Henry S. Bryans

December 18, 2002

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn: Jonathan G. Katz,
Secretary of the Commission

RE: Sarbanes-Oxley Act &sec; 307 - Implementation of Standards of Professional Conduct for Attorneys - Part 205 (File No. 33-8150.wp)

Dear Mr. Katz:

The comments expressed below on Release 33-8150 ("Implementation of Standards of Professional Conduct for Attorneys") (the "Release") and related proposed Part 205 (together with the Release, the "Proposals") are those of the undersigned alone and not those of my partners, my firm, or any other organization.

I have practiced corporate and securities law for almost thirty years. During that period, I have held the Commission in the highest regard. Although one never agrees with every decision made by a single regulatory agency over a stretch of three decades, I have always believed the Commission to have acted with appropriate study and care, applying its substantial expertise in a professional fashion to discharge the statutory duties assigned to it by Congress in a manner generally free of political influence or momentary hysteria.

In my view, the Proposals represent a marked departure from that record, or at least the record as perceived by the undersigned. As the Release concedes, Edward Greene, a former General Counsel of the Commission, observed twenty years ago that the Commission lacked the "expertise to fashion" standards of ethical or professional conduct (Release text at Note 20). That is, of course, exactly what the Proposals attempt to do and, quite unfortunately, the Proposals conclusively demonstrate that Mr. Greene's observation remains as true in 2002 as it was when he made it in 1982.

Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act") directs the Commission to issue rules within 180 days of the enactment of the statute:

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 -

While it cannot be doubted that Section 307 ostensibly authorizes the Commission to go beyond the "up the ladder reporting" requirement on the face of the statute, it is also clear that it did not require the Commission to do so. Nor is it clear that the Congress ever intended that the Commission use Section 307 in the manner now articulated in the Release. Other commentators on the Proposals cite floor remarks in Congress in support of the proposition that the Proposals substantially exceed what Congress thought it was authorizing. In the Proposals, the Commission appears to attempt to take a football planted squarely by Section 307 on roughly the eight yard line and to score what it apparently views as a touchdown at the opposite end of the field. Not only is such a regulatory approach extremely unwise in a field of regulation in which the Commission has no demonstrated expertise, but it also constitutes an attempt at the outright expropriation of the regulation of the professional responsibility of corporate counsel from the highest courts of the 50 states (or other body assigned by the constitutions or legislatures of the 50 states to promulgate such rules.)

Misguided Underlying Premises

In the undersigned's view, the Commission's motivation for its attempt to preempt the field on the professional responsibility obligations of the securities bar and the securities enforcement defense bar rests on three underlying premises, each of which is misguided:

First, the Commission apparently believes that the securities bar is partly to blame for, or somehow might have prevented, the recent spate of public company scandals revealed more or less coincident with the end of a frenetic bull market (See Release text at Notes 5-9).

Second, the Commission apparently believes that when a lawyer is engaged as counsel to a corporation, there comes into being a fiduciary relationship between that lawyer and the corporation's shareholders (See Release text prior to Note 36).

Third, for over eight years, the Commission has repeatedly failed to accept the fact that the United States Supreme Court held in Central Bank of Denver v First Interstate Bank of Denver, 511 U.S. 164 (1994), that there is no private right of action for aiding and abetting under the anti-fraud provisions of the Federal securities laws. The Proposals are, in many respects, an ill-disguised attempt by the Commission to reverse existing Supreme Court precedent by regulation when the Congress has repeatedly declined to do so by legislation.

Very little need be said of the supposed culpability of the securities bar in the recent disclosures of public company wrongdoing. The jury is out. The only support that the Commission has for its broad-based assertions that the securities bar bears blame are unsubstantiated floor remarks by Senators Edwards and Enzi, broad-based unsubstantiated accusations by Chairman Pitt in his August 12, 2002 speech to the American Bar Association, and the so-called "Cheek Report." A close reading of the Cheek Report, including footnote 8, reflects the fact that the Task Force also did not rely on or cite any specific incidences of a failure of a member of the securities bar to behave in a legally or ethically appropriate manner.

Laid end to end, the supposed defaults in performance of members of the securities bar are, at this time, no more or no less than "it must be so." But, "it must be so" simply is not the legitimate basis for a broad and sweeping set of regulations of the securities bar by the Commission. There is no basis to conclude that the Commission has, or realistically can, judge the broader impact of the Proposals on the main charter of the Commission. Lest we forget, that main charter is monitoring and enforcing the compliance by public issuers with a fair set of disclosure obligations promulgated by the Commission under the authority of the Securities Act of 1933 and the Securities Exchange Act of 1934. From this writer's perspective, the very real shadow that the Proposals will cast over the free exchange of information and legal advice between issuers and their counsel will be undermined, not enhanced, by the Proposals and the ability of issuers to comply with the increasing complexity of disclosure requirements will diminish. Whether or not that were to prove correct, when that risk is present and the regulatory case has not been made, the far better course is not to jeopardize the effectiveness of the Commission's primary regulatory mission.

The second premise -- that corporate counsel assumes, by reason of his or her engagement as such, fiduciary obligations to that corporation's shareholders -- is simply unsupported in decades of professional responsibility law and lore. A seed -- perhaps the seed -- for the Commission's notion is in Chairman Pitt's speech to the American Bar Association on August 10, 2002. In that speech, Chairman Pitt stated:

"Lawyers for public companies represent the company as a whole and its shareholder-owners, not the managers who hire and fire them. This should be self-evident, but recent events indicate some corporate lawyers have lost sight of this axiom, a form of professional blindness that isn't new."

(emphasis supplied).

Chairman Pitt's statement is, of course, not self-evident. Instead, it is simply wrong. Model Rule 1.13, as in effect in substantially all jurisdictions, makes it clear that a corporate lawyer's client is the corporation and not any of its constituents, including the shareholders. This is not a new idea. EC 5-18 expressed the same position, albeit in a more limited context. If further support for that proposition were required, and it should not be, the Commission is directed to Restatement of the Law Governing Lawyers §96 and 1 G. Hazard & W. Hodes, The Law Governing Lawyering §17.1 et seq (2002 Supp.).

Although the Release does not go so far as Chairman Pitt, it does assert that a lawyer for a corporation "has a fiduciary duty to act in the best interests of the issuer and its shareholders." To the extent that a corporate lawyer's obligations to the corporation redound to its constituents --including the shareholders -- they are thereby benefited. But a lawyer for a corporation has no lawyer-client or fiduciary relationship with that corporation's shareholders. The attempt of the Proposals -- going well beyond, as they clearly do, the concepts of Rule 1.13 and Section 307 of that Act -- to effectively create such direct obligations (the "noisy withdrawal" provisions of proposed Rule 205.3(d)) without any support in existing literature or Section 307 of the Act is sorely misguided and reflects a substantial and fundamental misunderstanding by the Commission of the appropriate and -- at least to this point -- well understood role of corporate counsel.

Insofar as Central Bank is concerned, the Commission had its day in Court and lost. Although the majority in Central Bank gave due consideration to the Commission's arguments as amicus curiae, it did not accept them. Ever since, the Commission has, with a uniform lack of success, sought legislative "correction" of the Central Bank holding and judicial limitation of its reach. The Proposals are clearly another foray by the Commission to undo the result in Central Bank. By creating obligations for the securities bar which are both vague and broad and providing that violations of the Proposals "shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act," the Commission clearly seeks to create civil liability in a context in which the most egregious violations of the Proposals would be no more than the very aiding and abetting for which Central Bank held there was no civil liability. The Commission takes this tack with, so far as is apparent, no statutory basis whatsoever. Nor can the Commission argue that this result is an unintended effect of the Proposals. The Release expressly notes that the Proposals "could [translate: surely will] have an effect upon malpractice insurance premiums..."

One might think that in the wave of hysteria which resulted in the Act, the Congress would have resuscitated aiding and abetting in private civil actions. It did not, and the Commission's attempt to do so through Section 307 of the Act is clearly in excess of its statutory authority.

Specific Issues

There are a large number of specific defects in the Proposals. The comment period is insufficient to deal fully with any of them, much less all of them. Any listing is of necessity incomplete. I will limit myself to four (4).

1. Appearing and Practicing Before the Commission. This proposed concept is far, far too broad. The Commission proposes to include any lawyer "who has reason to believe" that a contract which that lawyer has contributed to will be filed as an exhibit to a registration statement. Thus, a lawyer involved in the preparation of a portion of an employment agreement which he/she "has reason to believe" would be an exhibit to a periodic filing would be "appearing or practicing before the Commission." There is absolutely no need to cast a net so broad.

More fundamentally, the rule includes lawyers representing clients in connection with a Commission investigation or administrative proceeding. While such a result is not, in concept, surprising, the application of 205.3(d) to such counsel can have the effect of denying targets of an enforcement proceeding effective representation or requiring defense counsel to effectively wager his/her future career in prevailing on the matter at issue. Neither result is fair, appropriate or authorized by Section 307.

2. An Attorney "Acting Reasonably." Much of the underpinnings of the Proposals -- including the concepts of "evidence of a material violation" and "appropriate response"-- turn not on what a specific attorney actually believes, but rather what he or she would calculate some other hypothetical attorney "acting reasonably" might believe. Under the Proposals, the failure of counsel to divine that calculus correctly could result in a finding of a violation of the Federal securities laws. As has been noted in other comments, this approach effectively converts a set of rules ostensibly focused on professional responsibility to rules relating to professional competence and could lead to a further undesirable concentration of the securities bar. In any event, nothing in Section 307 authorizes the Commission to regulate competence as opposed to conduct and no lawyer should be required to answer for the hypothetical conduct of a hypothetical lawyer, as opposed to what he or she actually understood to be the operative facts and his or her own evaluation of those facts.

3. Materiality. The Proposals define "material" as "information about which a reasonable investor would want to be informed before making an investment decision." The Release contends that the proposed definition is "derived from Supreme Court precedent" and "consistent with" remarks of Senator Edwards on the floor. Put simply, because the definition is not that actually used in the Supreme Court precedent, and not the definition well known to the practicing securities bar, it could well be interpreted as a lower threshold than that set by the actual Supreme Court precedent from which it is said to be derived. As we all know, the Court held in TSC v. Northway, 426 U.S. 438, 449 (1976) that

"An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.... Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available."

(emphasis supplied).

The TSC definition, not that "derived" by the Commission, was adopted as the rule for litigation under Rule 10b-5 in Basic, Inc. v. Levenson, 485 U.S. 224, 232 (1988). Senator Edwards is entitled to some deference in "not getting it quite right." But the Commission is not.

Why does it make a difference? Because, so far as it appears, under the Proposals as constructed, an attorney is obligated to run the gamut of 205.3(b), (c) and (d) when there is evidence that a "material violation" will be, is being or has been committed if "a reasonable investor would want to be informed about it," whereas the client may not have in fact committed a securities law violation by omitting to disclose the violation if the violation did not itself meet the higher standards in TSC. While that may make sense to somebody, somewhere, it makes absolutely no sense to the undersigned. The definition of "material" should be precisely that in Supreme Court precedent and not a "derivation" thereof.

4. Noisy Withdrawal -- The Basic Concept. Under proposed Rule 205.3(d), if an outside lawyer retained by a corporate client who has exhausted internal remedies under Rule 205.3(b) with respect to on-going material violation, or one likely to occur, and has not received an appropriate response, or a response within a reasonable time, that lawyer must

The Commission admits that Section 307 does not mandate 205.3(d), but asserts that the "proposed rule would probably be incomplete if it did not provide for them." (Release text prior to Note 57). The Congress apparently did not believe the proposed rule would be incomplete. That is, Section 307 says nothing of "noisy withdrawal." Indeed, others have demonstrated quite convincingly that the remarks of Senators Edwards and Enzi affirmatively did not intend that there be any required reporting of anything to the Commission under Section 307. That the Commission believes otherwise is not only unfortunate -- it is extremely ill-advised. It reflects a persistent misunderstanding by the Commission of what the private practice of securities law is all about and jeopardizes the manner in which the vast majority of reporting companies have conscientiously attempted to comply with the Commission's ever-growing disclosure requirements.

The "noisy withdrawal" provisions are an attempt to deputize the private bar as members of the Commission's Enforcement Division. The harm and constructive distrust that such an effort will work on the free flow of information and advice between outside counsel and reporting company clients will far, far outweigh any benefit to the proposed requirement.

* * * * *

Time permitting, much, much more could and should be said as to the imprudence of the Proposals. But time does not so permit.

Almost ten years ago, one of my partners made the following observation in response to attempts by another Federal agency to deputize private practitioners as enforcement officers:

"The role of the lawyer representing the client is defined with fair precision by the ethical principles that have been adopted by the profession. There may come a day when society will decide that this role should be changed. One thing is certain: if change comes, it should not come in the form of a unilateral edict from a government regulatory agency in the context of defining the role of lawyers who represent clients before and against that agency. The rules are too important and require too delicate a balance between the interests of the government and the interests of the client to be defined in that way."

Lawrence J. Fox, OTS v. Kaye Scholer:
An Assault on the Citadel,
48 Bus. Law. 1522, 1542 (1993)

(emphasis supplied).

My partner's words in 1993 are no less applicable today. They are directly applicable to the Proposals. It is clear that the Commission should limit its regulatory action to that expressly mandated by Section 307 of the Act and leave decisions as to whether, and if so what, further regulation may be needed on the issues at hand to those with demonstrated expertise in the field.

Respectfully submitted,

Henry Sill Bryans