Attorney & Counselor at Law
P.O. Box 1598
Mercer Island, WA 98040-1598
Email: firstname.lastname@example.org or
December 17, 2002
[Letter Sent Via E-mail to: email@example.com]
Mr. Jonathan G. Katz
Securities & Exchange Commission
450 Fifth Street, NW
Washington DC 20549-0609
Re: File No. 33-8150.wp
Proposed Rules Implementing Standards of Conduct for Attorneys
Dear Mr. Katz:
This letter comments on the November 21, 2002 Proposed Rule: Implementation of Standards of Conduct for Attorneys. It states my own personal views and is not a statement of position as to any other organization.
While the proposed rules are a fine job of drafting, especially given the limited time and complexity of the issues, I believe they fall short in several areas:
1) The rules go beyond what Congress directed in Section 307 of the Sarbanes-Oxley Act of 2002. Congress did not direct that the rules require lawyers to blow the whistle on their clients by requiring noisy withdrawals. This Commission staff proposal is material, is not implied in the Congressional mandate, and should be removed from the proposed rules. Regulation of lawyers' professional conduct has long been a matter of state, not federal authority, and to the extent not preempted by federal law, the power to regulate lawyers remains with the states, and particularly within the inherent power of the state supreme courts. Congress has not mandated or implied the need for whistle-blowing by attorneys. The Commission does not have the authority on its own to require it.
Many state ethics laws do not permit lawyers to blow the whistle on their client's past crimes or fraud. If the Commission does adopt the whistle-blowing requirement, many lawyers will be placed in a quandary. If the Commission insists on implementing a whistle-blowing requirement, it should first coordinate with the Conference of Chief Justices of the state supreme courts so that implementing state ethics rules may be considered. Failing to do so, both state and federal regulators will be whip-sawed by lawyers claiming federal law required, or state law prohibited, their conduct.
Requiring lawyers to be whistle-blowers fundamentally changes the role of lawyers. Lawyers are not agents of the state nor are they to be informers for the state. They represent their clients, often against the state. Their loyalty is and must be to their client, not to the state. While this is most clearly obvious for a lawyer practicing criminal defense law, it likewise applies to all lawyers representing their clients vis-à-vis the state or government.
Unlike auditors whose duty by definition is to the public, lawyers' duty is to their clients, not to the public, and certainly not to the civil prosecutors at the SEC or criminal prosecutors in the Department of Justice. While it may be convenient for the government to try to make lawyers government informers, government convenience has never been sufficient basis for undermining the rule of law.
We as a society based on a rule of law have long encouraged people to seek legal advice and to do so have assured them that their communications with legal counsel will remain confidential. To require lawyers to become whistle-blowers undermines that encouragement and assurance. Often clients come to a lawyer for help in attaining a given result, sometimes planning on doing so in a manner that unbeknown to them violates the law. The lawyer can often show them a legal means of accomplishing the same goal. By discouraging people from seeking legal advice the proposed rules will result in more, rather than fewer, violations of law.
Instead of undermining the ability of persons to seek confidential legal advice by proposing to require lawyers to blow the whistle on their clients, the Commission would do far better to seek Congressional legislation or authority to promulgate rules requiring all non-lawyer corporate executives and corporate staff having knowledge of corporate misconduct to blow the whistle on corporate misdeeds. Corporate employees usually know of the fraud long before counsel does and by requiring them to report it, the lawyer-client relationship is not undermined and the lawyer does not become a mere lackey of the state.
2) The proposed rules in effect require that a lawyer have the clarity of hindsight and ignore the frequent confusion and ambiguities of the moment. I formerly served as Director of Lawyer Discipline/Chief Disciplinary Counsel of the Washington State Bar Association overseeing investigations and prosecutions of lawyers' alleged ethical violations. I also served as an enforcement branch chief at the SEC's former Seattle Regional Office. From these experiences I have learned that it is usually much easier to determine after an event what a lawyer should have done than it was for the lawyer in the midst of ambiguity and confusion to determine what he or she should do.
The proposed rules require a lawyer to report up the ladder or blow the whistle on a client based on "information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur." Aside from the proposed duty to report a client's past crimes, which is ethically prohibited in substantially all jurisdictions, the rule would require a lawyer having such information, but who does not believe it or who even knows there has been no violation, to report it. Any prosecutor and defense counsel can tell you that information alone can tell vastly different stories. The threshold for reporting should not be merely having the requisite information, but rather should be one of having actual knowledge of material violations. Otherwise, the proposed rule in effect requires that a lawyer, in the likely confusion and ambiguity of the moment, to have the clarity of hindsight and report smoke even when the lawyer knows there is no fire.
3) The proposed up-the-ladder reporting requirement is not practical in many lawyer-client relationships. In the abstract world, lawyers deal directly with corporate executives and have ready access to the corporation's board of directors. In small or closely-held corporations, up-the-ladder reporting can be accomplished because the lawyer usually has access to both senior executives and the board of directors.
Lawyers representing the large public corporations of the type regulated by the commission, however, often never have any direct communication with or access to the corporation's senior executives or its board of directors. Instead, they likely deal with in-house counsel or lower-level executives on local matters. Any attempt to go over the heads of such persons would likely result in the lawyer-client relationship being terminated and the loss of a lawyer's ability to counsel the executives on ways to accomplish their goals legally. It may also result in the lawyer being "black-balled" as to future representations.
The risk of losing a client would be understandable and acceptable to lawyers where they actually know and have clear evidence that the lower-level executives are engaged in fraud. But such clear knowledge is very, very rare, and at best, lawyers may have a vague sense of unease or uncertainty as to their client's motivations. In reality, a lawyer having unease over the client's activities is more likely to seek to withdraw from the representation than seek to report up the ladder, particularly when the Commission's proposed rules would require the lawyer at the top of the ladder to then publicly blow the whistle on the client.
ABA Model Rule 1.13, which incorporates the concept of reporting up-the-ladder, does not provide for public whistle-blowing. Washington state has no analogous rule. While reporting up the ladder may be appropriate in some cases, the Commission's proposed rules should permit a lawyer to either report up the ladder or to simply withdraw from a representation. If the lawyer determines not to withdraw, reporting up the ladder (aside from the whistle-blowing at the end) is appropriate.
4) The proposed rules are overbroad. The proposed definition of "appearing and practicing", for example, includes any lawyer who has ever "transacted any business with the Commission, including communication with . . . its staff." Thus a lawyer who calls the Commission staff solely to inquire as to the hours of operation of a Commission office is by definition "appearing and practicing before the Commission." Similarly, a junior real estate lawyer, who has never before had anything at all to do with the Commission and who has no knowledge or expertise in securities matters or laws, but who participates in drafting a single sentence in a property acquisition agreement for a client who appends it to a filing with the Commission, would be deemed to be appearing and practicing before the commission. For a lawyer to be deemed to be appearing or practicing before the Commission, there should be some direct tie between the business being transacted by the lawyer and the transaction for which the lawyer is to be held liable under the proposed conduct rules. The current definition is too broad.
Similarly, the proposed definition of "attorney" includes, but should not, a person who happens to be admitted to the bar but who advises a client in a wholly non-lawyer capacity. The person may, for example, be an in-house contract manager who is not required to be and is not in fact acting as a lawyer, but who may incidentally be a lawyer.
5) The proposed rules are the wrong solution to the limited problem of lawyer misconduct. While I can understand the Congressional desire for the rules and the Commission's mandate to promulgate rules, I believe they wrongly attempt to make lawyers responsible for their clients' misconduct.
If lawyers are engaged in securities fraud and crimes - and statistics show that of the nearly one million lawyers in the United States, very few are - they should and can be prosecuted under existing civil and criminal laws and rules. The proposed rules, however, seek to make lawyers become whistle-blowing agents of the state and make them responsible for their clients' misconduct.
The Commission would be far more effective in regulating those few lawyers who are engaged in securities violations by changing its enforcement practices. Most important, the Commission should refuse to accept any consent judgment from a lawyer defendant unless the lawyer admits fully to the underlying charged illegal misconduct. Without such an admission the judgment is essentially useless in lawyer disciplinary proceedings, where the entire underlying alleged misconduct will have to be proven again by disciplinary counsel who lack the expertise in complex securities matters held by Commission enforcement staff. As a practical matter, that means the disciplinary case will likely be dropped or resolved for a lesser sanction than it should be. Better yet, the SEC should work cooperatively with state disciplinary agencies to resolve their cases simultaneously so that the Commission's civil and or criminal case and the state disciplinary case are treated as a package.