April 3, 2003

Via Electronic Filing

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W. Mailstop 6-9
Washington, DC 20549

Re: Implementation of Standards of Professional Conduct for Attorneys, Release Nos. 33-8186; 34-47282; File No. S7-45-02 (the "Proposal")

Dear Mr. Katz:

The Investment Counsel Association of America1 appreciates the opportunity to submit additional comments regarding the Commission's proposed "noisy withdrawal" requirements for attorneys practicing before the Commission. Our comments relate principally to the effect of the Proposal on attorneys employed by an investment adviser to a mutual fund. The Proposal would require such attorneys, in certain circumstances, to report material violations to the Commission and to make a noisy withdrawal from representation. We oppose such a requirement for the reasons set forth below. In addition, we submit that the alternative proposal to require the issuer to make the report to the Commission is equally inappropriate. Accordingly, we urge the Commission to refrain from adopting the Proposal.

I. The Noisy Withdrawal Provisions Are Unworkable for Attorneys Employed by Advisers to Mutual Funds.

In a companion release to the Proposal, the Commission adopted rules under Section 307 of the Sarbanes-Oxley Act that require attorneys appearing and practicing before the Commission in the representation of an issuer to report evidence of a material violation up-the-ladder within the issuer organization.2 In our comment letter regarding the Final Rule,3 we expressed concerns with the reporting up provisions as they pertain to attorneys working for investment advisers to investment companies, especially as a result of the unique role that investment adviser attorneys play in the mutual fund complex. These issues are even more complicated when applied in the reporting out context.

The Final Rule requires an attorney employed by an investment adviser who prepares or assists the issuer with Commission filings to report evidence of a material violation up-the-ladder within the issuer organization. The Proposal would impose the further requirement on that attorney, in certain circumstances, to report to the Commission when he or she reasonably believes he or she did not receive an "appropriate response" to evidence of a material violation. In addition, the attorney "retained by the issuer" must withdraw from representing the issuer.

We have a number of concerns regarding how the rule requirements would be implemented. First, the Commission has not provided guidance on what would be deemed an "inappropriate response." This is, at best, subject to the reasonable judgment of the attorney, who may or may not be experienced or expert with respect to the regulations at issue. For example, a relatively inexperienced attorney may be the only attorney employed by the investment adviser who is responsible for investment company matters. Such an attorney may not have sufficient expertise about potential securities law violations nor does he or she necessarily have direct access to the issuer organization or its board of directors. We do not believe that such an attorney is in the best position to pass judgment on whether or not an appropriate response was given.

Second, as the Commission notes in the Proposal, the noisy withdrawal provisions address "what we hope is the rare situation" in which an attorney would receive an inappropriate response from the issuer organization. There is ample reason to believe that mutual fund board members, guided by their fiduciary duties and aware of consequences of potential securities law violations, will be responsive to the advice of their counsel. In many cases, mutual fund board members, guided in some instances by the advice of independent counsel, will have more knowledge about mutual fund operations and regulations and will be in a better position to make such judgments than the reporting attorney. There is no reason to believe that the view of an attorney working for a separate entity should be a substitute for better-informed views of mutual fund board members or their independent counsel.4 Even if the board disagrees with counsel or does not provide what the attorney believes to be an "appropriate response," there is every reason to believe that such a disagreement will be resolved in good faith - especially in light of new corporate governance requirements under Sarbanes Oxley.5

Finally, in the rare circumstance that the attorney determines there is an inappropriate response, it is not clear how an attorney employed by an investment adviser would withdraw from representation of the fund. The Proposal distinguishes between outside attorneys retained by an issuer and in-house attorneys employed by an issuer and requests comment on how an attorney employed by an investment adviser should be treated. If the attorney were treated as an outside attorney retained by the issuer, then he or she would be required to withdraw from representing the issuer. It is difficult to imagine how the attorney would effect such a withdrawal when he or she is employed directly by the investment adviser and not by the investment company. Would the attorney be required to withdraw from employment with the adviser as a result of inaction by the mutual fund or simply to stop working on investment company filings? This leads to the strange result that an attorney employed by an investment adviser would have to be "in-house" counsel to the fund for purposes of this rule. We do not believe that there are sufficient legal or public policy reasons to mandate such a requirement.6

We also submit that the noisy withdrawal provisions would be contrary to the interests of investors in that it would discourage fund-related personnel from sharing information with attorneys out of concern that the attorney would feel obligated to disclose such matters to the Commission. As noted in comment letters submitted by various bar associations,7 the noisy withdrawal provisions pose a serious threat to the attorney-client privilege and may hinder open and free communication between attorneys and issuer organizations. This threatens the quality of legal advice to investment companies, because internal lawyers for advisers may be reluctant to provide advice to personnel managing the fund's day-to-day business. Legal expenses for investment companies also may substantially increase because investment companies will be forced to seek counsel from outside law firms. Finally, we concur with other commenters that the noisy withdrawal proposal would conflict with confidentiality and other requirements governing attorney-client relationships in certain states and non-U.S. jurisdictions.8

For all of the foregoing reasons, we urge the Commission to eliminate the noisy withdrawal provisions.

II. The Alternative Noisy Withdrawal Approach is Also Inappropriate.

The Commission has proposed an alternative approach to the "noisy withdrawal" proposal that would require the issuer, instead of the attorney, to report to the Commission an attorney's written notice of withdrawal or failure to receive an appropriate response to evidence of a material violation. We believe that this alternative position poses many of the same problems as the originally proposed noisy withdrawal provisions. Although the attorney would not be required to file a report, he or she would still be required to pass judgment on what would be considered an inappropriate response and would be required to withdraw from representation of an issuer. The only change would be that the issuer, instead of the attorney, would be obligated to "blow the whistle" on itself. We do not believe that such a requirement would be effective, given that the responsibility for reporting the wrongdoing would most likely fall on the wrongdoer. Accordingly, we urge the Commission to not adopt either of the noisy withdrawal proposals.

If the Commission does adopt the alternative proposal, we recommend that the final rule permit the mutual fund's board of directors to determine, based on the advice of independent counsel, whether to report an attorney's notice of withdrawal to the Commission. Fund boards, acting with the advice of independent counsel, are in a better position than an attorney employed by the investment adviser to make judgments about what actions are in the best interests of the issuer organization and its shareholders. The Commission requested comment on whether the board should seek the advice of counsel not involved in the matters underlying the material violation. We agree that this requirement is appropriate and would give the board discretion to act in a manner that is consistent with good corporate governance.

* * *

We appreciate the opportunity to comment on the proposed rules and would be pleased to discuss any questions the Commission or its staff may have with respect to this letter.


Karen L. Barr
General Counsel

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

1 The ICAA is a not-for-profit association that exclusively represents the interests of SEC-registered investment advisers. Founded in 1937, the Association's membership today consists of approximately 300 investment advisory firms that collectively manage in excess of $3 trillion for a wide variety of institutional and individual clients. For additional information, please consult our web site at www.icaa.org.
2 Final Rule: Implementation of Standards of Professional Conduct for Attorneys, Release Nos. 33-8185; 34-47276; File No. S7-45-02 (January 29, 2003) (the "Final Rule").
3 Letter dated January 16, 2003 from Karen L. Barr, Investment Counsel Association of America, to Jonathan G. Katz, Securities and Exchange Commission.
4 The Qualified Legal Compliance Committee (QLCC) approach, as articulated by the Commission in its Final Rule, recognizes this situation because it creates an alternative reporting arrangement for the reporting attorney. Such an attorney is relieved from further reporting obligations (including noisy withdrawal) once it notifies a QLCC of the violation. See Section 205.3(c) of Final Rule. The QLCC approach recognizes that matters regarding potential securities law violations may be best handled by independent members of the issuer organization. We believe that the QLCC approach should also be extended to situations where the reporting adviser attorney directly notifies independent counsel of the mutual fund's board.
5 See Strengthening the Commission's Requirements Regarding Auditor Independence, Release Nos. 33-8183; 34-47265; 35-27642; IA-2103 (January 28, 2003); See also Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations, Release Nos. 33-8182, 34-47264 (January 27, 2003); See also Certification of Management Investment Company Shareholder Reports and Designation of Certified Shareholder Reports as Exchange Act Periodic Reporting Forms; Disclosure Required by Sections 406 and 407 of the Sarbanes-Oxley Act of 2002; Release Nos. 34-47262; IC-25914 (January 27, 2003); See also Disclosure Required By Sections 406 and 407 of the Sarbanes-Oxley Act of 2002, Rel. Nos. 33-8177; 34-47235 (January 23, 2003); See also Insider Trades During Pension Fund Blackout Periods, Rel. Nos. 34-47225; 34-47226 (January 22, 2003).
6 The same practical considerations are magnified when applied to the subadvisory context. Many mutual funds utilize multiple subadvisers. If the Proposal is adopted, each attorney working for a subadviser would be forced to make judgments about violations that occur at the issuer organization. The views of such attorneys should not be a substitute for the well-informed views of mutual fund board members.
7 See Comments of Gerald S. Backman, Chairman, Securities Regulation Commission, Business Law Section, New York State Bar Association, December 18, 2002; See also Comments of 77 Law Firms, December 18, 2002.
8 See Comments of the International Bar Association, Inc., December 18, 2002; See also Comments of the Law Society of England and Wales, December 18, 2002; See also Comments of the Japanese Federation of Bar Associations, December 18, 2002.