American Society of Corporate Secretaries, Inc.April 7, 2003 VIA E-Mail Mr. Jonathan G. Katz
Re: Release No. 33-8186, Proposed Rule: Implementation of Standards
Dear Mr. Katz: The American Society of Corporate Secretaries, Inc. ("Society") is a professional association founded in 1946, serving more than 4,000 corporate attorneys and other business executives, representing over 3,000 companies, whose major duties include working with corporate boards of directors to improve corporate governance; assuring company compliance with securities regulations; coordinating activities of stockholders, including proxy voting for the annual meeting of shareholders; and administering other activities handled by the Corporate Secretary's Office. The majority of the Society's members are attorneys. We appreciate the opportunity to provide you with our views on Securities and Exchange Commission ("Commission") proposals to create additional standards of professional conduct for attorneys appearing and practicing before the Commission and to impose new reporting requirements for public companies. Up-the-Ladder Reporting The Commission recently adopted final rules requiring attorneys to report evidence of misconduct up-the-ladder within a company. We support the notion of an up-the-ladder reporting requirement, and commend the Commission for moving forward with these rules. In addition, the revised rules, which authorize Qualified Legal Compliance Committees to "recommend" rather than "direct" remedial actions to the board, represent a marked improvement. Reporting Out At the same time it adopted the final rules, the Commission extended the comment period for proposed rules that would impose withdrawal and "reporting out" obligations on attorneys who do not believe a client's board of directors has responded appropriately to evidence of misconduct. The Commission also proposed an alternative approach that would require a company - rather than its attorney - to file a report on Form 8-K disclosing that the attorney has withdrawn or stopped participating in a matter for professional reasons. We appreciate the Commission's recognition of the controversial nature of its "noisy withdrawal" proposal and the need for additional time for comments. The Society has serious concerns about the noisy withdrawal proposal. We also have concerns about the alternative Form 8-K proposal and the impact it could have on public companies. Specifically, we believe either proposal would undermine the relationship between attorneys and their organizational clients and deter officers, directors and employees from seeking advice from counsel on sensitive matters. Corporate executives will be reluctant to confide in counsel, and companies will be less likely to retain counsel, if they believe that any disagreement with counsel could lead to notification to the Commission. As a result, attorneys could be excluded from the very situations in which legal advice is most needed to prevent violations. Alternative Approach Although both proposals would interfere with the attorney-client relationship, we believe the alternative Form 8-K approach is even more troublesome than the original proposal. It would require public disclosure of disagreements between a company and its attorneys, in many cases before the company has had the opportunity to fully investigate an attorney's claims. Forcing a company to announce such disagreements on Form 8-K, within two days after receiving an attorney's notice of withdrawal or failure to receive an appropriate response, could give investors the impression that the company has violated the law - causing significant damage to the company's stock price and reputation when no such finding has been made. As a result, companies faced with the threat of withdrawal (and subsequent public disclosure) could effectively be compelled to acquiesce to their attorney's position - even if the board of directors disagrees in good faith with that position. In this regard, the alternative proposal would replace the judgment of the board with the judgment of a single attorney. We do not believe this represents good corporate governance. Finally, the alternative proposal would require disclosure beyond that required by the original noisy withdrawal proposal. Under the original proposal, an attorney would be required to notify the Commission that he or she is withdrawing for "professional considerations," but the attorney would not have to disclose the nature of the disagreement. The alternative proposal would require the company to disclose not only that its attorney has withdrawn or stopped participating in a matter, but also the circumstances related to the withdrawal. This extension of the proposal raises serious attorney-client privilege concerns. We believe it is vital that the Commission's rules not impair the willingness of corporate officers, directors and employees to share their concerns with counsel. Encouraging full and frank communications with counsel is the best way to assure legal compliance, and we urge the Commission not to adopt rules that would interfere with this goal. We appreciate your consideration of these comments.
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