Chicago Bar Association
DELIVERED BY E-MAIL
December 18, 2002
Mr. Jonathan G. Katz, Secretary
Re: File No. 33-8150.wp
Dear Mr. Katz:
The Chicago Bar Association submits this letter of comment on the Commission's proposal to add a new Part 205 to Title 17, Chapter II of the Code of Federal Regulations, establishing standards of professional conduct for attorneys who appear and practice before the Commission in the representation of issuers. In light of the limited time available for review and comment, this letter focuses on four significant specific points.
Founded in 1874, The Chicago Bar Association is one of the oldest, largest, and most active metropolitan bar associations in the United States. The Association's voluntary membership of more than 21,000 includes numerous lawyers engaged in representation of corporations, including public companies required to file reports with the Commission. The Commission's proposed rules will directly affect the professional responsibilities of those lawyers. They will also have a profound impact upon all Association members because of their stated application to lawyers other than those generally understood to be engaged in securities practice, and because standards adopted by the Commission will undoubtedly have substantial influence well beyond the Commission's jurisdiction.
Our principal concern about the proposed rules is their impact upon the relationship of trust and confidence between clients and lawyers. The touchstone of that relationship is the client's assurance that it may deal confidentially with its lawyer. That basic principle promotes frank communications between client and lawyer, which equips a lawyer to provide informed advice to the client concerning compliance with law. Certain aspects of the Commission's proposed rules strike at the very heart of the confidential relationship, putting the lawyer in a position of auditor or policeman. The net result will be a breakdown of communication between client and lawyer. Clients will be reluctant to confide in their lawyers when they know that the lawyers have a mandatory duty, under penalty of violation of federal law, to effectively blow the whistle on the clients if the lawyers believe that a fact-finder may some day conclude that the client acted wrongly. Lawyers may be reluctant to learn too much about a client's activities. The result will be irreparable damage to the most effective means of promoting compliance with law-the informed advice of a lawyer. See generally Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S. Ct. 677, 682 (1981) (the purpose of the attorney-client privilege "is to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice").
Mandatory Noisy Withdrawal and Notice to Commission
Those portions of Sections 205.3(d)(1) and 205.3(b)(3) of the proposed rules that provide for mandatory noisy withdrawal and mandatory notices by lawyers to the Commission should be withdrawn. These provisions provide the most serious threat to the client-lawyer relationship. They appoint the lawyer as the Commission's field agent and impose a mandatory duty that is fundamentally inconsistent with the basic principle that a client has a right to confide in and trust its lawyer. We recognize that the Commission is obligated by Section 307 of the Sarbanes-Oxley Act of 2002 to propose certain standards of lawyer conduct dealing with reporting to responsible officers and directors of the client, but Section 307 does not require enactment of standards that require the lawyer to report outside the client. In any event, such extraordinary new mandatory obligations should not be imposed upon such short notice without adequate opportunity for consideration of their corrosive impact upon the client-lawyer relationship and upon compliance with law.
Permissive Disclosure Provisions
The proposed rules that purport to allow lawyers to disclose confidential client information, Sections 205.3(d)(2), 205.3(d)(4), and 205.3(e)(2), should be withdrawn at this time. They go well beyond the action required of the Commission under Section 307 of the Sarbanes-Oxley Act, and it is therefore unnecessary for the Commission to propose such provisions at this time. The extent to which lawyers may disclose confidential client information has long been the province of state supreme courts. Traditionally, the courts have benefited from the robust debate and discussion of such issues that takes place in the bar, including the American Bar Association and state and local bar associations throughout the country. The American Bar Association's Task Force on Corporate Responsibility is currently holding hearings and preparing a report on these very issues. State and local bar associations, including The Chicago Bar Association, are in the process of reviewing those issues as they consider the revised ABA Model Rules of Professional Conduct adopted just this year. The Commission should benefit from that discussion, not step into the middle of the debate and peremptorily impose its own rules without listening to the responsible voices of the bar.
The Commission's proposed rules would impose reporting, noisy withdrawal, and notice to Commission obligations on lawyers who do not represent an issuer in its dealings with the Commission, on lawyers who represent a client in adversary proceedings or investigations, and on lawyers who do not even represent the issuer. In at least those respects, the rules are too broad and should be withdrawn.
The proposed rules provide that the reporting and subsequent duties apply to lawyers "appearing and practicing before the Commission." Section 205.3. That term is broadly defined to extend to:
The problem of the overbreadth of "appearing and practicing before the Commission" is compounded because the proposed rules trigger reporting and other duties when a lawyer is appearing and practicing before the Commission "in the representation of an issuer." The latter term is defined to mean "acting in any way in behalf of, at the behest of, or for the benefit of an issuer, whether or not employed or retained by the issuer." Section 205.2(f). Accordingly, a lawyer who represents a party completely separate from the issuer (e.g., a lawyer for an investment banker assisting in a transaction, or a lawyer paid by the issuer for services to an employee or other party, each of whom has ethical obligations to maintain independence from the issuer) would apparently have reporting obligations to the issuer. (Because the noisy withdrawal and notice to the Commission obligations apply to lawyers "retained" or "employed" by the issuer, those obligations would apparently not apply to lawyers for other parties.)
These provisions go too far in sweeping within the Commission's reporting, withdrawal, and notice requirements lawyers who have little or nothing to do with the Commission, lawyers whose duty is advocacy, and lawyers who do not represent the issuer. They also go well beyond the established definition of practicing before the Commission contained in the Commission's Rules of Practice. 17 C.F.R. §201.102(f). The proposed rules should be modified in at least the respects identified.
Information Required to Trigger Reporting Duty
The proposed rules require a lawyer to report, in the first instance to the issuer, if the attorney becomes aware of "information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur." Sections 205.3(b), 205.2(e). Such a standard places a tremendous burden on the lawyer to predict, in the midst of evolving facts, what a person looking back in cool hindsight will conclude. It would necessarily entail hypothetical second guessing. Lawyers would be called upon to make difficult judgments, often about matters at which they are not expert, such as accounting matters. Communication with clients would be impaired because a lawyer would be required to question whether a jury or other fact-finder might later disagree with the lawyer's judgment. The standard for triggering any such reporting duty should be the standard now contained in Illinois Rule of Professional Conduct 1.13 (as well as in ABA Model Rule of Professional Conduct 1.13), that is, whether the lawyer "knows" that a material violation has occurred, is occurring, or is about to occur.
We regret that the exigencies of time have made it impossible to provide more extensive comments on the points addressed above or comments on other problematic provisions of the proposed rules. We ask the Commission to reassess its proposal and to implement at this time only those rules necessary to comply with the statutory mandate. Adoption of other rules should follow a more deliberate and thoughtful process.
Thank you for considering our comments on this important subject.
cc: Hon. William Donaldson, Chairman-Nominee