Law Society of England and WalesOur ref:
Jonathan G.Katz
12 December 2002 Dear Mr Katz FILE 33-8150.WP: Application of Proposed Rule 205 to English and Welsh Solicitors The Law Society of England and Wales (`The Law Society') is grateful to the Securities and Exchange Commission (SEC) for giving it the opportunity to comment on the proposed rule on professional standards for attorneys appearing and practising before the SEC. The Law Society wishes to comment from its standpoint as a professional body, responsible for the regulation of over 100,000 English and Welsh solicitors, working both as in-house lawyers and in private practice. The Law Society operates under powers delegated to it by statute and is obliged to act in the public interest. It is, however, perhaps unusual amongst regulatory Bar Associations, given the large number of its members who practice outside England and Wales, including a substantial number practising in the United States. The Law Society recognises that the Sarbanes-Oxley Act has an important public interest function to perform. Investor confidence is vital to the health of any market economy and public authorities must act when there is evidence of any behaviour likely to undermine this confidence. Lawyers clearly have an important role to play in helping to maintain this confidence and the Law Society would certainly wish to be as helpful as it can be to the SEC in ensuring that the key objectives of the Sarbanes-Oxley Act are achieved. The Law Society, however, has serious concerns about the text of proposed rule 205, published on 21 November, on which the SEC is currently seeking consultation. Law Society Concerns The Law Society's concerns are mainly rooted in the potential conflicts between the proposed rule, English law, which applies in England and Wales, and the Law Society's own rules of professional conduct for solicitors. There are three particular issues that the Society would wish to highlight. (a) `Noisy withdrawal' The most worrying aspect in the draft rule for the Law Society is the proposed rule 205.5 on `noisy withdrawal'. In contrast to the assertion contained in the text distributed by the SEC, the Law Society cannot agree that `the notification to the Commission prescribed by this paragraph (d) does not breach the attorney-client privilege'. This may be true in the United States but it is not the case in England and Wales. The current position in law and conduct for English and Welsh solicitors, in relation to client confidentiality and privilege, is that a solicitor is only permitted to report, or conduct a "noisy withdrawal", in extremely limited circumstances, which are not covered by proposed Rule 205. These are outlined in the detailed commentary attached to this letter. Legal professional privilege and client confidentiality are recognised by the English courts as substantive common law rights as well as human rights under Articles 6 and 8 of the European Convention on Human Rights. Privilege and confidentiality belong to the client and, where these rights have not been waived by the client or abrogated by Parliament, they are paramount and absolute in English law. The extra-territorial operation of the Sarbanes-Oxley Act, or of SEC rules, cannot change this. Proposed rule 205 therefore creates great difficulties for English and Welsh solicitors because it would impose a reporting requirement on them in the form of `noisy withdrawal', despite the fact that for them to abide by this requirement would violate client confidentiality and privilege in England and Wales. There would therefore be a risk that, if implemented as drafted, rule 205 would leave a solicitor who had effected a noisy withdrawal open to a civil proceeding from a client on the grounds of a breach of confidentiality. (b) Definition of Appearing and Practising This provision also potentially runs into conflict with Law Society rules because it is an extremely open-ended definition. It would appear to include lawyers not only practising outside the US but also carrying out activities or providing advice in areas not traditionally regarded as practice before the SEC. This definition raises problems for the Law Society because it would cover English solicitors practising outside the US over whom the SEC has no authority in respect of matters of English law or the professional conduct of solicitors. The preamble and rule 1 of our Solicitors Overseas Practice Rules (SOPR 1990) establish that solicitors practising overseas are bound by requirements of local law or applicable local rules when they are practising `from an office outside England and Wales'. By extension, they cannot be bound by these rules unless they are truly `appearing and practising' before the SEC. (c) Definition of an attorney - application of the rules to Foreign Attorneys The SEC requested views from other parties on whether the definition of an attorney appearing and practising before the SEC should include foreign attorneys preparing material in foreign jurisdictions. The Law Society's concerns in this area stem from a combination of rule conflicts and practical considerations. The definition of an attorney, as proposed, creates potential rule conflicts for English solicitors for two reasons: Firstly, its geographical scope is excessive. Solicitors can only be subject to local rules where they are either practising abroad (rule 1 SOPR, 1990) or dual qualified (rule 18, SOPR). The SEC cannot amend the common law or professional conduct rules governing English solicitors, which would be the effect of the definition of `attorney' given under rule 205 as currently drafted. Secondly, under Law Society professional conduct rules, solicitors are only bound by local rules made within the powers of the organisation concerned. In the view of the Law Society, therefore, the only solicitors who would be bound by the SEC's procedural rules would be those English solicitors who actually represent clients before the SEC. Having set out these difficulties, the Law Society would, however, not wish to argue that English and Welsh solicitors should be excluded from the ambit of the rules altogether. There will be some English and Welsh solicitors, practising from an office in the US or dual qualified US attorneys, who will be `appearing and practising' before the Commission in the true and generally understood sense of this definition. The Law Society would therefore not support the wholesale exclusion of foreign lawyers (or at least English and Welsh solicitors) from section 307. The Law Society also believes that there are practical reasons why the definition of `attorney' given in the draft rule should be modified to take account of the position of those practising outside the US. These lawyers cannot, nor should not, be expected to have sufficient knowledge of relevant US securities law to make judgements on material violations. Alternatives The SEC asked about alternative protections under foreign law. In this context, the Law Society would wish to draw the SEC's attention to the following protections, which exist within the rules currently applying to English and Welsh solicitors. (a) Rules governing English and Welsh Solicitors which might act as a substitute for rule 205 An English solicitor is already under an obligation to report internally "up the line" under English law, if he or she becomes aware of plans to commit a crime or fraud and has received no satisfactory response further down the line. The Law Society therefore has no difficulties with proposed rule 205 on up the ladder reporting. The Law Society would generally regard the solicitor as having fulfilled his or her responsibilities through internal upward reporting. The Law Society would also like to point out that no solicitor could knowingly assist in a breach of the law without breaching both the law and principles of professional conduct. (b) Disciplinary proceedings The SEC may also be interested to know that the Law Society of England and Wales has its own disciplinary procedures. Under the Law Society's professional rules, breach of foreign law may be, but is not always, misconduct that would require the Law Society to take disciplinary action. Concluding Remarks In summary, the Law Society wishes to be as supportive as it can be of the SEC's objectives in formulating rule 205. The Law Society would certainly not seek to exempt all of its members from such a rule as there will be some who should be properly and fully covered by them. There are, nonetheless, significant problems, within rule 1 or 18, which would arise for the Law Society if the current formulation of the rule were to be implemented. In order to avoid putting its members in the position of either breaking Law Society professional rules or the SEC's proposed rules, the Law Society would require, as a minimum, a significant limitation and much greater clarity in the coverage of the rule1, and an elimination of the requirement on a solicitor to report outside the issuer, in the event of circumstances arising which would have triggered the noisy withdrawal provision under the original proposed rule. In the case of both in-house solicitors and those in private practice, we would expect them to have discharged their duties to the SEC's rules by before considering whether revised proposals could be, as a matter of principle, acceptable. The Law Society is not able to support the present proposals as applying to all English solicitors generally. The Law Society has drawn up a commentary on proposed rule 205, which is attached. We hope that this helps to flesh out our above remarks.
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COMMENTARY ON PROPOSED RULE 205 BY THE LAW SOCIETY OF ENGLAND AND WALES The Law Society of England and Wales wishes to make the following detailed points on the SEC's proposed rule 205 which sets out minimum standards of professional conduct for attorneys. The SEC's proposed text is in grey and the Law Society's comments are in black. Suggested amendments to the proposed rule are made in bold text. 205.1 Purpose and scope Consistent with Section 307 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 7245, the Commission is adopting rules setting forth minimum standards of professional conduct for attorneys appearing and practising before it in any way in the representation of an issuer. Where the standards of a State where an attorney is admitted or practices conflict with this part, this part shall govern. The Law Society believe that the scope of the proposed rule goes beyond the requirements of the Sarbanes-Oxley Act of 2002 (the "Act") Section 307 only gives the Commission power to make procedural rules for lawyers appearing and practising before it. The proposed definition stretches the meaning of the words `in any way' to include people who are not appearing or practising before the Commission at all. Section 307 also gives the Commission no powers to infringe lawyer-client privilege and confidentiality through a provision such as a `noisy withdrawal'. It is the Law Society's view that `noisy withdrawal' is equivalent to reporting and therefore, prima facie, breaches lawyer-client privilege. In the Law Society's view these two aspects of rule 205: the definition of `appearing and practising' and `noisy withdrawal' cannot be applied to English solicitors. In the former case, the Commission has no authority over solicitors outside the United States and in the latter case, the Commission `s rule is seeking to override the common law duties of legal privilege and client confidentiality without the benefit of a clear statutory mandate to do so. In some situations, English solicitors practising outside the United States would be prohibited by law and by rules of conduct from complying with the proposed rule. Moreover the fact that the text of this article says that `where standards of a State where an attorney is admitted or practices conflicts with this part, this part shall govern' suggests that the rule is not intended (nor could) override foreign lawyers' codes of conduct. 205.2 Definitions "For the purposes of this part, the following definitions apply: (a) Appearing and practising before the Commission includes, but is not limited to, an attorney's: (1) Transacting any business with the Commission, including communication with Commissioners, the Commission, or its staff; (2) Representing any party to, or the subject of, or a witness in a Commission administrative proceeding; (3) Representing any person in connection with any Commission investigation, inquiry, information request, or subpoena; (4) Preparing, or participating in the process of preparing, any statement, opinion, or other writing which the attorney has reason to believe will be filed with or incorporated into any registration statement, notification, application, report, communication or other document filed with or submitted to the Commissioners, the Commission, or its staff; or (5) Advising any party that: (i) A statement, opinion, or other writing need not or should not be filed with or incorporated into any registration statement, notification, application, report, communication or other document filed with or submitted to the Commissioners, the Commission, or its staff; or The party is not obligated to submit or file a registration statement, notification, application, report, communication or other document with the Commission or its staff" Apart from the concern about vires (see above), the Law Society has two concerns with this article: (1) The phrase in the first line of article 205(a): `includes, but is not limited to.' is very open-ended and runs the risk of creating uncertainty about the other possible circumstances in which an attorney might be considered to be appearing and practising before the Commission. The inclusion of this phrase runs the risk of creating uncertainty and will increase the perceived `risk' of transacting business before the SEC. This phrase also raises the question of whether the definition could potentially apply indefinitely. This creates further problems. If a lawyer is no longer instructed by a client it would be impossible for him to investigate whether there had, or had not, been a material violation, and therefore to know whether action was needed to comply with the rule. In addition he would no longer have access to the `up the ladder' reporting mechanisms. Given the above concerns, the Law Society therefore suggests that the following amendment is made to the text of 205.2(a): `(a) Appearing and practising before the Commission is defined as conducting business with the Commission on behalf of a client.' (2) The Law Society believes that the definition should stop at that point, and that there should be no detailing of particular activities. If however the Commission persist in keeping a detailed list of activities as part of the definition, the Law Society is also very concerned by the `expansive' nature of 205.2(a)(4) and (5). Although procedural rules made by the SEC would govern English solicitors who actually represent clients before the Commission, the SEC cannot amend the general law governing English solicitors. The SEC rules cannot therefore apply where the solicitor is not actually dealing with the Commission (i.e. writing or communicating with it, or appearing before it). Moreover, beyond the legal issue there is a question of whether such a catch-all definition is proportionate (in that it would include lawyers who do not have, nor should have, any knowledge of US securities law). The Law Society believes there should be no detailed list of activities, but if there is, it suggests that (4) be amended to read as follows: `(4) Filing or submitting any registration statement, notification, application, report, communication or other document or oral communication to the Commissioners, the Commission, or its staff.'' The Law Society also proposes that, if a detailed list is included in the definition, the activities currently listed under (5) be deleted altogether. (b) "Appropriate response means a response to evidence of a material violation reported to appropriate officers or directors of an issuer that provides a basis for an attorney reasonably to believe: (1) That no material violation, as defined in paragraph (i) of this section, is occurring, has occurred, or is about to occur; or (2) That the issuer has, as necessary, adopted remedial measures, including appropriate disclosures, and/or imposed sanctions that can be expected to stop any material violation that is occurring, prevent any material violation that has yet to occur, and/or rectify any material violation that has already occurred" No comment "(c) Attorney refers to any person who is admitted, licensed, or otherwise qualified to practice law in any jurisdiction, domestic or foreign, or who holds himself or herself out as admitted, licensed, or otherwise qualified to practice law" The Law Society submits that the proposed definition of an `attorney' is not acceptable in its current form. The SEC does not have the authority to authorise or make professional conduct rules governing English solicitors practising outside the United States. Only the UK Parliament, Law Society or the Lord Chancellor has that authority. Even within the United States, under English law, the SEC would not have power to make professional conduct rules for English solicitors who are not actually practising before the SEC, unless explicitly given this mandate by Congress. Because there appears to be no effective legal authority deriving from Congress in relation to solicitors who are not actually practising before the SEC, the rules would not override the existing law and rules of conduct applying to those solicitors. In some cases, English solicitors would be prohibited by English law and English rules of conduct from complying with the "noisy withdrawal" requirements of rule 205. However, the Law Society would not argue that all solicitors should be exempted from the rules as there will be solicitors who are `appearing and practising' before the Commission in its true sense. These solicitors, and these solicitors alone, can and should be bound by SEC procedural rules. The Law Society therefore suggests that the following is inserted in the first line of paragraph (c) after `person who is `: `...conducting business with the Commission on behalf of a client and ...' "(d) Breach of fiduciary duty refers to any breach of fiduciary duty recognized at common law, including, but not limited to, misfeasance, nonfeasance, abdication of duty, abuse of trust, and approval of unlawful transactions" No comment "(e) Evidence of a material violation means information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur" The fact that foreign lawyers would not, nor should be expected to, be familiar with US securities law and would therefore not be in a position to identify evidence of a material violation, reinforces the argument made under article 205.2(b) and (c) for limiting the application of the rule to attorneys who are appearing and practising in the traditional sense. "(f) In the representation of an issuer means acting in any way on behalf, at the behest, or for the benefit of an issuer, whether or not employed or retained by the issuer" The definition appears too wide. The Law Society would be concerned that, if it stands, this definition would cover counsel to the underwriters on an international offering, who could be said to be acting `for the benefit of an issuer'. It would be helpful if the SEC could confirm whether or not these provisions would extend to underwriter's counsel. "(g) Issuer means an issuer (as defined in Section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)), the securities of which are registered under Section 12 of that Act (15 U.S.C. 78l), or that is required to file reports under Section 15(d) of that Act (15 U.S.C. 78o(d)), or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933(15 U.S.C. 77a et seq.), and that it has not withdrawn" No comment "(h) Material refers to conduct or information about which a reasonable investor would want to be informed before making an investment decision" The comments made above, under (e) evidence of a material violation also apply here. "(i) Material violation means a material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation" The Law Society believes the phrase `or similar material violation' is too vague, particularly for non-US attorneys who are not familiar with US securities law. "(j) Qualified legal compliance committee means a committee of an issuer that: (1) Consists of at least one member of the issuer's audit committee and two or more members of the issuer's board of directors who are not employed, directly or indirectly, by the issuer and who are not, in the case of a registered investment company, "interested persons" as defined in Section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)); (2) Has been duly established by the issuer's board of directors and authorized to investigate any report of evidence of a material violation by the issuer, its officers, directors, employees or agents; (3) Has established written procedures for the confidential receipt, retention, and consideration of any report of evidence of a material violation under §205.3(c); (4) Has the authority and responsibility: (i) To inform the issuer's chief legal officer and chief executive officer (or the equivalents thereof) of any report of evidence of a material violation (except in the circumstances describedin §205.3(b)(5)); (ii) (ii) To decide whether an investigation is necessary to determine whether the material violation described in the report has occurred, is occurring, or is about to occur and, if so, to: (A) Notify the audit committee or the full board of directors; (B) Initiate an investigation, which may be conducted either by the chief legal officer (or the equivalent thereof) or by outside attorneys; and (C) Retain such additional expert personnel as the committee deems necessary; and (iii) At the conclusion of any such investigation under paragraph (j)(4)(ii) of this section, to: Direct the issuer to adopt appropriate remedial measures, including appropriate disclosures, and/or to impose appropriate sanctions to stop any material violation that is occurring, prevent any material violation that is about to occur, and/or to rectify any material violation that has already occurred; and inform the chief legal officer and the chief executive officer (or the equivalents thereof and the board of directors of the results of any such investigation under paragraph (j)(4)(ii) of this section and the appropriate remedial measures to be adopted; and to or filed with the Commission by the issuer that the individual member of the qualified legal compliance committee or the chief legal officer or the chief executive officer reasonably believes is false or materially misleading (5) Each member of which individually, together with the issuer's chief legal officer and chief executive officer (or the equivalents thereof) individually, has the authority and responsibility, in the event the issuer fails in any material respect to take any of the remedial measures that the qualified legal compliance committee has directed the issuer to take, to notify the Commission that a material violation has occurred, is occurring or is about to occur and to disaffirm in writing any document submitted" This definition assumes a familiarity with US law and regulation which is incompatible with the inclusion of non-US practitioners in the proposed rule. The reference in (j) (1) to `interested persons' is one example. This underlines the Law Society's concern that this rule should only apply to those lawyers who are genuinely appearing and practising before the SEC. The rule also assumes that the establishment of a QLCC is compatible with the corporate governance rules in other countries. Allowance should be made for some alternative to the QLCC, which embodies the same concept of upward reporting within the company, and through which both an in-house and external lawyer can fulfil their obligations. (k) Reasonable or reasonably denotes the conduct of a reasonably prudent and competent attorney" No comment "(l) Reasonably believes means that an attorney, acting reasonably, would believe the matter in question" No comment "(m) Report means to make known to directly, either in person, by telephone, by e-mail, electronically, or in writing" No comment 205.3 Issuer as client. "(a) Representing an issuer. An attorney appearing and practising before the Commission in the representation of an issuer represents the issuer as an organisation and shall act in the best interest of the issuer and its shareholders. That the attorney may work with and advise the issuer's officers, directors, or employees in the course of representing the issuer does not make such individuals the attorney's clients" Whilst the rule could prohibit those subject to it from advising a director or employee as well as the company, the rule cannot alter an English solicitor's general position in law or conduct. The second sentence of this paragraph conflicts with the position in English law and conduct governing English solicitors. If the solicitor is advising a company through its director, it is indeed the company, not the director, who is the client. However, the solicitor may be advising the director as well as the company, and in that case the director and the company are both clients of the solicitor. The real question would be whether it was appropriate in the circumstances for the solicitor to be advising both the director and the company, or whether there was a conflict of interest which would make it improper for the solicitor to be advising both. "(b) Duty to report evidence of a material violation. (1) If, in appearing and practising before the Commission in the representation of an issuer, an attorney becomes aware of evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer, the attorney shall report any evidence of a material violation to the issuer's chief legal officer (or the equivalent thereof) or to both the issuer's chief legal officer and its chief executive officer (or to the equivalents thereof) forthwith (unless the issuer has a qualified legal compliance committee and the attorney chooses instead to report the evidence of a material violation to that committee under paragraph (c) of this section). An attorney does not reveal client confidences or secrets or privileged or otherwise protected information by communicating such information related to the attorney's representation of an issuer to the issuer's officers or directors" There is no exact equivalent of the up the ladder reporting requirement in Law Society rules, however the Society has no problem with "up the ladder" reporting as this involves no breach of client confidentiality or solicitor-client privilege. However, this would not be the case if the solicitor's client is an underwriter or subsidiary of the issuer, unless the subsidiary had consented to upward reporting to the issuer. "(2) The attorney reporting evidence of a material violation shall take steps reasonable under the circumstances to document the report and the response thereto and shall retain such documentation for a reasonable time" No comment "(3) The chief legal officer (or the equivalent thereof) shall cause such inquiry into the evidence of a material violation as he or she reasonably believes is necessary to determine whether the material violation described in the report has occurred, is occurring, or is about to occur. If the chief legal officer reasonably believes no material violation has occurred, is occurring, or is about to occur, he or she shall so advise the reporting attorney. If the chief legal officer reasonably believes that a material violation has occurred, is occurring, or is about to occur, he or she shall take any necessary steps to ensure that the issuer adopts appropriate remedial measures, including appropriate disclosures, and/or imposes appropriate sanctions to stop any material violation that is occurring, prevent any material violation that is about to occur, and/or to rectify any material violation that has already occurred. The chief legal officer shall promptly report the remedial measures adopted and/or sanctions imposed to the chief executive officer, to the audit committee of the issuer's board of directors, or to the issuer's board of directors, and to the reporting attorney. The chief legal officer shall take reasonable steps to document his or her inquiry and to retain such documentation for a reasonable time. In lieu of causing an inquiry under this paragraph (b), a chief legal officer (or the equivalent thereof) may refer a report of evidence of a material violation to a qualified legal compliance committee under paragraph (c)(2) of this section. If the issuer fails in any material respect to take any remedial measure that the qualified legal compliance committee directs the issuer to take in order to stop any material violation that is occurring, prevent any material violation that is about to occur, and/or to rectify any material violation that has already occurred, the chief legal officer shall notify the Commission that a material violation has occurred, is occurring or is about to occur and shall disaffirm in writing any documents submitted to or filed with the Commission by the issuer that the chief legal officer reasonably believes are false or materially misleading" The Law Society's concerns on `noisy withdrawal' and client confidentiality apply equally to the in-house lawyer. Law Society rule require a chief legal officer or equivalent to have direct access to the board. Under our rules we would expect the CLO to have fulfilled his or her obligations to the SEC by taking all the internal remedial actions required to stop any material violation and, ultimately, notifying the Board. (4) If an attorney who has made a report under paragraph (b)(1) of this section reasonably believes that the chief legal officer or the chief executive officer of the issuer (or the equivalent thereof) has not provided an appropriate response, or has not responded within a reasonable time, the attorney shall report the evidence of a material violation to: (i) The audit committee of the issuer's board of directors; (ii) Another committee of the issuer's board of directors consisting solely of directors who are not employed, directly or indirectly, by the issuer and are not, in the case of a registered investment company, "interested persons" as defined in section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)) (if the issuer's board of directors has no audit committee); or (iii) The issuer's board of directors (if the issuer's board of directors has no committee consisting solely of directors who are not employed, directly or indirectly, by the issuer and are not, in the case of a registered investment company, "interested persons" as defined in section 2(a)(19) of the Investment Company Act of 1940(15 U.S.C. 80a-2(a)(19)))." The Law Society believes this paragraph should provide that an attorney will have discharged his upward reporting responsibilities by reporting to the board irrespective of whether the issuer has a committee fulfilling the criteria under (I) or (ii). "(5) If an attorney reasonably believes that it would be futile to report evidence of a material violation to the issuer's chief legal officer and chief executive officer (or the equivalents thereof) under paragraph (b)(1) of this section, the attorney may report the evidence of a material violation as provided under paragraph (b)(4) of this section" No comment "(6) An attorney retained or directed by an issuer to investigate evidence of a material violation reported under paragraph (b)(1), (b)(4), or (b)(5) of this section shall be deemed to be appearing and practising before the Commission. Directing or retaining an attorney to investigate reported evidence of a material violation does not relieve the officers or directors of the issuer to whom the evidence of a material violation has been reported under paragraph (b)(1), (b)(4), or (b)(5) of this section of the duty to respond to the reporting attorney" This provision seeks to make a lawyer appointed to investigate a possible "material violation" subject to the upward reporting and "noisy withdrawal" requirements. The latter would place inappropriate duties on the investigating lawyer. It is not the same as the situation where a lawyer comes across wrongdoing in the course of acting for the client - the lawyer here is expected to accept a retainer on the basis that he or she will in certain circumstances report on the client's activities to an outside agency. This is contrary to the fiduciary relationship between lawyer and client in a common law jurisdiction and a rule introducing such a radical departure from the normal lawyer-client relationship must have clear statutory authority. "(7) An attorney who receives what he or she reasonably believes is an appropriate and timely response to a report he or she has made pursuant to paragraph (b)(1), (b)(4), or (b)(5) of this section and who has taken reasonable steps to document his or her report and the response thereto under paragraph (b)(2) of this section need do nothing more under this section regarding the evidence of a material violation" No comment "(8) If the attorney reasonably believes that the issuer has not made an appropriate response to the report or reports made pursuant to paragraph (b)(1), (b)(4), or (b)(5) of this section, or the attorney has not received a response in a reasonable time, the attorney shall: (i) Explain his or her reasons for so believing to the chief legal officer, chief executive officer, or directors to whom the attorney reported the evidence of a material violation pursuant to paragraph (b)(1), (b)(4), or (b)(5) of this section; and (ii) Take reasonable steps to document the response, or absence thereof, and to retain such documentation for a reasonable time" The SEC should clarify the length of time for which retention of a document might be considered `reasonable' (c) Alternative reporting procedures for attorneys retained or employed by an issuer with a qualified legal compliance committee. (1) If, in appearing and practising before the Commission in the representation of an issuer, an attorney becomes aware of evidence of a material violation by the issuer or by any officer, director, employee, or agent of the issuer, the attorney may, as an alternative to the reporting requirements of paragraph (b) of this section, report such evidence of a material violation to a qualified legal compliance committee, if the issuer has duly formed such a committee. Except as provided in paragraph (b)(3) of this section, an attorney who reports evidence of a material violation to a qualified legal compliance committee has satisfied his or her obligation to report evidence of a material violation within the issuer, is not required to assess the issuer's response to the reported evidence of a material violation, and is not required to take any action under paragraph (d) of this section regarding the evidence of a material violation. (2) A chief legal officer (or the equivalent thereof) may refer a report of evidence of a material violation to a qualified legal compliance committee in lieu of causing an inquiry to be conducted under paragraph (b)(3) of this section. Thereafter, pursuant to the requirements under §205.2(j), the qualified legal compliance committee shall be responsible for responding to the evidence of a material violation reported to it under this paragraph (c) of this section " No comment (d)"Notice to the Commission where there is no appropriate response within a reasonable time. (1) Where an attorney who has reported evidence of a material violation under paragraph 3(b) of this section rather than paragraph 3(c) of this section does not receive an appropriate response, or has not received a response in a reasonable time, to his or her report, and the attorney reasonably believes that a material violation is ongoing or is about to occur and is likely to result in substantial injury to the financial interest or property of the issuer or of investors: (i) An attorney retained by the issuer shall: (A) Withdraw forthwith from representing the issuer, indicating that the withdrawal is based on professional considerations; (B) Within one business day of withdrawing, give written notice to the Commission of the attorney's withdrawal, indicating that the withdrawal was based on professional considerations; and (C) Promptly disaffirm to the Commission any opinion, document, affirmation, representation, characterization, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading; (ii) An attorney employed by the issuer shall: (A) Within one business day, notify the Commission in writing that he or she intends to disaffirm some opinion, document, affirmation, representation, characterization, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading; and (B) promptly disaffirm to the Commission, in writing, any such opinion, document, affirmation, representation, characterisation, or the like; and (iii) The issuer's chief legal officer (or the equivalent) shall inform any attorney retained or employed to replace the attorney who has so withdrawn that the previous attorney's withdrawal was based on professional considerations" The current position in law and conduct for English solicitors, in relation to client confidentiality and privilege, is that no solicitor could knowingly assist at a breach of the criminal law, but that he would have to withdraw from acting. However no solicitor would currently be allowed to conduct a "noisy withdrawal" except in one of the following circumstances:
The Law Society does not believe that the SEC can require "noisy withdrawal", even of an English solicitor actually practising before the SEC for reasons set out earlier in this document. Even if the SEC is held to have the authority to make a "noisy withdrawal" requirement, the Law Society does not believe these can legally apply to an English solicitor who is not actually practising before the SEC. However, the Law Society does believe that an English solicitor who is actually practising before the SEC will be (and should be) bound by the SEC's rules. The English prohibition on "noisy withdrawal" cannot be overcome by any permissive provision. Only a requirement to take certain steps would be effective in relation to English solicitors. If a "noisy withdrawal" requirement were properly applied to solicitors, they would need to make their clients aware, at the outset, of the circumstances in which a "noisy withdrawal" might be required. It could be helpful if the SEC were to provide in the rule for attorneys to give such a warning. If there was a "noisy" withdrawal" requirement in the final rule it should be less specific and require only that the lawyer withdraw, notify the SEC, and withdraw any document he knows to be misleading "(2) Where an attorney who has reported evidence of a material violation under paragraph (b) rather than paragraph (c) of this section does not receive an appropriate response, or has not received a response in a reasonable time, to his or her report under paragraph (b) of this section, and the attorney reasonably believes that a material violation has occurred and is likely to have resulted in substantial injury to the financial interest or property of the issuer or of investors but is not ongoing: (i) An attorney retained by the issuer may: (A) Withdraw forthwith from representing the issuer, indicating that the withdrawal is based on professional considerations; (B) Give written notice to the Commission of the attorney's withdrawal, indicating that the withdrawal was based on professional considerations; and (C) Disaffirm to the Commission, in writing, any opinion, document, affirmation, representation, characterisation, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading; (ii) An attorney employed by the issuer may: (A) Notify the Commission in writing that he or she intends to disaffirm some opinion, document, affirmation, representation, characterisation, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading; and (B) Disaffirm to the Commission, in writing, any such opinion, document, affirmation, representation, characterisation, or the like; and (iii) The issuer's chief legal officer (or the equivalent) shall inform any attorney retained or employed to replace the attorney who has so withdrawn that the previous attorney's withdrawal was based on professional considerations" The Law Society believes that the obligation to disaffirm should be restricted to the attorney who filed or submitted the original documents. "(3) The notification to the Commission prescribed by this paragraph (d) does not breach the attorney-client privilege" The Law Society disagrees with this statement. In its view "noisy withdrawal" is de facto reporting. Legal professional privilege and the solicitor's duty of confidentiality can only be overridden by clear statutory authority. This was not given to the Commission in the Act. "(4) An attorney formerly employed or retained by an issuer who has reported evidence of a material violation under this section and reasonably believes that he or she has been discharged for so doing may notify the Commission that he or she believes that he or she has been discharged for reporting evidence of a material violation under this section and may disaffirm in writing to the Commission any opinion, document, affirmation, representation, characterization, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading" As with "noisy withdrawal", this rule creates a problem for the Law Society. It purports to give a lawyer who is no longer acting, permission to breach the continuing duty of confidentiality to the ex-client. As we have indicated above, a permissive rule cannot operate to release a solicitor from such a duty. "(e) Issuer confidences. (1) Any report under this section (or the contemporaneous record thereof) or any response thereto (or the contemporaneous record thereof), may be used by an attorney in connection with any investigation, proceeding, or litigation in which the attorney's compliance with this part is in issue" A lawyer who has complied with the rule by reporting should be entitled to rely on the record to defend him or herself against an accusation of failure to comply with the rule. However the rule as drafted would put the SEC in a position to use an accusation against a lawyer in order to gain access to internal reports which the lawyer would otherwise be under a duty to keep confidential. We do not believe that the SEC has authority to make such a rule. If a rule of this type is nevertheless to be made, it should only permit the lawyer to disclose the reports to his or her own bar, Law Society or Disciplinary Tribunal. "(2) An attorney appearing and practising before the Commission in the representation of an issuer may reveal to the Commission, without the issuer's consent, confidential information related to the representation to the extent the attorney reasonably believes necessary: (i) To prevent the issuer from committing an illegal act that the attorney reasonably believes is likely to result in substantial injury to the financial interest or property of the issuer or investors; (ii) To prevent the issuer from committing an illegal act that the attorney reasonably believes is likely to perpetrate a fraud upon the Commission; or (iii) To rectify the consequences of the issuer's illegal act in the furtherance of which the attorney's services had been used. (3) Where an issuer, through its attorney, shares with the Commission information related to a material violation, pursuant to a confidentiality agreement, such sharing of information shall not constitute a waiver of any otherwise applicable privilege or protection as to other persons" The Law Society believes that 205.3(e)(2) gives the attorney carte blanche in deciding what to disclose to the Commission and in what circumstances, and embodies a false conception of the role of the lawyer. It is not a lawyer's job to correct or rectify the consequences of other people's illegal actions, or even to prevent wrong-doing. If an English solicitor believed that his client was in danger of committing an illegal act in its dealings with the Commission, the solicitor would be bound to draw this to the attention of his client. If this failed to prevent the client from taking an illegal course of action, the solicitor would be bound to withdraw. However, a solicitor would in most circumstances be prohibited from reporting on a client to the Commission either by "noisy withdrawal" or by direct reporting. If reporting was required by law and were included in the Commission's procedural rules, a solicitor actually practising before the Commission, could comply with it - but the solicitor would have a duty to explain to the client at the outset this limitation on the normal duty of confidentiality. 205.4 Responsibilities of supervisory attorneys (a) "An attorney supervising, directing, or having supervisory authority over another attorney is a supervisory attorney. An issuer's chief legal officer (or the equivalent) is a supervisory attorney under this section. (b) A supervisory attorney shall make reasonable efforts to ensure that a subordinate attorney, as defined in §205.5(a), that he or she supervises, directs, or has supervisory authority over is appearing and practicing before the Commission conforms to this part and complies with the statutes and other rules administered by the Commission. To the extent a subordinate attorney appears and practices before the Commission on behalf of an issuer, that subordinate attorney's supervisory attorneys also appear and practice before the Commission. (c) A supervisory attorney is responsible for complying with the reporting requirements in §205.3 when a subordinate attorney has reported to the supervisory attorney evidence of a material violation. (d) A supervisory attorney who reasonably believes that information reported to him or her by a subordinate attorney under §205.5(c) is not evidence of a material violation shall take reasonable steps to document the basis for the supervisory attorney's belief" No comment 205.5 Responsibilities of a subordinate attorney (a) "An attorney under the supervision, direction, or supervisory authority of another attorney is a subordinate attorney. (b) A subordinate attorney is bound by this part notwithstanding that the subordinate attorney acted at the direction of or under the supervision of another person. (c) A subordinate attorney complies with §205.3 if the subordinate attorney reports to his or her supervising attorney under §205.3(b) evidence of a material violation that the subordinate attorney becomes aware of in the course of appearing and practicing before the Commission. (d) A subordinate attorney may take the steps permitted or required by §205.3(b), (c), and (d) if the subordinate attorney reasonably believes that a supervisory attorney to whom he or she has reported evidence of a material violation under §205.3(b) has failed to comply with §205.3" The Law Society is content with a provision that a subordinate attorney will have discharged his or her obligations by reporting to the supervising attorney. 205.6 Sanctions (a) A violation of this part by any attorney appearing and practising before the Commission in the representation of an issuer shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), and any such attorney shall be subject to the same penalties and remedies, and to the same extent, as for a violation of that Act. (b) With respect to attorneys appearing and practising before the Commission on behalf of an issuer, "improper professional conduct" under section 4C(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78d-3(a)) includes: (1) Intentional or knowing conduct, including reckless conduct, that results in a violation of any provision of this part; and (2) Negligent conduct in the form of: (i) A single instance of highly unreasonable conduct that results in a violation of any provision of this part; or (ii) Repeated instances of unreasonable conduct, each resulting in a violation of a provision of this part. An attorney appearing and practising before the Commission who violates any provision of this part is subject to the disciplinary authority of the Commission, regardless of whether the attorney may also be subject to discipline for the same conduct in a jurisdiction where the attorney is admitted or practices." The Law Society can discipline solicitors (and US attorneys who are Registered Foreign Lawyers and practising as partners in Multi-National Partnerships or as directors in companies which are recognised bodies, or as members of LLPs which are recognised bodies). Breach of the law can be misconduct but may not always be. If the Commission's procedural rules properly required reporting on a client, an English solicitor who is practising before the SEC would legally be able to comply with this requirement. If he or she failed to do so, the Commission could take action against the solicitor and the Law Society could in appropriate cases take action also, for breach of its conduct requirements. The Law Society would support a `safe harbor' from civil suits for lawyers who have withdrawn from representing clients, unless the person bringing the suit can properly allege express malice on the part of the reporting attorney. The Law Society of England and Wales
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