Cleary, Gottlieb, Steen & Hamilton

April 7, 2003

Jonathan G. Katz, Esquire
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: File No. S7-45-02; Proposed Rules Implementing Section 307 of the Sarbanes-Oxley Act

Dear Mr. Katz:

We are former general counsels of the Commission. We submit this comment letter on the Commission's rule proposal implementing Section 307 in light of our experience at the Commission, our involvement with these issues during our tenures, and our hope that we can contribute to a constructive discussion of the Commission's proposals. While we are both partners of the firm Cleary, Gottlieb, Steen & Hamilton, our affiliation is noted for identification purposes only, and we submit these comments solely on our own behalf. At the same time, we support and agree with the comment being submitted by the firm today.

With one crucial caveat, we support the Commission's alternative proposal for "reporting out" rather than "noisy withdrawal." Given the extraordinary circumstances that would trigger such a requirement, and because the issuer can describe the "circumstances" of the lawyer's withdrawal in a way that does not divulge the lawyer's advice, we believe the proposal strikes the appropriate balance between the public interest considerations of requiring full disclosure to investors of material facts concerning violations of law and ensuring that issuers continue to seek the very legal advice that can prevent the violations in the first place.

Our caveat, though, is quite serious. Both the "noisy withdrawal" and the "reporting out" proposals would, under the triggering circumstances, require the attorney to "withdraw from representing the issuer . . . ." As written, the proposals seem to require the attorney to withdraw from a representation that does not involve the lawyer in appearing and practicing before the Commission; it also would seem to require the lawyer to withdraw from a representation, including one that entails appearing and practicing before the Commission, that is unrelated to the material violation that triggers the lawyer's obligation to report. To the extent the Commission's rules would require withdrawal in either of these circumstances, they would be beyond Congress's grant of authority to the Commission.

Congress has not granted the Commission the authority to require lawyers to withdraw from representations that do not involve appearing and practicing before the Commission. The Commission has never interpreted its authority under the federal securities laws as encompassing plenary authority to regulate all aspects of the professional conduct of the lawyers who practice before it. This interpretation is consistent with the understanding, which both of us had while we served as the Commission's general counsels, that no statute purports to give the Commission such plenary authority. This is the reason that, in applying Rule 102(e) of the Commission's Rules of Practice, the Commission has for decades asserted its authority only in circumstances in which there was a nexus between the attorney's alleged misconduct and his appearance and practice before the Commission.

Nothing in the language of Section 307 nor in its legislative history would suggest that Congress intended to effect a dramatic change in the Commission's regulatory mission. Had Congress intended such a change, it would certainly have done so unambiguously, because to have done so would have been truly remarkable. The Commission's mission is to protect investors and the integrity of the securities markets. It has no interest in regulating lawyers except to the extent doing so furthers that mission.

Similarly, there is no indication in any statute that Congress intended to empower the Commission to require lawyers to withdraw from representing clients before the Commission because the clients were involved in material violations of law of which the lawyer was aware but as to which the lawyer was not engaged in providing professional services. The lack of any such indication comes as no surprise, because such a course would be senseless and involve great mischief.

The Commission has no interest in depriving clients of counsel of their choice with respect to one matter simply because the lawyer is aware of another matter in which the lawyer believes the client is violating the law. We are, in candor, unable to think of a rationale under which the Commission would do so. Even clients who violate the law are entitled to their choice of counsel on matters other than those involving the violation. And even the most direct interest in regulating the professional integrity of lawyers who practice before the Commission would not be furthered by requiring lawyers not to represent "bad" clients.

One can, of course, readily identify the mischief that would attend such a rule. The Commission is not in the business of deciding who can have counsel and who cannot. Given the importance of legal representation in our society, particularly where the lawyer is interposed between the client and the state, the government has no legitimate role to play in burdening the client's choice of counsel. The Commission may have a legitimate interest in preventing lawyers from using their professional talents to further client violations of the securities laws, but beyond that, there is no warrant for the Commission to intrude in the relationship between lawyer and client.

We also urge the Commission to clarify what it means by the phrase "substantial evidence" in proposed rule 205.3(d)(1)(3). The proposing release is silent on this point. We trust the Commission intended to convey some quantum of evidence in excess of a preponderance. Surely the Commission does not intend to impose on a lawyer or an issuer a "noisy withdrawal" or "reporting out" obligation in circumstances in which the lawyer has not concluded that there is an imminent or ongoing violation of law. But "substantial evidence" as used in Section 706 of the Administrative Procedure Act has been construed to mean something significantly less than a preponderance. The Supreme Court has described the "substantial evidence" standard as requiring somewhat more evidence than is required to avoid a conclusion that a finding was not "clearly erroneous," while noting that the difference is a "subtle one" and that "we have failed to uncover a single instance in which a reviewing court conceded that use of one standard rather than the other would in fact have produced a different outcome." See Dickinson v. Zurko, 527 U.S. 150, 162 (1999). If the Commission intended to use a higher evidentiary standard - as we believe it did -- it should say so.

Finally, we urge the Commission to take an early opportunity to provide additional guidance about what it means by the "reasonable likelihood" standard in those provisions of Part 205, involving the up-the-ladder reporting requirements, that the Commission recently adopted. In particular, we would urge the Commission to clarify whether the reporting obligations are triggered where the uncertainty relates to how a court would decide a legal issue, as opposed to uncertainty whether a set of circumstances actually occurred. To take one example, management and an issuer's lawyers make materiality judgments regularly; those judgments often involve deciding not to disclose a particular matter. We would be surprised if the Commission intended those judgments to be reviewed regularly by a committee of the issuer's board of directors. But the definition of "evidence of material violation" in Rule 205.2(e) would cause the various up-the-ladder procedures to be triggered even under circumstances in which the lawyer concluded that it was quite likely that a court would conclude that a particular fact was not material, but that there was some non-trivial possibility - for example, a 30% probability - that a court would reach a different conclusion. The Commission should clarify its intention in this regard.

Respectfully submitted,

Edward F. Greene   David M. Becker