UNIVERSITY OF HOUSTON LAW CENTER
100 Law Center
Houston, TX 77204-6060
December 18, 2002VIA EMAIL (firstname.lastname@example.org)
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
|Re:||Proposed Rules pursuant to Section 307 of the Sarbanes-Oxley Act of 2002 |
under File Number 33-8150.wp
Dear Mr. Katz:
I am responding to the Commission's request for public comment on its Proposed Rule for Implementation of Standards of Professional Conduct for Attorneys, 17 CFR Part 205 (the "Proposed Rules").1 Although I applaud the Commission's rapid yet comprehensive draft of the Proposed Rules, I write to suggest some additional issues for the Commission to consider.
From my perspective, the single biggest difficulty facing the Commission in promulgating the Proposed Rules is the interface between the Proposed Rules and the various state ethics rules. To the extent that the Proposed Rules differ in any respect from state ethics rules, the Proposed Rules should create some form of safe harbor for attorneys. Otherwise, attorneys practicing before the Commission will run the very real risk that compliance with the Commission's rules will cause them to violate their own state ethics rules.
In attempting to create a safe harbor, the Proposed Rules state, in Section 205.3(d)(3), that "[t]he notification to the Commission prescribed by this paragraph (d) does not breach the attorney-client privilege."2 Unfortunately, the attorney-client privilege does not protect attorneys from discipline for the violation of state ethics rules regarding confidentiality. The attorney-client privilege is a rule of evidence and is not an ethics rule.3 To create a true safe harbor, the Commission needs to address state ethics rules on confidentiality directly.
The need for a workable safe harbor is clear. The Commission has recognized that the Proposed Rules differ in significant respects from various states' ethics rules.4 For example, to the extent that an attorney is a member of a state bar that prohibits noisy withdrawal, Section 205.3(d) of the Proposed Rules creates an irreconcilable conflict.5 An attorney admitted in that state who practices before the Commission will have two unpalatable choices: (1) effect a noisy withdrawal and violate the state's rules on confidentiality or (2) refuse to effect a noisy withdrawal, violate Section 205.3(d) (thereby violating the Securities and Exchange Act of 1934),6 and thus violate the state's ethics prohibition against committing professional misconduct.7 Either way, a lawyer in a state that prohibits noisy withdrawal will find himself in trouble with state ethics rules. The same situation would occur if an attorney was a member of a state bar that prohibited the revelation of confidential information about a future crime: if the Proposed Rules required the attorney to reveal confidential information about a future crime and a state prohibited the attorney from revealing that information, the attorney would again face an irreconcilable conflict.
The Commission has expressed a preference for leaving to the states much of the regulation of attorneys,8 and that deference to state authority is appropriate. But the request for comments on the Proposed Rules also makes clear that the Commission is cognizant of the problem of irreconcilable conflicts between the Proposed Rules and state ethics rules.
The prospect of simultaneous Commission and state disciplinary proceedings for the same misconduct raises the question of the impact of the rule upon state ethical rules and regulations. Due to the breadth and specificity of the Congressional mandate to the Commission to implement an "up the ladder" reporting system applicable to attorneys representing issuers, the Commission is considering whether Congress intended for the agency's rule to "occupy the field" on this issue, and whether Part 205 would preempt any state rules governing the reporting of evidence of a material violation by attorneys representing issuers before the Commission.9
The Proposed Rules are designed to provide a uniform ethics protocol for lawyers who practice before the Commission, while recognizing that many of those lawyers also hold state law licenses or law licenses from foreign countries. In order to provide a true safe harbor for attorneys, the Commission must address the issue of whether the Proposed Rules could or should preempt state ethics rules.10 I do not pretend to be an expert in Commission jurisprudence. I have, however, spent a considerable portion of my career examining the issue of whether Congress should revise the United States Bankruptcy Code to provide for a separate, federal code of ethics for attorneys who practice before the United States Bankruptcy Courts.11 To the extent that my experience in studying the Bankruptcy Code might be of use to the Commission,12 I would be happy to supplement this response. I suggest only that the Commission should carefully consider the following two issues: (1) whether the Commission has the authority to preempt state ethics rules with respect to providing a safe harbor; and (2) the precise mechanics of how such a safe harbor would function. As discussed above, the use of the attorney-client privilege as a safe harbor does not protect attorneys; instead, the Proposed Rules would need to delineate the circumstances where the revelation of a client's confidences should not trigger state disciplinary action.
The events of 2001 and 2002 have demonstrated the importance of the Commission's efforts to ensure that attorneys continue to remember their dual roles as advocates for their clients and as officers of the court. Likewise, tipping the balance too far in favor of zealous representation of clients has created an environment in which even respectable companies' financial statements are greeted with skepticism. Tipping the balance too far in favor of disclosure of confidential information, without first providing the proper safeguards for attorneys who seek to follow the Commission's rules, may solve one problem while creating another.
Very truly yours,
Nancy B. Rapoport
Dean and Professor of Law
cc: Commissioners Atkins, Compos, Glassman, and Goldschmid.
|1||Because I hold the position of Dean and Professor of Law at the University of Houston Law Center, I wish to make clear that I am writing today solely in my capacity as a law professor, and that the views expressed in this response are my own, and are not those of the University of Houston or the University of Houston Law Center.|
|2||67 F.R. at 71690.|
|3||See, e.g., Charles Alan Wright & Kenneth W. Graham, Jr., 24 Fed. Prac. & Proc. Evid. § 5484 n.158 ("[T]he ethical duty of confidentiality and the privilege of the client are the subject of different sets of rules and thus the province of different kinds of scholars. Our ethical analysis undoubtedly seems unsophisticated to experts in the question of confidentiality, but we can assure them that their view of the privilege suffers from a failure to draw distinctions that are essential to the proper implementation of privilege policy; e.g., the distinction between contraband and evidence."); Thomas D. Morgan, Toward Abandoning Organized Professionalism, 30 Hofstra L. Rev. 947, 963 n.105 (2002) ("Lawyers sometimes cite the attorney-client privilege as an example of their greater duty of confidentiality. However, that privilege covers far less information than the confidentiality obligation applicable to lawyers and other agents. Indeed, the privilege is not really a confidentiality obligation at all; it is a limited immunity from legal compulsion to testify about certain confidential communications.").|
|4||See, e.g., 67 F.R. at. 71690-91 ("[N]early forty states, adopting the 1981 recommendation of the Kutak Commission, permit disclosure of confidential information to the extent an attorney reasonably believes necessary to prevent a criminal or fraudulent act or to rectify the consequences of a criminal or fraudulent act in which the attorney's services were used.") (footnotes omitted); id. at 71692 n.69 ("Thirty-seven states permit an attorney to reveal confidential client information in order to prevent the client from committing criminal fraud.") (citations omitted). If 41 states permit noisy withdrawal, then 9 states do not; if 37 states permit an attorney to disclose confidential information to prevent the client from committing criminal fraud, then 13 states do not. Even if the Proposed Rules conformed in all respects to the ABA's Model Rules of Professional Conduct - which they do not - the Model Rules themselves are not the issue, because states do not enforce Model Rules. Rather, individual states enforce their own rules, whether or not those rules had been derived from the Model Rules.|
|5||Section 205.3(d) proposes that:
(1) Where an attorney who has reported evidence of a material violation under paragraph 3(b) of this section rather than paragraph 3(c) of this section does not receive an appropriate response, or has not received a response in a reasonable time, to his or her report, and the attorney reasonably believes that a material violation is ongoing or is about to occur and is likely to result in substantial injury to the financial interest or property of the issuer or of investors:
(i) An attorney retained by the issuer shall:
(A) Withdraw forthwith from representing the issuer, indicating that the withdrawal is based on professional considerations;
(B) Within one business day of withdrawing, give written notice to the Commission of the attorney's withdrawal, indicating that the withdrawal was based on professional considerations; and
(C) Promptly disaffirm to the Commission any opinion, document, affirmation, representation, characterization, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading;
(ii) An attorney employed by the issuer shall:
(A) Within one business day, notify the Commission in writing that he or she intends to disaffirm some opinion, document, affirmation, representation, characterization, or the like in a document filed with or submitted to the Commission, or incorporated into such a document, that the attorney has prepared or assisted in preparing and that the attorney reasonably believes is or may be materially false or misleading; and
(B) Promptly disaffirm to the Commission, in writing, any such opinion, document, affirmation, representation, characterization, or the like; and
(iii) The issuer's chief legal officer (or the equivalent) shall inform any attorney retained or employed to replace the attorney who has withdrawn that the previous attorney's withdrawal was based on professional considerations.
67 F.R. at 71688-89.
|6||See 67 F.R. at 71696 ("A violation of this part by any attorney appearing and practicing before the Commission in the representation of an issuer shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), and any such attorney shall be subject to the same penalties and remedies, and to the same extent, as for a violation of that Act.").|
|7||Pursuant to ABA Model Rule 8.4,
It is professional misconduct for a lawyer to . . .:
(b) commit a criminal act that reflects adversely on the lawyer's honesty, trustworthiness or fitness as a lawyer in other respects;
(c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation; or
(d) engage in conduct that is prejudicial to the administration of justice . . . .
States that have enacted a version of Model Rule 8.4 or its predecessor, Model Code DR 1-102, would thus be able to discipline - as an independent state ethics rule violation - the violation of the Proposed Rules.
|8||See 67 F.R. at 71673 "The Commission does not intend to supplant state ethics laws unnecessarily, particularly in areas (e.g., safeguarding of client assets, escrow procedures, advertising) where the Commission lacks expertise."|
|9||67. F.R. 71697-98 (footnotes omitted).|
|10||The Commission already is addressing some of the thorny problems for lawyers with licenses from foreign countries. I do not know enough about the ethics rules of other countries to comment on the implications of the proposed safe harbor in terms of its effect on foreign attorneys. See, e.g., 67 F.R. at 71676-78.|
|11||Nancy B. Rapoport, The Intractable Problem of Bankruptcy Ethics: Square Peg, Round Hole, 30 Hofstra L. Rev. 977 (2002); Nancy B. Rapoport, Our House, Our Rules: The Need for a Uniform Code of Bankruptcy Ethics, 6 Am. Bankr. Inst. L. Rev. 45 (1998) [hereinafter Our House]; Nancy B. Rapoport, Seeing the Forest and The Trees: The Proper Role of the Bankruptcy Attorney, 70 Ind. L.J. 783 (1995); Nancy B. Rapoport, Turning and Turning in the Widening Gyre: The Problem of Potential Conflicts of Interest in Bankruptcy, 26 Conn. L. Rev. 913 (1994).|
|12||The case for a separate code of bankruptcy ethics is made somewhat easier by the fact that the United States Constitution gives Congress the power to establish bankruptcy laws. See U.S. CONST. art. I, § 8, cl. 4; Our House, supra n.10, at 74.|