Mid-America Legal Foundation
150 N. Michigan Ave.
Chicago, IL 60601
312-750-8623
December 16, 2002
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549 - 0609
Re: File No. 33-8150.wp
Implementation of Standards of Professional Conduct for Attorneys
Dear Secretary Katz,
Please accept this Comment by the Mid-America Legal Foundation concerning certain rules proposed by the Securities and Exchange Commission in response to the Sarbanes-Oxley Act.
Proposed Rule 205.3(b) imposes reporting, record keeping and other requirements on an attorney, appearing or practicing before the Commission, if that attorney becomes aware of evidence of a material violation by an issuer client. Proposed Rule 205.2(a) proposes an expansive definition of "appearing and practicing before the Commission" to include mere participation in the preparation of any writing that may be filed with the Commission, and proposed Rule 205.2(i) proposes an expansive definition of "material violation."
The Commission states that "the conduct of attorneys in practice specialties other than securities law will be covered by the proposed rule where...they have reason to believe they are assisting in the preparation of a document transmitted to the Commission." The scope of this Comment is limited to the impact of these rules on attorneys in practice specialties other than securities law.
Attorneys, both retained and in-house, are often requested to review and comment upon filings made to the Commission. These filings often contain statements that the company is subject to litigation and regulatory challenges commonly encountered in the industry. A fuller description is made of certain specific matters due to their magnitude or nature, or due to the fact that they have advanced to a point where securities attorneys are able to determine that a materiality threshold has been met.
Under the proposed rules, litigation counsel and regulatory compliance counsel will be faced with a difficult burden since they cannot be expected to have a full and adequate understanding of securities law and materiality concepts. This is the realm of the securities lawyer, a specialist in this highly regulated field, and the obligations and sanctions should stop there.
Securities attorneys conduct a process of fact gathering and verification before making a filing. Securities attorneys rely on a variety of corporate professionals including businesspersons, technical experts, corporate leaders and, in some cases, attorneys in practice specialties other than securities law. The Commission is seeking to single out these attorneys for special adverse treatment in this respect. Other corporate professionals are appropriately recognized as mere resources relied upon by the securities attorney.
Under the proposed rules, attorneys who provide any information and review concerning a Commission filing take on significant and unnecessary burdens. These burdens are beyond the intent of the Sarbanes-Oxley Act, and adversely impact issuer client companies and their shareholders.
The Commission explains that a violation of Rule 205(3)(b) is a violation of the Exchange Act and may result in injunctive and other relief as well as the imposition of civil money penalties. It must also be recognized that sanctions by the Commission may be considered to be a disciplinary action with permanent and significant ramifications on an attorney. An attorney can take little comfort when the Commission states that the standard for imposition of criminal penalties would probably not be met with a violation of the proposed rule.
These sanctions may arguably be appropriate for securities attorneys who truly practice before the Commission. It is inappropriate and dangerous to impose these sanctions on attorneys having no contact with the Commission.
The fact situations that may create unintended consequences under these proposals are numerous and predictable. Non-securities attorneys may believe that any violation of law, merely alleged in a lawsuit or prospectively possible due to a regulatory change, may trigger action under proposed Rule 205(3)(b). This predictable belief coupled with the unnecessarily expansive definition of practicing before the Commission, will cause an avalanche of unproductive and detrimental activities.
In an effort to protect oneself from Commission sanctions, non-securities attorneys may seek to avoid reviewing Commission filings or may be motivated to find a safe harbor in the reporting and record keeping procedures of the proposed rules. Further, the rules will have a chilling effect on companies to prematurely disclose or over-disclose pending matters. The successful resolution of pending matters may well be jeopardized by these actions and the best interests of the company and its shareholders will not be served.
The negative impact described above is particularly acute in the disclosure of environmental and employment matters. Although environmental and employment causes of action may have significant potential liabilities, they are often based on highly questionable allegations. The appropriate role for trial counsel in these matters is to provide necessary subject matter expertise unencumbered by the specter of Commission sanctions. The application of the materiality test should remain within the exclusive purview of experienced securities counsel. The attempt by the Commission to impose a securities policing function on environmental and employment counsel is particularly inappropriate and dangerous.
It appears that the Commission may not have fully considered the adverse impact discussed above. In its discussion of the Paperwork Reduction Act, the Commission concludes that the paperwork burdens of the proposed rules would be "minimal." The reason for this conclusion is that those impacted by the rule "would be attorneys who appear and practice before the Commission and...are already making the types of reports and retaining the records contemplated by the proposed rule." Although this may be true for securities attorneys who truly practice before the Commission, the adverse and detrimental impact of including non-securities attorneys in these requirements must now be carefully considered by the Commission.
The Commission has a legitimate need to assure that certain matters are disclosed to shareholders. Recent noteworthy examples in need of closer Commission scrutiny include off-balance sheet transactions, insider trading and similar matters. Threatened tort actions or regulatory challenges do not have a history of misleading investors. The attempt by the Commission to regulate these matters is contrary to the intent of the Sarbanes- Oxley Act. The impact of these proposed rules is to pressure non-securities attorneys to act in self-interest to the detriment of the company client and its shareholders
The Mid-America Legal Foundation is a nonprofit and non-partisan public interest law firm with a twenty-five year history of promoting economic reasonableness in regulatory proposals, opposing the criminalization of business practices and helping to protect jobs and prosperity in Mid-America.
The Mid-America Legal Foundation
By: John Bernbom
President and General Counsel
jbernbom@aol.com