of shareholders and investors, and that will provide some content to the extremely broad and vague phrase "similar violations."
In the case of officers, directors, employees or other agents of issuers, the fiduciary duties that should be covered by the rule are those the agent owes to shareholders or to the issuer itself, and the breach of which may adversely affect the issuer and its shareholders. Section 307 should not be interpreted to require reporting of breaches of fiduciary duties by an issuer's agents that are wholly unrelated to, and cannot harm, the issuer or its shareholders. Otherwise Section 307 will convert the issuer's securities attorney into an all-purpose ombudsman who must monitor and report on violations of all sorts of fiduciary duties that may have nothing to do with shareholders or the federal securities laws.
Limiting the type of fiduciary duty covered by the rule in this way will also help to answer the question, "what is a similar violation?" It will give content and concrete meaning to the otherwise extremely vague phrase, "similar violation," that follows immediately after "breach of fiduciary duty" in Section 307. Unless the term "fiduciary duty" is limited to duties owed to an issuer's shareholders, the related phrase "similar violation" will continue to confound attorneys seeking to comply with the rule.
The limited definition we propose will provide attorneys and issuers subject to the rule,Commission personnel who must apply and enforce the rule, and courts that may in some cases be called upon to interpret and provide remedies for violation of the rule, fair notice of what kind of "breach of fiduciary duty or similar violation" is covered by the rule. Those who will be required to comply with and enforce the rule need and deserve such guidance.
8. SARBANES-OXLEY SECTION 307 DOES NOT AUTHORIZE
SECTION 205.6(a)'S ATTEMPT TO CONVERT
RULE VIOLATIONS BY ATTORNEYS INTO `34 ACT VIOLATIONS
Proposed Change: Delete paragraph (a) of proposed Section 205.6.
Rationale: Section 205.6(a) of the proposed rule provides that an attorney's violation of the rule "shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934," and that attorneys guilty of such rule violations "shall be subject to the same penalties and remedies, and to the same extent, as for a violation of that Act." The Commission's commentary on Section 205.6(a) notes that these remedies include a civil action for injunctive and other equitable relief, and for civil monetary fines, or a Commission cease and desist proceeding. (The commentary also notes that the Commission does not believe that violation of the rule, without more, would warrant criminal penalties under the `34 Act.)
Nothing in Section 307 or any other section of the Sarbanes-Oxley Act authorizes the Commission to convert regulatory violations into statutory violations, or to subject rule violators to the same penalties and remedies as violators of the Act. The Commission's commentary on Section 205.6(a) offers no justification or explanation for this audacious provision. The unfairness of equating an attorney's violation of a reporting rule - which could result from a mere misjudgment about the nature of a client's conduct - with the kind of fraudulent issuer conduct that is normally punished under the `34 Act is obvious. This is especially true for a new rule, the precise scope and meaning of which will become clear only as the Commission and the courts render decisions in enforcement proceedings, or as the Commission issues interpretive guidance concerning the rule.
For these reasons, Section 205.6(a) of the proposed rule should be deleted.
9. THE QLCC PROVISIONS AND CERTAIN OTHER
PROVISIONS OF THE PROPOSED RULE ARE
Summary Comment: The proposal for Qualified Legal Compliance Committees in of Section 205.3(c) is an innovative and practical concept. It will provide a useful avenue for reporting potential problems to those in corporations who can deal with them, and it will assist both issuers and their counsel in complying with Section 307 while minimizing possible disruption of, or damage to, the attorney-client relationship. In addition, it may help attorneys avoid some of the unwarranted liability exposure that might otherwise result from compliance with the proposed rule. A number of other provisions in the proposed rule (described below) track existing law or state rules of professional conduct, are clear and should, subject to our prior comments on the need to change certain definitions, assist attorneys seeking to understand and comply with Sarbanes-Oxley Section 307 and the rule. We also applaud the proposed rule's requirement for attorney personal knowledge, as opposed to imputed knowledge, as a trigger for reporting in Section 205.3(b).
A. Qualified Legal Compliance Committees (QLCCs)
The proposal for Qualified Legal Compliance Committees is a good example of creative and constructive administrative rule-making. Where used by issuers, such committees will help both issuers and their outside securities attorneys to comply with Section 307 while minimizing risks of attorney-client friction, disruption of, or damage to, the attorney-client relationship, and liability exposure for reporting attorneys. By placing responsibility to investigate reports from outside counsel in a board committee of independent directors, QLCCs assure that outside attorney reports will be responded to in the most effective way by those who have ultimate authority for the affairs of the issuer. They also provide a far easier and less burdensome procedure for outside counsel to share with the issuer's board concerns that may be difficult or impossible to raise with the issuer's senior management. From the corporation's perspective, implementation of a QLCC may reduce the costs of compliance with the rule because reporting to the QLCC will be less time intensive for an outside attorney and, therefore, less costly to the corporation. Finally, because attorneys are never required under the QLCC procedure to determine the "appropriateness" of the issuer's response, they will not be required to investigate their own client's conduct, nor to withdraw (if paragraph (d)(1)(i) of Section 205.3 is not deleted, as ALAS has recommended above), nor to report to the Commission and disaffirm prior submissions simply because of a breakdown in the client's investigation and response procedures.
We urge the Commission to retain the concept of QLCCs in its final rule, and perhaps even to expand it by providing more incentives to issuers and their outside attorneys to utilize the QLCC procedure. For example, the Commission might consider an express exception to applicability of the new up-the-line reporting rule for outside counsel specially retained by a QLCC to investigate and make recommendations to the QLCC in response to reports from the issuer's counsel. Since outside attorneys hired by the issuer to investigate up-the-line reports are subject to the rule under Section 205.3(b)(6), an exception for QLCC-retained counsel would provide issuers a strong incentive to use that procedure. Moreover, it would have no negative impact on the efficacy of the rule because the QLCC itself remains responsible under Section 205.2(j)(4) and (5) to deal appropriately with the report, including under certain circumstances reporting a material violation to the Commission.
B. Definitions of "Material" and "Material Violation"
The proposed definitions in paragraphs (h)("material") and (i)("material violation") of Section 205.2 appear consistent with existing law. However, the meaning of the term "material violation" will be confusing unless the rule provides clearer guidance on the scope and meaning of "breach of fiduciary duty or similar violation" as used in Section 307 (see point 7 above).
C. The Issuer as Client
Section 205.3(a)'s designation of the issuer as client is consistent with Model Rule 1.13(b). This is an area on which ALAS frequently counsels its member firms and the rule's consistency on this point is helpful.
D. Responsibilities of Supervisory and Subordinate Attorneys
Sections 204.4 and 205.5 on responsibilities of supervisory and subordinate attorneys appear generally consistent with ABA Model Rules 5.1 and 5.2. As we have noted throughout this comment, such consistency is desirable to minimize both attorney confusion and any conflict between the proposed rule and state rules of professional conduct and state agency law principles governing attorney-client relationships.
The expansive attorney conduct rule proposed in Release 33-8150 would have consequences far beyond the contemplation of Sarbanes-Oxley Section 307. Because of the short time the Commission has to implement Section 307, and the even shorter time it will have to consider the comments of affected attorneys and others, the Commission should limit itself to an initial rule that implements the minimum requirements of the statute. This will allow time for the Commission to consider several developments now underway that ought to affect the ultimate scope of the rule: the recommendations of the ABA Task Force on Corporate Responsibility for changes in the Model Rules; the activity now underway in almost every state to revise state attorney conduct rules to incorporate recommendations of various ABA bodies, including the Task Force; and the Commission's own report to Congress under Sarbanes-Oxley Section 703 that will describe the extent to which attorneys, among others, have been involved in aiding and abetting securities law violations by issuers and with what consequences. More time will permit both the Commission and affected attorneys to address with greater care and deliberation the important issues raised by Section 307, and will avoid the disruption of attorney-client relationships that would certainly follow implementation of the rule proposed in Release 33-8150.
In considering our comments on the proposed rule, as well as those of others, we urge the Commission to balance the need to assure public confidence in attorneys and to protect investors on the one hand and, on the other hand, the importance of the attorney-client relationship and the role of attorneys as confidential counselors who, if they have their client's trust, can be the single most effective force to assure lawful issuer conduct. If the Commission uses the limited time it has to finalize a rule that both provides clear guidance to those who are subject to it and that fits within the regulatory scheme already applicable to attorneys, Congress' mandate will be satisfied and both attorneys and the public interest will be well served.