Corporate Lawyers' Association of New Zealand
Australian Corporate Lawyers Association
18 December 2002
Jonathan G Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
United States of America File No. 33-8150
IMPLEMENTATION OF STANDARDS OF CONDUCT FOR ATTORNEYS
CLANZ & ACLA
The Corporate Lawyers' Association of New Zealand (CLANZ) and the Australian Corporate Lawyers Association (ACLA) are the representative organisations respectively in New Zealand and Australia for in-house lawyers employed by corporations, government and other organisations not in private legal practice. There are nearly 10,000 corporate and government lawyers in New Zealand and Australia, representing nearly 15% and 20% respectively of the entire legal profession in those countries.
ENDORSE UNDERLYING PRINCIPLES OF SARBANES-OXLEY
CLANZ and ACLA endorse and support initiatives that facilitate the principled development and enhancement of best practice corporate governance principles, including the key objectives on which the Sarbanes-Oxley Act are based.
As currently drafted, however, aspects of the proposed rules relating to the professional conduct of lawyers might, perversely and inadvertently, inhibit achievement of some of those objectives. Specifically, we have three main areas of concern:
- The proposed rules create a trap for the `unwary innocent';
- They may inadvertently constrain the effectiveness of in-house lawyers in detecting and remedying inappropriate behaviour; and
- Their apparent definitional and jurisdictional over-reach creates inconsistency and conflict with existing rules, and may inadvertently constrain the principled development of international best practice governance principles.
TRAP FOR THE `UNWARY INNOCENT'
Non-US lawyers who do not practise in the US, who have limited day-to-day involvement with US laws, who seek advice from US lawyers when required, and who do not practice in securities law even in their home jurisdictions, might not consider themselves subject to US regulations.
The proposed rules, however, seek to encompass the activities of a very great number of such lawyers around the world.
In New Zealand and Australia, as in the US, ignorance of the law is generally no excuse. But to seek to impose such wide-ranging rules on lawyers who may quite legitimately not have turned their minds to the prospect, and who would be scrupulous in ensuring full disclosure if they were to do so, would be to construct a trap for the `unwary innocent'.
In our respectful submission, this imposition would be inappropriate, particularly in the circumstances of extreme urgency under which the SEC is required by legislative direction to operate.
PROPOSED RULES CONSTRAIN IN-HOUSE COUNSEL'S EFFECTIVENESS
In-house lawyers perform an important role assisting their client organisations to understand, and meet, legal obligations. The prospect, however, that counsel might disaffirm company documents or (for external lawyers) make a `noisy withdrawal', could have a 'chilling' effect on the disclosure of information between lawyer and client. This may stifle both full and frank disclosure and vigorous confidential debate, which is essential between lawyer and client.
Yet the willingness of managers and staff to raise compliance issues with an organisation's lawyers is vital. This process (by which, in practice, most potential breaches are discovered and dealt with appropriately, professionally, and without publicity) could be curtailed if lawyers are perceived as being in a `policing' and `whistleblowing' role rather than being trusted advisers and compliance professionals. Such a change would have wide-ranging impact:
- Inherently `bad' companies, with poor ethical standards/ controls - Ironically, it is the behaviour of these companies that the rules should primarily address. Yet the rules would create an environment constraining the ability of in-house counsel to receive information that might enable them to detect errant behaviour. Such companies could ensure that in-house counsel perceived as acting in the new `policing' role - as required by the proposed rules - are relegated to low-level technical rather than strategic executive roles, and are quarantined from sensitive information. Alternatively, the services of in-house counsel may not be used at all.
- `Good' companies, with strong compliance and governance cultures, assisted by in-house counsel - For most companies, the prospect of breaching obligations that could trigger their lawyers taking the kind of action that is contemplated under the proposed rules is remote. Most companies seek genuinely to meet their legal obligations to the fullest extent. Their in-house counsel play an important role in enabling them to do so - advising on the organisation's obligations, and (with a wide reach of knowledge across the organisation, facilitated by client-lawyer confidentiality, a `roving brief', and usually reporting directly to the Chief Executive) helping to detect and address potential and actual breaches. Yet even these organisations may find that their lawyers' ability to detect occasional inappropriate activity by rogue staff at the earliest stages will be impaired. In-house lawyers could be increasingly perceived by line management and staff as performing a policing role on behalf of the SEC rather than as trusted advisers and counsellors.
- Other `good' companies, with strong compliance and governance standards but no in-house legal function -Organisations of this kind, which might ordinarily welcome a trusted adviser to assist them meet their legal obligations, might not warm to the prospect of employing someone they might reasonably perceive as effectively being an enforcement agent of a regulatory agency. By way of analogy, how many US companies would happily employ an active IRS agent as their CFO?
In short, the proposed rules while designed to increase lawyers' responsibility for the behaviour of their corporate clients may inadvertently have the perverse effect of reducing the effective use of in-house and external counsel. Further, over time, the valuable relationship between corporate client and corporate counsel acting as high-level, trusted advisers and key members of the senior executive team, may diminish. Pro-active and valuable corporate counselling may eventually give way to lawyers being asked to act increasingly as mere legal technicians, addressing specific queries and being less able to help instil a culture of excellence in corporate governance.
COUNTER-PRODUCTIVE DEFINITIONAL AND JURISDICTIONAL OVER-REACH
The detail of the proposed rules raises many definitional and jurisdictional issues. We limit our comments to three areas of particular relevance to non-US organisations.
The proposed rules' expansive view of `attorney' (anyone qualified to practice law, in any jurisdiction and who is deemed as appearing and practising before the Commission) effectively seeks to regulate the conduct of non-US lawyers including those whose involvement with US law and the SEC may, at best, be tenuous. Combined with the definition of what constitutes evidence of a material violation, this would appear to impose a duty on non-US lawyers to be expert in US securities laws in order to ensure compliance with reporting obligations. Yet this is patently not feasible for non-US lawyers, who are neither trained in US law, nor qualified to practice US law.
If it is appropriate for US lawyers to be subject to an objective test of what constitutes evidence of a material violation of US law - irrespective of whether the lawyer believes there to have been such a violation - it cannot be appropriate for foreign lawyers to also be subject to such a test. Quite simply, foreign lawyers should not be assumed or required to have knowledge of US law. If the proposed rules are to apply to foreign lawyers at all, then as a general rule (subject to further comments below) they should be based on actual, not imputed, knowledge of US law and actual facts constituting requisite elements of that law.
Some non-US lawyers may seek to develop a defence or mitigating circumstance by deliberately eschewing all knowledge of US securities law - yet this would not advance Sarbanes-Oxley objectives. Moreover, prudent and competent non-US lawyers who diligently gain familiarity with the key concepts and provisions of US securities laws, and who seek specific advice from US-lawyers, would be in an invidious position - potentially fixed with knowledge and caught by rules they should not be required to fully comprehend, and in which they have no training.
Overall, placing non-US lawyers in a position that purports to require them to report potential US securities law violations is an extra-territorial expansion of regulation by the SEC that represents a dramatic shift in its past practice of respecting the sovereignty of nations.
Extension of lawyers' rules to non-lawyers, and to lawyers' work product without knowledge of incorporation into SEC documents
Many non-US organisations employ lawyers in non-legal roles, in quasi-legal `contract management' positions and in general management and administrative roles with no material legal component. Some of the people in such non-legal positions, particularly finance managers and senior executives in companies with a US presence, may have some involvement in preparing or reviewing documents that may ultimately be filed with the SEC. As currently drafted, such qualified lawyers acting in a non-legal capacity could in certain circumstances be subject to the proposed rules dealing with lawyers' obligations. This is presumably unintended.
The definitional reach of the proposed rules, applying to virtually every stage of the preparation of documents that might ultimately be presented to the SEC, seeks also to impose obligations, irrespective of any actual awareness by such managers and staff of the ultimate destination of such documents.
This would also apply to practising lawyers. Even lawyers whose work product is not obviously (or to their knowledge) destined for SEC documents could nonetheless be caught under the proposed rules. This would be inequitable. In the New Zealand and Australian context, disclosure documents and annual reports prepared for filing in the respective local jurisdictions may be drawn on for subsequent use in an SEC filing, unknown to the lawyer who may have assisted with the preparation of the original document. This differs considerably from the situation in which the lawyer actually knows that a document is being produced for presentation to the SEC.
New Zealand and Australian companies filing documents with the SEC often instruct US attorneys to advise on and take responsibility for SEC filings. Unlike most foreign lawyers, such attorneys are licensed to practice before the SEC and are trained and experienced in US securities law. In such cases - at least to the extent that the US attorney takes responsibility for the particular document - it would be appropriate for obligations that apply to that attorney not to apply to the (non-US trained, non-US practising) foreign lawyer.
The proposed rules would interfere and conflict with the regulation of the legal profession in other countries. If New Zealand or Australian lawyers are required to report to an agency to meet `public' interests, as well as to their clients, those lawyers may well breach professional duties to their client, their employer, and their professional body. There could be a breach of applicable ethical rules relating to lawyer-client confidentiality, privilege and conflicts of interest.
In New Zealand and Australia (as in the US), breaches of ethical rules have significant consequences, including fines, costs and the ultimate removal of practising certificates - involving the immediate and abrupt cessation of a lawyer's employment, and career.
Two examples highlight some of the conflicts that would be generated for non-US lawyers:
- Even if the words "appearing and practising before the Commission" in the definition of "attorney" are clarified to include only lawyers who have some direct and meaningful involvement with the SEC (eg those knowingly preparing documents for SEC filing), the test that would then apply (material violation of US securities laws) is one that most non-US lawyers would be incapable of meeting. Most non-US lawyers are neither trained in US law, nor qualified to practice US law.
- While the SEC's proposed rules may offer US lawyers required to report `up the ladder' and to effect a `noisy withdrawal' adequate protection from sanction for breach of professional duties, non-US lawyers will remain subject to such obligations in their home jurisdictions. The proposed rules impose obligations on non-US lawyers without the protections that may appropriately be available to US lawyers.
In some cases therefore, non-US lawyers may be faced with a `Catch-22' situation, being required to decide whether to break the rules of ethical and professional conduct in their own jurisdiction, or face the prospect of possible sanctions from the SEC. In New Zealand and Australia, the Commission's rules provide at best a limited defence for breach of lawyer-client obligations. They may in fact provide no defence at all.
In short, the proposed rules would create considerable ambiguity about which regulatory jurisdiction applies, and would impose significant burdens on non-US lawyers.
Potential solutions to the concerns outlined above would include to:
- Address the jurisdictional conflicts - clarify the definitions to apply only to US-lawyers, or exempt foreign lawyers from application of the rules;
- Address the other definitional concerns - clarify that the rules apply only to practising lawyers, and require that there be actual knowledge of relevant facts (eg that documents are being prepared for the SEC) and of US law (eg what constitutes a `material violation' of US law) before imposing the onerous duties proposed. Either include within the definition of those `appearing and practising before the Commission' only those who have in fact had some direct and material involvement with the SEC, or alternatively, exclude those whose involvement is merely incidental, indirect or immaterial. In appropriate cases where a US attorney takes responsibility for the preparation of particular documents, the obligations that would apply to that attorney should not also apply to the (non-US trained, non-US practising) foreign lawyer;
- Address the broader issue of conflict with existing ethical rules (eg in other jurisdictions) - work with relevant regulatory and bar associations and other organisations to develop rules that enhance consistent standards, internationally. Logistically, this may not be easy, but it is not impossible. After all, with the globalisation of world markets, the principal objectives of such organisations world-wide are virtually identical - to facilitate effective corporate governance and enhance investor confidence;
- Address the overriding issue of not inhibiting lawyers' ability to encourage compliance - develop a comprehensive education program together with relevant bar and representative organisations (such as the American Bar Association and the American Corporate Counsel Association in the US, and international bodies as appropriate, such as the International Bar Association);
- Address the heart of the issue more directly (the real goal of enhancing investor and regulatory confidence) - focus more directly on the continued development of effective corporate governance, in which lawyers play an important part, rather than on the lawyers themselves as a substitute for good governance. To some extent, the Commission has already flagged this broader view. If a company establishes a Qualified Legal Compliance Committee ("QLCC") of its Board, a lawyer should have no further obligations after reporting suspected breaches to the QLCC. This concept would remove some of the difficulties faced by non-US lawyers, particularly those relating to the breach of confidentiality requirement to effect a `noisy withdrawal'. Irrespective of its detail, the concept should underscore the importance of facilitating the ultimate responsibility of corporate governing Boards rather than that of employed staff.
We do appreciate the Commission's legislative constraints and mandate in relation to the last suggestion, which we know requires it to implement certain rules regarding the professional conduct of attorneys. We therefore offer no further comment beyond the general statement above.
We also appreciate that the two preceding suggestions may appear inconsistent with the Commission's mandate of urgency, and would require the Commission to work closely with other regulatory organisations rather than to simply superimpose its rules over existing rules. Nevertheless, to do so would in our opinion most constructively help facilitate the principled development of good corporate governance, and strengthen rather than inadvertently weaken the ability of in-house lawyers to even more actively encourage corporate compliance.
In-house lawyers play a vital role in ensuring compliance with disclosure and other rules. To further the objectives of the Sarbanes-Oxley Act, the important role of in-house lawyers should, in our respectful submission, be supported, not constrained.
CLANZ and ACLA respectfully invite the Commission to amend its proposed rules so that they do not perversely or inadvertently conflict with the underlying objectives of the Sarbanes-Oxley Act, and thereby more readily help facilitate the continued development of international best-practice corporate governance.
|Ronald F Pol
Corporate Lawyers' Association of New Zealand
| Peter Turner
Chief Executive Officer & General Counsel
Australian Corporate Lawyers Association