Blank Rome Comisky & McCaulley LLP
Counselors at Law
November 27, 2002
Jonathan G. Katz, Secretary
Re: File No. 33-8150.wp
Dear Mr. Katz:
This letter is intended to oppose the "noisy withdrawal" provisions of paragraph (d) of proposed Rule 205.3 of Part 205, which serves as an amendment to Title 17, Chapter II, of the Code of Federal Regulations.
This provision, which effectively requires an attorney to become a "whistleblower" (although without content to the disclosure), will be counter-productive to full disclosure under the securities laws by undermining the ability of securities attorneys to obtain a frank and full relationship with management of registrants. Moreover, this provision violates the assurances that were given by one of the sponsors of Section 307 of the Sarbanes-Oxley Act of 2002.
Senator Michael Enzi, one of the key sponsors of Section 307, made the following statements in floor debate in order to reassure the U.S. Senate of the wisdom of enacting Section 307 (according to page S6555 of the July 10, 2002 Congressional Record - Senate):
Senator Enzi: "Under 31 CFR, part 10.21 of the IRS regulations, each attorney who knows the client has not complied with the revenue laws or who has made an error or omission on any return or document required by the IRS shall advise the client promptly of the fact of such non-compliance, error, or omission. The amendment I am supporting will give the SEC authority to promulgate a rule similar to the IRS rule." [Emphasis Supplied]
Comment: Senator Enzi's comment was designed to reassure his colleagues that Section 307 was authorizing the SEC to adopt a regulation similar to the Internal Revenue Service ("IRS") regulation which appears in 31 CFR 10.21 and which reads in full as follows:
Senator Enzi obviously contemplated that SEC would adopt something "similar" to Regulation 10.21. The IRS does not have any "noisy withdrawal" provisions in Regulation 10.21 and does not require any notice to the IRS. Indeed, when one compares the complex and overbearing rules proposed by the SEC in their 93 page release to Regulation 10.21, it seems clear that Senator Enzi never contemplated the complex provisions currently being proposed by the SEC to regulate attorneys and certainly did not contemplate provisions which require attorneys to become "whistleblowers" (although without content). How many Senators would have supported Section 307 had they known what the SEC really contemplated?
Senator Enzi: "In the wake of Enron, over forty professors with expertise in Federal securities and ethics law, have written to SEC Chairman Harvey Pitt asking for some form of regulation over the practice and conduct of attorneys involved in Federal securities law.
"In their letter, they state that if senior managers will not rectify a violation, lawyers who are responsible for the corporation's securities compliance work, should be required to report to the board of directors.
"As they point out, such a disclosure obligation is still less onerous than that imposed on the accountants under section 10A of the 1934 Securities Exchange Act, which requires an auditor to report, both to the client's directors and simultaneously to the SEC, and [sic] illegal act if management fails to take remedial action.
"The amendment I am supporting would not require the attorneys to report violations to the SEC, only to corporate legal counsel or the CEO, and ultimately, to the board of directors." [Emphasis supplied]
Comment: Senator Enzi again felt the need to reassure the U.S. Senate that Section 307 would not require attorneys to become "whistleblowers", with or without content to their whistleblowing. He specifically stated that attorneys were to be distinguished from accountants who had an obligation under Section 10A of the Securities Exchange Act of 1934 to report to the SEC.
Footnote 57 of the referenced release mischaracterizes the statement of Senator Enzi in the quoted passage by arguing that he was merely suggesting that disclosure to the client's directors and the SEC "simultaneously" was the only way in which Section 307 was "less onerous" for attorneys and accountants. Given the overall context of Senator Enzi's remarks, the SEC's distinction can only be viewed as absurd hairsplitting which twists Senator Enzi's very clear remarks. Aside from twisting Senator Enzi's language, footnote 57 also omits the specific reference made by Senator Enzi to the "similar" IRS regulation which he expected the SEC to adopt and which does not contain any notice to the IRS. Furthermore, footnote 57 omits the subsequent statement by Senator Enzi quoted next which makes no reference to notice to the SEC, only notice to the board of directors.
Senator Enzi: "Some argue that the amendment will cause a breach of client/attorney privilege, which is ludicrous. The attorney owes a duty to its client which is the corporation and the shareholders. By reporting a legal violation to management and then the board of directors, no breach of the privilege occurs, because it is all internal - within the corporation and not to an outside party, such as the SEC."
Comment: Again Senator Enzi made it clear to his colleagues that Section 307 only required "up the ladder" reporting, with no obligation to report to the SEC.
The SEC has clearly used Section 307 to advance its own agenda, not the agenda of the U. S. Senate. By requiring that comments on the release be received on or before December 18, 2002, in the midst of the Thanksgiving and Christmas holidays, the SEC will be deprived of many of the thoughtful comments from the legal community which are necessary to evaluate the fundamental changes in the attorney-client relationship contemplated by the "noisy withdrawal" provisions as well as other less objectionable, but still objectionable, provisions of the release. If I had the time, I would also comment on these other objectionable provisions and so would many other attorneys.
The SEC's agenda, which started with the National Student Marketing case, should not be advanced using the excuse of Section 307. By way of background on the SEC's agenda, see Lipman, The SEC's Reluctant Police Force: A New Role for Lawyers - New York University Law Review, October, 1974 (Vol. 49, No. 4) "The SEC and others are advancing the proposition that a lawyer has a duty to the public which overrides his traditional obligations to his client... Perhaps to emphasize that it considers no lawyer or law firm immune from this duty, the SEC has subjected several prestigious law firms and at least one former high-ranking SEC official to enforcement actions. For example, in SEC v. National Student Marketing Corp., Civil No. 225-72, [1971-1972 Transfer Binder] CCH FED. SEC. L. REP. ¶ 93,360 (D.D.C. filed Feb. 3, 1972), the law firm of White & Case and one of its partners were charged with violating Section 17(a) of the Securities Act, 15 U.S.C. 77q(a) (1970), and Sections 10(b), 13(a) and 14(a) of the Exchange Act, id. §§ 78j(b), 78m(a), 78n(a), and various rules promulgated thereunder, including rule 10b-5, 17 C.F.R. § 240. 10b-5 (1974). In the same complaint, the law firm of Lord, Bissell & Brook and two of its partners were charged under Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and rule 10b-5 promulgated thereunder. In SEC v. Vesco, No. 72 Civ. 5001, [1972-1973 Transfer Binder] CCH FED, SEC. L. REP. ¶ 93,671 (S.D.N.Y., filed Nov. 27, 1972), anti-fraud charges were made against Alan F. Conwell, a New York City lawyer, who served as General Counsel and later as Director of the SEC's Division of Corporate Regulation from 1961 to 1964."
Accordingly, in order to comply with the time limits of Section 307, it is recommended that the SEC only adopt a rule which echoes the exact wording of Section 307, with perhaps some clarification of its terms, similar to the IRS regulation quoted above (31 CFR 10.21).