Debra M. Brown
20 Oak Street, Suite 200
Beverly, MA 01915
December 12, 2002
Jonathon G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Comments Submitted on Proposed Attorney Conduct Rule (File No. 33-8150.wp.)
Dear Ladies and Gentlemen:
Thank you for the opportunity to comment on this proposed rule. It is clear by the length and depth of the proposing release, that many members of the staff labored on the provisions of this proposed rule. Brown & Associates and Self Audit, Inc. provide specialized compliance related services to mutual fund companies and investment advisers. Brown & Associates' clients engage our firm to conduct "mock" regulatory reviews and to make recommendations on their regulatory compliance programs. We serve as "independent consultant" to firms that have experienced regulatory problems. Our role is to help clients create, maintain and enhance state of the art compliance programs for their unique businesses. Self Audit, Inc. is a provider of software that enables firms to conduct mock audits internally. Both firms provide clients with a means to incorporate proactive compliance procedures into their organizations. In this context, we submit comments to the proposed rulemaking on attorney conduct and emphasize the chilling effect that this type of rulemaking would have on financial services firms' proactive compliance programs.
As a preliminary matter, the application of the Sarbanes-Oxley Legislation to investment companies is inconsistent with the premise of the protection of investors. Mutual funds are investors, as well as vehicles, for many U.S. investors to invest in the market. The application of each of the Sarbanes-Oxley rulemaking initiatives to registered investment companies is costly and in many cases inappropriate due to their structure. These are virtual companies and do not employ individuals directly. The cost of compliance with each of these rules will ultimately pass on to the investors, whereby, the U.S investors continue to pay the price for the corporate scandals. The staff and Congress should reconsider the application of the Sarbanes-Oxley legislation to registered investment companies.
Since the proposed rule does apply to investment companies, these comments are provided in the context of investment companies. In our business, we generally have the opportunity to provide comments on the compliance program directly to the Chief Legal Counsel or Chief Executive for the firm. In some cases, we provide all comments to the compliance officer. In many cases, our reports are provided to Boards of Directors for the affected mutual funds. We do consider our reports to be privileged, as part of the attorney-client relationship. The firms that have hired us to conduct these reviews are proactive, compliance-conscious firms that are trying to have the most effective internal compliance programs. In light of this experience, the internal reporting process to the chief executive officer, chief legal officer or board of directors, seems consistent with our business practice.
Although Sarbanes-Oxley requires the Commission to promulgate professional conduct rules for attorneys1, the proposed rule goes beyond the scope of the Sarbanes-Oxley to the extent that attorneys are required to report violations to the SEC or to withdraw from the representation of the issuer. The internal "reporting process" and requirements for the attorney to maintain written records of their reporting process does fall within the congressional mandate2.
It is my belief that the overall nature of this proposed rule would create incentives for financial services firms to do away with in-house counsel and limit communication with outside counsel. As for our firm's proactive compliance services, we see little reason that an issuer would undertake such steps, if those steps would trigger greater compliance issues. As a practical matter, many attorneys would not have their employment continued if they were to take the steps required by the rule proposal. Many in-house attorneys are also subject to non-compete agreements and confidentiality agreements. In order to comply with these provisions, many attorneys would face losing their legal careers. Alternatively, employers could take recourse against the in-house or outside attorney's through state bar ethics proceedings.
In support of this position, I cite the following quote from the Montgomery case:
"The inescapable conclusion to be drawn from the facts is that the [compliance officer/chief legal counsel] lacked the responsibility, ability, or authority to affect the conduct of the [employee]. The [compliance officer/chief legal officer] had no responsibility, ability, or authority to discipline any registered representative of the firm; he could and did bring problems or potential problems to the attention of senior management, but, at the time, his recommendations to discipline, fire or not to hire were ignored. Nor did the [compliance officer/chief legal counsel] have the responsibility, ability, or authority to implement general procedural changes that would detect questionable sales practices by the registered representatives. Again, he could make recommendations to senior management, who would, at times, reject them.3 The discussion in this case illustrates the relationship that many in-house counsels have with senior management: they can make recommendations, which are sometimes accepted and other times rejected. It is our position that in-house legal/compliance officers help many issuers stay in compliance with the securities laws but cannot prevent non-compliance in all cases. For that reason, I object to the outside reporting requirements of the proposed rule.
In addition to the general comments above, the following specific comments are submitted:
In summary, the rule proposal in its current state would have a chilling effect on all in-house legal and compliance areas. All proactive services, such as the services that our firm provides would become a liability for firms under this proposed rule. Please reconsider the provisions of this rule and try to provide incentives for firms to have good compliance, rather than punish firms for the detection of issues.
The comments reflected herein represent solely the views, comments and concerns of the undersigned and do not necessarily represent the views of the undersigned's firm or the clients of the firms. Please do not hesitate to call me with any questions.
Very truly yours,
Debra M. Brown
Brown & Associates
Self Audit, Inc.
1 Section 307 of the Sarbanes-Oxley Act of 2002 states that the Commission shall issue rules, in the public interest and for the protection of investors, setting forth minimum standards of professional conduct for attorneys appearing and practicing before the Commission in any way in the representation of issuers, including a rule - (1) requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company; and (2) if the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial measures) requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors.
2 See ftnt. 1.
3 In the Matter of Kirk Montgomery, Initial Decision Release No. 168. Administrative Proceeding File No. 3-9786-EAJA, June 27, 2000.