Cleary, Gottlieb, Steen & Hamilton
2000 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20006-1801 41, AVENUE DE FRIEDLAND 75008 PARIS RUE DE LA L01 23 1040 BRUSSELS CITY PLACE HOUSE 55 BASINGHALL STREET LONDON EC2V 5EH	one liberty plaza new york, ny 10006-1470 telephone (212) 225-2000 facsimile (212) 225-3999	MAIN TOWER NEUE MAINZER STRASSE 52 60311 FRANKFURT AM MAIN PIAZZA DI SPAGNA 15 00187 ROME BANK OF CHINA TOWER ONE GARDEN ROAD HONG KONG SHIN KASUMIGASEKI BUILDING 3-2, KASUMIGASEKI 3-CHOME CHIYODA-KU TOKYO 100-0013

April 7, 2003

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Proposed Rules Regarding Implementation of Standards of Professional Conduct for Attorneys (File No. S7-45-02)

Dear Mr. Katz:

We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on the Commission's proposed rules (the "Proposed Rules") regarding implementation of standards of professional conduct for attorneys set forth in Release Nos. 33-8150; 34-46868; IC-25829 and Release Nos. 33-8186; 34-47282; IC-25920 (together, the "Proposing Release"). We appreciate the opportunity to comment on the Proposed Rules.

We commend the Commission for its decision to defer action on the "noisy withdrawal" provisions of the Proposed Rules and the considerable efforts made to respond to comments when adopting Part 205. In particular, we note that the final rules narrow considerably the circumstances requiring mandatory withdrawal under either the "noisy withdrawal" or the alternative "reporting out" provisions. Under the final rules, an attorney will not be required to withdraw if either (i) the client has established a qualified legal compliance committee to which potential violations are reported or (ii) the issuer, with the consent of the Board or the appropriate Board committee, has retained counsel to assess the reported violation and counsel has concluded that a colorable defense to the purported violation exists.

Against this backdrop, we acknowledge that how best to weigh the competing public interests involved in these matters is a hard question on which many in the profession will differ. For our part, we believe the alternative reporting out proposal, if modified in certain respects that we suggest below, strikes an appropriate balance between preserving candid and open communication between clients and attorneys, on the one hand, and preventing or halting material violations¹ that are likely to cause substantial financial injury to the issuer or to investors, on the other.

Central to our support for the alternative reporting out proposal is our observation that the proposal encroaches upon the attorney-client relationship only in limited circumstances. Under the proposal, withdrawal is required only where both (i) there is "substantial evidence" that a material violation "is" ongoing or about to occur and "substantial injury" is likely² and (ii) the client has failed to avail itself of several opportunities to respond appropriately to the attorney's advice.

We are aware that some in the profession remain concerned that even this high threshold will unacceptably chill attorney-client communication. In our view, the alternative reporting out proposal is appropriately circumscribed. It focuses on situations where the potential harm to investors is clear, and it requires withdrawal, and the related disclosure, only in the case of clients who have demonstrated, by failing to avail themselves of several opportunities to respond appropriately, that they place little value on the advice of counsel the attorney-client privilege is designed to protect.

In sum, we support the alternative reporting out proposal, subject to the modifications and clarifications we suggest below.

• The Commission should clarify that "substantial evidence," as used in Section 205.3(d)(1) of the alternative reporting out proposal, means a preponderance of the evidence. The term "substantial evidence" is not defined in the Proposed Rules, and is not discussed at length in the Proposing Release. In its requests for comment, the Commission suggests that it intends the term to provide a "different and higher evidentiary standard for withdrawal" than the "reasonable belief" test used in the noisy withdrawal proposal. On this basis, we assume that at a minimum, the Commission intended the evidence to be sufficient for the attorney to conclude that it is more likely than not that a violation is ongoing or imminent. The Commission should make this clear and expressly define the term to mean a preponderance of the evidence. Absent clarification, we are concerned that the term may be construed in accordance with its use in the Administrative Procedure Act context, where the term "does not mean a large or considerable amount of evidence"³ but rather "require[s] a court to ask whether `a reasonable mind might accept' a particular evidentiary record as `adequate to support a conclusion.'"⁴ In that context, courts have interpreted the term to mean a threshold that "may be somewhat less than a preponderance."⁵ We do not believe such a low threshold would be consistent with the Commission's intent.

• Section 205.3(e) should be revised to permit an issuer to notify the Commission in a non-public filing of the issuer's receipt of a withdrawal notice. The Commission asks in its requests for comment whether the issuer's report to the Commission should be confidential or public. Under the noisy withdrawal proposal, the notice provided to the Commission by a withdrawing attorney would not be made in a public filing. We believe the same accommodation should be provided under the alternative reporting out proposal. An issuer should have the opportunity to discuss the matter with the Commission, and to independently assess the materiality of the matter, prior to airing its disagreement with counsel in public.⁶

• An issuer should not be required to report the circumstances related to an attorney's notice. The Commission requests comment on whether the requirement in 205.3(e) that the issuer report the circumstances surrounding the attorney's written notice under 205.3(d) is appropriate. If, despite our concerns above, the Commission determines to maintain the requirement for a public report of such notices, we believe a description of the circumstances surrounding the report should be permitted but not required. The principal purpose of the reporting obligation - deterrence - is served by the imposition of that obligation alone.

• When withdrawal is required, it should be limited to the particular matter involving the material violation. The Commission asks in its requests for comment whether a retained attorney should be required to withdraw from all representation of the issuer or only from representation on the matter concerning the material violation. We believe the required withdrawal should be limited to the particular matter involving the material violation. Requiring withdrawal from matters having no connection to the violation would be highly disruptive and difficult to implement in practice - particularly with respect to litigation matters already underway. Requiring withdrawal from the particular matter in question should be sufficient to achieve the Commission's purposes.

• A client, with the consent of the Board or the appropriate Board committee, should be permitted to retain the reporting lawyer to carry out the further investigation to determine whether there is a colorable defense. Part 205.2(b)(3) establishes that it is an appropriate response if an issuer, with the consent of the board or the appropriate board committee, has retained or directed counsel to review the reported evidence of a material violation and that counsel has advised the issuer that a colorable defense exists. Although this provision may be invoked where a new attorney is retained to provide a second opinion, an issuer should have the option to direct the reporting attorney to carry out the investigation. We suggest the Commission clarify that this alternative is permitted.

• The Commission should make clear that "applicable foreign law," as used in Section 205.6(d), includes the rules of the applicable local bar association. Ethical rules prohibiting an attorney practicing outside the United States from complying with the noisy withdrawal or alternative reporting out provisions may be part of the rules of the local bar association. The Commission should make clear that under Section 205.6(d), an attorney need not comply with Part 205 to the extent doing so would be prohibited under the foreign ethical rules applicable to the attorney, regardless of whether such rules are embodied in a statute, regulation or local bar rules.

• The Commission should provide a safe harbor from civil suits against an attorney who withdraws from representation pursuant to the Proposed Rules. In its requests for comment, the Commission asks whether a safe harbor from civil suits should be provided to attorneys who report to the Commission under the noisy withdrawal proposal. We believe a safe harbor from civil suits should be afforded to attorneys who withdraw under either the noisy withdrawal proposal or the alternative reporting out proposal. In both cases, an attorney will be required to make difficult and, inevitably, subjective judgments regarding the criteria for withdrawal. Absent a safe harbor, an attorney who withdraws under the Proposed Rules will be exposed to potentially considerable litigation risk concerning the withdrawal. Adopting a safe harbor will promote compliance with the rule by alleviating this risk.

* * *

We thank you for the opportunity to submit this comment letter. We would be happy to discuss with you any of the comments described above or any other matters you feel would be helpful in your review of the Proposed Rules. Please do not hesitate to contact Allan G. Sperling or Leslie N. Silverman in New York (212-225-2000) or Edward F. Greene in London (44-207-614-2200) if you would like to discuss these matters further.

Very truly yours,

CLEARY, GOTTLIEB, STEEN & HAMILTON

cc: The Honorable William H. Donaldson, Chairman
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Harvey J. Goldschmid, Commissioner
The Honorable Paul S. Atkins, Commissioner
The Honorable Roel C. Campos, Commissioner

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1	In its requests for comment, the Commission asks whether it is appropriate to limit mandatory withdrawal to situations involving current or future violations. We believe impingement on the attorney-client relationship should be limited to matters where disclosure can help prevent substantial harm from occurring.
2	In our view, the higher evidentiary standard, greater definiteness and substantial injury threshold embodied in the alternative reporting out proposal are more appropriately suited to the gravity of a requirement to withdraw from representation and the related disclosures than the lower "reasonable belief" trigger used in the original noisy withdrawal proposal. Thus, we support the requirement under the alternative reporting out proposal that the attorney make separate determinations that there is "substantial evidence" that (i) a material violation "is" ongoing or "is" about to occur and (ii) substantial injury is likely.
3	Pierce v. Underwood, 487 U.S. 552, 564-65 (1988).
4	Dickinson v. Zurko, 527 U.S. 150, 153 (1999), citing Consol. Edison Co. v. NLRB, 305 U.S. 197, 229 (1938).
5	See e.g., Mastro v. Apfel, 270 F.3d 171, 176 (4th Cir. 2001).
6	The Commission also asks in its requests for comment whether Form 20-F is the appropriate form to use to make the required disclosures under Section 205.3(d). We believe that Form 20-F is ill-adapted to reports of current events of this type, and that it would be preferable for the Commission to create a new form for those disclosures.