Sullivan & Cromwell
125 Broad Street
New York, New York 10004-2498

December 18, 2002

VIA E-MAIL: rule-comments@sec.gov

Mr. Jonathan G. Katz,
Secretary,
Securities and Exchange Commission,
450 Fifth Street, N.W.,
Washington, D.C. 20549-0609.

Dear Mr. Katz:

We are responding to Release No. 33-8150 in which the Commission solicited comments on proposed rules relating to standards of professional conduct for attorneys, including rules implementing Section 307 of the Sarbanes-Oxley Act of 2002.

Summary

We recognize that Section 307 of the Sarbanes-Oxley Act requires the Commission to adopt rules setting forth minimum standards of professional conduct for attorneys in an extremely compressed time frame. In light of the expedited time frame, the complexity of the issues involved and the far-reaching consequences of the proposed rules, it is troubling that the proposed rules go far beyond the mandate set out by the Sarbanes-Oxley Act and in many cases conflict with established state rules of professional responsibility.

Principal Comment. We have grave concerns that the "noisy withdrawal" provisions conflict with attorneys' current obligations and will not in practice benefit the investing public. We therefore strongly urge the Commission not to adopt this aspect of the proposed rules, or at least to defer actions to allow sufficient time to study the implications of the proposal. By effectively requiring attorneys to police and pass judgment on their clients, the basic attorney-client dynamic is altered fundamentally -- instead of viewing attorneys as confidential advisors, clients may begin to view their attorneys as also being agents of the Commission. The resulting chilling effect on communications could result in less attorney involvement, which would be contrary to the policy of Section 307 and the interests of investors.

Other Comments. We also have the following comments:

• Provisions mandating the production and retention of records should be deleted because such a requirement would also hinder free communication between attorneys and clients.
   
• The authority of a "qualified legal compliance committee" should be limited to receiving reports of material violations, making investigations into these reports and reporting to the board of directors. The power to direct the issuer to adopt remedial measures should reside with the board and should not be ceded to a committee.
   
• The standard for evidence of a material violation should be based upon what the subject attorney knows or believes rather than creating a new standard based on the knowledge of a hypothetical reasonable attorney.
   
• For practical reasons, as well as purposes of international comity, the definition of "attorney" should cover only a person licensed to practice law in the United States, and "material violation" should be limited to a violation of (1) the U.S. Federal securities laws and (2) corporate fiduciary duty laws of the states in the United States.
   
• The definition of "appearing and practicing before the Commission" should cover only an attorney advising an issuer with respect to its obligations under the U.S. Federal securities laws.
   
• The rules should expressly provide that they do not apply to attorneys who are retained by third parties.
   
• The rules should expressly state that they do not create a private right of action.
   
• The rules should clarify that mid-level attorneys do not assume the obligations of supervisory attorneys.

I. Proposed Rule 205.3(d) - Noisy Withdrawal

Our paramount concern with the proposed rules is § 205.3(d), which would require attorneys in specified circumstances to withdraw from representation of a client and notify the Commission of its withdrawal. We have four principal objections to this "noisy withdrawal" requirement.

First, we believe that noisy withdrawal provisions would adversely affect the relationships between issuers and their attorneys that have quietly and consistently served the investing public since the basic Federal securities laws were originally enacted in the 1930s.

Second, the adoption of noisy withdrawal rules by the Commission would represent such a radical departure from the traditional standards of behavior for attorneys and the expectations of their clients that it should be deferred until such time as the Commission has had the opportunity to undertake a more detailed examination of the issue and its implications. In any event, there is no need for the Commission to adopt a "noisy withdrawal" requirement at the same time that it issues rules setting forth minimum standards of professional conduct for attorneys envisaged by § 307 of the Sarbanes-Oxley Act.

Third, a noisy withdrawal rule would impair the ability of attorneys to be zealous advocates.

Finally, we believe that adoption of a noisy withdrawal regime by the Commission would exceed the Commission's authority.

1. The proposed "noisy withdrawal" requirement would undermine the willingness of corporate officials to share information with their attorneys, thereby impairing the effectiveness of attorneys in assisting their clients to comply with the law.

We believe that the proposed rules would be contrary to the interests of investors in that they would discourage corporate officials, acting reasonably and in good faith, from sharing information with their attorneys, particularly in difficult cases, out of concern that the attorneys would feel obliged to require premature disclosure of matters that the officials believe are not required to be disclosed or not ripe for disclosure."

The confidentiality of lawyer-client communications has been recognized as a fundamental pillar of our legal system. Indeed, our system and the public interest generally depend primarily upon voluntary compliance with the law. Compliance with the law requires knowledge of the law, and the increasing complexity of laws and regulations makes it ever more important for large corporations to obtain advice from qualified professionals. Obtaining sound legal advice requires free and open communication between attorney and client. If a client fears that communications with a lawyer will result in regulatory reprisals, free communication will be jeopardized. As a result of this long-recognized dynamic, all states and the Federal judiciary (at the direction of Congress) have adopted ethics rules that impose obligations on attorneys to preserve and protect the confidentiality of communications with their clients.

Attorneys have no ability to compel their clients to disclose information to them just because they consider the information relevant or material; they depend completely on voluntary disclosure of information by corporate officials. Corporate officials will confide in counsel only when they have confidence that counsel cannot be compelled to use the information against them.

The practice of securities law necessarily involves making judgments that are continually re-evaluated as circumstances evolve. Sometimes an issuer's officers and its attorneys, all acting reasonably and in good faith, will come to different conclusions regarding the implications of a given set of circumstances. The same can be true for discussions between internal attorneys and external attorneys. Under current practice, an issuer's officers can consult counsel with complete candor because they can be confident that a good faith disagreement, while likely requiring further involvement of senior management or the board of directors, will not be disclosed to third parties.

When counsel is required by rule to police its client, pass judgment and report to a regulatory agency if counsel's judgment is not implemented, it is unrealistic to expect that the client will consult with its counsel in complete candor. Such a regime creates an incentive for officers and other corporate officials to be selective in disclosure to counsel and to present issues to counsel in a manner designed to persuade counsel that the issue is immaterial, isolated or resolved. Furthermore, under the proposed rules, an attorney's views regarding discharge of fiduciary duty would supplant the considered judgment of the issuer's board of directors, where fiduciary obligations ultimately rest.

2. The Commission should defer adoption of noisy withdrawal provisions.

Irrespective of the merits of a "noisy withdrawal" regime, the concept of mandatory attorney withdrawal and notification to the Commission would be a radical departure from nearly 70 years of practice under the Federal securities laws and from established systems of state attorney ethics rules. To do so with less than 70 days of public input and study seems imprudent. At a minimum, the Commission should defer adopting these provisions until sufficient time has passed to evaluate the effects of the new "up the ladder" reporting system.

Our expectation is that a system of mandatory attorney reporting internally "up the ladder" will be an effective one. The final rung in the ladder provided under the Commission's proposed rules is the board of directors or a committee of non-employee directors. There is every reason to expect that board members, guided by their fiduciary duties and aware of the consequences of potential securities law violations and defects in disclosure, will be responsive to the advice of fully informed counsel. Moreover, if a board or committee is unable to agree with counsel regarding a potential material violation, there is every reason to believe that such a disagreement will be resolved in good faith and no reason to believe that the view of counsel should supplant that of informed and conscientious board members.

We note that the New York Stock Exchange and the Nasdaq Stock Market are in the process of revising public company corporate governance requirements. We have every expectation that these revisions will further solidify the position of the board of directors as the appropriate final stop for any reports of material violations of the type envisaged by the Sarbanes-Oxley Act. Also, many provisions of the Act are intended to enhance the effectiveness and independence of boards of directors (see, e.g., §§ 204, 301 and 407 relating to audit committees and §§ 304-306, 402 and 403 regarding insider transactions and disclosure). Rules that would effectively usurp board powers would be contrary to the Act's emphasis on the value to the investor community of a vigorous and independent board vested with plenary authority.

3. Noisy withdrawal provisions will impair the ability of attorneys to be zealous advocates.

An attorney's principal obligation, both to the client and to the public interest, is to be a zealous advocate for his or her client within the bounds of the law.¹ Issuers are likely to have concerns about the ability of counsel to advocate their interests before the Commission zealously and within the bounds of the law when counsel himself or herself could become a target, or threatened target, of the Commission. Clients may be deprived of effective representation to the extent the attorney more readily recommends settlement or compromise during a Committee investigation or enforcement proceeding in the face of Commission pressure on the attorney himself or herself for failure to report an unusual material violation to the Committee in a timely manner. Rules that effectively strip corporate clients of their advocates raise issues of fundamental fairness. It is difficult to rationalize imposing on counsel to the target of a civil investigation obligations to the Commission that exceed the obligations such counsel would have to a tribunal in the defense of a criminal matter.

Under a "noisy withdrawal" regime, investigations by internal and external counsel would likely become much more complex, expensive and protracted. An issuer's employee would necessarily view the issuer's counsel as also being an agent of the Commission and be more likely to retain his or her own counsel at the earliest opportunity. This would not expedite prompt resolution of a matter and could impede the issuer's ability to identify and resolve problems. That result would not benefit investors.

4. The Commission does not have authority to implement the proposed noisy withdrawal provisions.

By purporting to override existing state and Federal attorney-client privilege law, we believe the Commission has overstepped its statutory authority.

The rules override existing attorney-client privilege -- and the judgments of the states and the Federal judiciary in adopting attorney-client privilege laws and rules -- by mandating attorneys "appearing and practicing before the Commission" to withdraw from representation of clients under certain circumstances, to reveal to the Commission that their withdrawal was "based on professional considerations" and to "disaffirm" documents filed with the Commission that they believe may be false or misleading.²

There is no question that such a withdrawal and disaffirmation, albeit only a "flag wave" and not disclosure of the details of the problem, would violate existing privilege rules in many situations. The proposed rules purport to address this conflict by declaring that the notification "does not breach the attorney-client privilege,"³ and that in any case in which state standards governing attorneys conflict with the proposed rules, "this part shall govern."⁴ Also, under certain circumstances, an attorney would be compelled to disclose confidential client communications in order to defend against an allegation that the attorney has not complied with the rules. Accordingly, the proposed rules provide that where an attorney "shares" information with the Commission pursuant to a confidentiality agreement, "such sharing of information shall not constitute a waiver of any otherwise applicable privilege or protection as to other persons."⁵

By overriding attorney-client privilege, the rules conflict with a 1975 Congressional statute. We believe that nothing in the Sarbanes-Oxley Act authorizes the Commission to adopt rules that are directly inconsistent with an existing statute because they purport to override Federal and state law establishing attorney-client privilege. This existing statute -- Rule 501 of the Federal Rules of Evidence, enacted by Congress in 1975 -- provides that the scope of attorney-client privilege in Federal courts is to be determined "by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience," and by state law where state law provides the rule of decision. The only exceptions to this are those required by the Constitution, provided by an act of Congress, or set forth "in rules prescribed by the Supreme Court pursuant to statutory authority."⁶ There is no authority for government agencies to prescribe rules of privilege.

There is no indication in the Sarbanes-Oxley Act that Congress intended to repeal the Federal Rules of Evidence sub silentio. As a consequence, there is no reason to expect that the Federal or state courts would defer to the proposed rules' statements concerning privilege waivers.⁷ Likewise, since Congress has reserved the development of the rules of privilege to the courts, there is no reason to believe the proposed rules with respect to privilege would be observed by state courts.

Thus, we believe that, in light of Rule 501, the Commission does not have the power to adopt a disclosure rule that mandates conduct inconsistent with the ethical obligations imposed upon attorneys under existing privilege law.⁸

II. Records Creation and Retention

The proposed rules at §§ 205.3(b)(2), 205.3(b)(3) and 205.3(b)(8)(ii) require that subject attorneys prepare and retain records demonstrating their compliance with the rules. We believe that these provisions are inappropriate and should be deleted from the final rules.

We are unaware of any state attorney conduct rule that requires, or any serious proposal that would require, records creation and retention of the type proposed by the Commission. The Commission cites not a single precedent. Whenever a party is aware that the burden is on that party to prove, ex post facto, that he or she has complied with a particular requirement, the party will have an incentive to produce contemporaneous evidence in an effective and efficient manner. There are countless provisions of the securities laws and aspects of securities practice that induce careful practitioners to produce and retain evidence of compliance. The "due diligence" defense contained in Section 11(b) of the Securities Act is one such example. Yet the Commission has never sought to impose document creation requirements to demonstrate ability to use this defense. We believe that the Commission should follow the same approach with respect to the professional conduct rules.

The proposed recordkeeping requirements would only create an additional barrier between attorney and client that would lead clients to avoid bringing evidence of possible material violations to counsel. Investors would not be well served by rules that frustrate, complicate or delay the process by which issuers present important issues to their attorneys. Issuers could view the proposed records as an audit trail of every potential disagreement that may arise during the course of a representation. It is difficult to imagine a greater disincentive to the free flow of information between attorney and client.

The Commission indicated in the proposing release that it believes that the records creation and retention provisions would be useful as a protective measure to allow an attorney to demonstrate compliance in the event that the attorney becomes subject to a Commission investigation regarding his or her compliance under the rules. In other words, the attorney could use materials prepared at the client's expense to protect the attorney and convict the client. This is precisely why such a requirement would inhibit clients from disclosing sensitive or ambiguous information to their attorneys.

For the foregoing reasons, we believe that the Commission's final rules should delete the records creation and retention provisions contained in the proposal.

III. Qualified Legal Compliance Committee - Proposed Rule 205.2(j)

Proposed Rule 205.3(c) would permit issuers to avail themselves of an alternative reporting procedure by establishing a "qualified legal compliance committee" ("QLCC") meeting the requirements of § 205.2(j). We believe that the notion behind this proposal -- that a body of independent fiduciaries, appropriately authorized and equipped, can effectively assess and provide guidance on compliance with legal requirements -- is a useful one and that such a body could be a valuable component of a corporate governance and control system. However, we are concerned that proposed § 205.2(j) creates significant issues that will deter issuers from establishing such a committee. If this concern is correct, § 205.2(j) may amount to an effective step backward because the QLCC concept is likely to foreclose further experimentation in this area.

The QLCC parameters raise concerns primarily because of the sweeping mandate that a QLCC would have to be given, namely, the power to "[d]irect the issuer to adopt appropriate remedial measures" to stop, prevent or rectify material violations. The range of conceivable violations and the scope of the action required to rectify a significant violation, particularly a past violation, are such that it is unlikely that an issuer's executive officers will propose to its board of directors that the board delegate ex ante, and unlikely that its directors will choose to delegate, such broad power to any committee, particularly one in which the officers of the issuer do not participate and which may be advised by attorneys who do not regularly represent the issuer. We believe that the weight of responsibility that would be placed upon QLCC members would be viewed as creating a commensurately heavier liability risk -- one that many potential candidates to serve on a QLCC would choose not to bear. To the extent the Commission retains a Commission notification requirement for individual QLCC members, or even the QLCC as a body, potential QLCC members would have a "further basis to decline QLCC membership.

Our concerns stemming from the breadth of the proposed QLCC mandate could be addressed by limiting the required minimum powers of the QLCC to the power to receive and investigate reports of evidence of material violations and to report its findings to the full board of directors (and not to the Commission). Such a mandate would satisfy the objective of establishing clear lines of reporting to an identified body of non-employees authorized to pursue reports. There is no reason to believe that a report from such a body to an issuer's chief executive officer and full board would not be carefully considered or that an appropriate response would not be undertaken.

We are also concerned that the proposed requirements relating to the QLCC's composition will deter widespread adoption of the QLCC approach. Proposed § 205.2(j)(1) would require that the QLCC consist of "at least one member of the issuer's audit committee and two or more members of the issuer's board of directors who are not employed, directly or indirectly, by the issuer." We concur that a QLCC would be most effective if its members did not include employees of the issuer but do not believe that additional constraints on issuer flexibility in this regard are necessary to assure QLCC effectiveness. The Commission's final rules should permit a QLCC to be comprised of any number of non-employee directors designated by the board of directors, and that such directors need not include a member of the audit committee or any other specific constituency.

IV. The Standard of Awareness of Evidence of a Material Violation - Proposed Rule 205.2(e)

The proposed rules provide that an attorney's reporting obligation and, in effect, the full panoply of the rules' requirements are triggered when the attorney becomes aware of evidence of a material violation. Proposed § 205.2(e) defines "evidence of a material violation" as "information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring or is about to occur." We are concerned that this standard, if adopted, would be unworkable in practice.

The proposed standard is that of a "reasonable attorney." This is not a subjective ethics standard. It is also apparently not a malpractice standard, which penalizes conduct below the level of ordinary reasonable skill and knowledge common in the profession. Rather, it appears to call upon an attorney to take action when anyattorney would reasonably believe a violation had occurred, is occurring or is about to occur. The range of what attorneys might reasonably believe is immense. Indeed, attorneys are trained and retained for the very purpose of formulating and advocating positions that can diverge markedly. The rules appear to mandate that the attorney adopt the most conservative of the range of reasonable beliefs, on pain of sanction if the attorney's guess as to what another reasonable attorney might believe is wrong. This would be exacerbated in cases where the attorney's best judgment is most needed -- i.e., where there is unclear legal authority, split legal authority or apparently incorrectly decided contrary authority. This exercise of least-common-denominator judgment is not why clients hire attorneys and does not constitute best professional practice. Ultimately, it will cause clients to think of attorneys as impractical nay-sayers. In driving attorneys from their clients, the standard in the rule will not serve the goals of the Commission to enhance compliance with the law.

Transactions that involve the Commission often have multiple attorneys representing clients with multiple and sometimes conflicting interests. In this context, the least-common-denominator approach to the practice of law could create perverse incentives. For example, in order to delay or otherwise steer the transaction to its own client's advantage, an attorney for one party could take an extreme legal position knowing that all other attorneys would have to pay heed.

Issuers retain attorneys to receive the benefit of their judgment. That judgment may take into consideration the range of views of other practicing attorneys, but such consideration necessarily comprises only a part of the process of evaluating a particular course of conduct. An attorney must consider the relative persuasiveness and relevance of the views of other attorneys, including an assessment of their particular level of expertise. Most importantly, an attorney must consider the likely view of a court of competent jurisdiction.

Recommendation.For the foregoing reasons, we recommend that the final rules formulate the definition of "evidence of a material violation" as follows:

"Evidence of a material violation means information of which the attorney is consciously aware that would, in the attorney's judgment, constitute a material violation that has occurred, is occurring, or is about to occur."

V. Applicability to Non-U.S. Attorneys

The definition of "attorney" should be revised so that it encompasses only U.S. attorneys practicing U.S. securities law. Proposed § 205.2(c) would define "attorney" as "any person who is admitted, licensed or otherwise qualified to practice law in any jurisdiction, domestic or foreign, or who holds himself or herself out as admitted, licensed, or otherwise qualified to practice law." We recommend that this definition be tailored so that it applies only to persons who are licensed to practice law in a jurisdiction within the United States andpractice U.S. securities law.

Attorneys licensed in non-U.S. jurisdictions should be excluded from obligations under the rules. There is no reason to expect non-U.S. attorneys generally, or non-U.S. securities law attorneys in particular, to be sufficiently versed in the U.S. securities laws or U.S. fiduciary duty concepts -- or, for that matter, concepts of "similar laws" -- to recognize "evidence of a material violation," formulate a report with respect to such evidence and evaluate the response to the report, as required of attorneys under the proposed rules. Many of the non-U.S. attorneys potentially subject to these proposed rules cannot speak or read English. The individuals to whom such attorneys would be required to report "up the ladder" in such circumstances would likely be equally unfamiliar with U.S. law and the English language. It is unclear how a non-U.S. attorney could comply with the rules as proposed other than by developing a working knowledge of U.S. securities law, but there has never been an expectation that non-U.S. counsel should be required to practice U.S. securities law in order to comply with the Commission's rules. We doubt that investors would derive any benefit from rules requiring non-U.S. counsel to attempt to practice U.S. law.

Neither the letter nor the spirit of § 307 of the Act, nor sound policy considerations, require the Commission to police the professional conduct of attorneys practicing in every jurisdiction in the world. Non-U.S. issuers have effectively complied with U.S. securities laws and the Commission's rules and regulations on a routine basis for decades by relying on U.S. counsel. We recognize that the Sarbanes-Oxley Act generally does not distinguish between U.S. and non-U.S. issuers, but there is no reason to believe that the final rules would fail to cover non-U.S. issuers if their application was limited to U.S. attorneys. We are also concerned that the proposed rules could deter non-U.S. issuers from accessing the U.S. capital markets through registered offerings.

Furthermore, as noted above, the Commission does not have authority to pre-empt non-U.S. attorney ethics regulations, which in many countries are incompatible with a noisy withdrawal regime.

Recommendation.For the reasons set forth above, we recommend that the definition of "attorney" be revised to provide as follows:

"Attorney refers to any person who is admitted, licensed, or otherwise qualified to practice law in any United States jurisdiction and who practices U.S. securities law."

VI. Scope of Conduct Subject to Rules

The proposed rules include definitional provisions that result in their applicability to an overbroad range of conduct.

1. The definition of "appearing and practicing before the Commission" should be narrowed.

The proposed rules contain a definition of "appearing and practicing before the Commission" that includes five categories of activity. The fourth and fifth categories under the definition stretch the reach of the term to cover attorneys only tangentially involved in the preparation of disclosure documents as well as those not involved at all. The inclusion of these categories of activity would lead the rules to cover attorneys unequipped to make the judgments the rules require and would impose burdens that would far outweigh any potential benefits that investors could be expected to derive.

Category Four.Category four of the definition applies to attorneys who prepare any statement that the attorney "has reason to believe" will be filed with or incorporated into any registration statement, notification, application, report, communication or other document filed with the Commission. This language would appear to include lawyers who are not advising on disclosure, compliance with securities law or fiduciary duty, thereby expanding the reach of the rules to attorneys who may not even be aware of the rules' existence. The investor protection rationale of the rules would be amply satisfied if category four were limited to the preparation of disclosures in response to the requirements of the U.S. securities laws. The inclusion into this definition of the preparation or review, for example, of material contracts filed as exhibits to registration statements or reports is unnecessary to protect the interests of investors. Although investors can be harmed by the publication of misleading disclosures in Exchange Act reports, attorneys who draft leases, commercial contracts, powers of attorney, trust indentures and other documents, or who are responding to non-U.S. securities law requirements, ordinarily are not undertaking any obligation relating to disclosure under the Federal securities laws and should not, without more, be asked to do so. Furthermore, statements contained in writings outside U.S. securities law disclosure documents do not serve the informational functions of disclosure documents and as a result present reduced risk to investors.

Category Five.Under category five of the definition of "appearing and practicing" attorneys are subject to the proposed rules if they advise an issuer that (i) a statement, opinion or other writing need not or should not be filed with the Commission or that (ii) it is not obligated to file a registration statement or other report with the Commission. We believe that this fifth category should be deleted from the final rules.

It is not necessary to include the concept of advising an issuer that a statement need not be filed in order to address disclosure violations in the form of material omissions. An attorney who becomes aware of a material omission in the course of providing disclosure advice to an issuer in connection with a filing would be covered by paragraph (4) of the definition as we suggest it be revised. Even in the circumstance where an issuer chooses not to file a current report on Form 8-K when such a report might be required, such a decision would compromise the disclosure contained in a currently effective shelf registration statement or in a registration statement proposed to be filed, and, if the omission continued, could compromise the issuer's next periodic report, all of which would be filed in consultation with internal and/or external counsel. This fifth category also seems to cover the activities of attorneys in connection with private placements and other private communications. In the context of an unregistered offering, sophisticated investors typically undertake or arrange their own diligence efforts and receive a premium over comparable registered securities. We do not believe that Commission oversight of such attorney activities is necessary to comply with the letter or spirit of § 307 of the Act.

Recommendation. For the foregoing reasons, we recommend that proposed § 205.2(a)(5) be deleted from the final rules and that § 205.2(a)(4) be revised to provide as follows:

"(4) Preparing, or participating in the process of preparing, any statement that the attorney knows is to be included in a document to be filed with or submitted to the Commission, the Commissioners or the Commission's staff, in connection with such attorney's advice to the issuer as to its obligations with respect to such disclosure under the U.S. securities laws."

2. The definition of "in the representation of an issuer" should be narrowed.

Proposed § 205.2(f) defines "in the representation of an issuer" to mean "acting in any way on behalf, at the behest, or for the benefit of an issuer, whether or not employed or retained by the issuer."

The rules should make clear that they do not apply to attorneys who act for parties in privity of contract with issuers, such as underwriters, placement agents or financial advisors. An attorney acting for such a counterparty owes his or her professional duties to his or her own client and has no obligations with respect to the issuer. To impose such duties upon counsel to counterparties would be to require such counsel to breach their duties to their own clients.

We believe that extending the rules to counterparties will not provide a significant benefit to the investor community. It is unlikely that attorneys representing counterparties will be aware of circumstances of which the issuer's own attorneys are unaware. Such attorneys will be less likely to have sufficient background knowledge of the issuer's affairs to make valuable judgments concerning the issuer's circumstances. Attorneys for counterparties will have no authority and little practical ability to conduct a worthwhile investigation into an issuer's affairs. Further, to the extent counsel to a counterparty, such as underwriters' counsel, becomes aware of information indicative of a material violation, it is virtually inconceivable that counsel to the counterparty would not consult with counsel to the issuer, if for no other reason than to confirm the information or understand its context.

Recommendation. Section 205.2(f) should be revised to delete the definition, since there is no need for a definition of "in the representation of an issuer" and the term should be understood in its usual way.

3. The definition of "material violation" should be narrowed to exclude violations of non-U.S. law.

Proposed § 205.2(i) defines "material violation" as "a material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation." Neither this definition nor the definition of its component "breach of fiduciary duty" expressly limits the scope of the term to U.S. law, though language in the proposing release implies that the term "securities laws" is limited to U.S. law. The apparent reach of the definition of material violation is highly problematic for U.S. attorneys representing non-U.S. issuers before the Commission.

There can be no reasonable expectation that U.S. attorneys would be able accurately to discern whether a given course of conduct on the part of an issuer would constitute a breach of non-U.S. securities law or whether particular actions on the part of an issuer's associated persons would amount to a breach of such persons' fiduciary duties to the issuer under non-U.S. law. A mistaken conclusion that such a breach has occurred could be disastrous for the issuer and the attorney and not helpful to investors. Yet a mistaken conclusion in the other direction could be equally disastrous for the attorney. Creating this dilemma will not achieve greater compliance with law or otherwise benefit investors significantly. This is also not required by Section 307.

Over the course of decades of practice before the Commission, U.S. and non-U.S. attorneys acting in the representation of non-U.S. issuers have crafted a division of labor with respect to the production of Commission filings in which attorneys advise as to the laws of their own jurisdictions. In the context of advising a non-U.S. reporting company, U.S. counsel typically advises the issuer and its non-U.S. counsel as to U.S. securities law matters and non-U.S. counsel advises the issuer and its U.S. counsel as to the local legal implications of developments with respect to the issuer.

To disturb that division of labor would be to create a significant inefficiency in representation. The costs that would be required to be borne by U.S. attorneys in order to develop a working understanding of non-U.S. law concepts and requirements (including, in many cases the costs of language instruction or translations) is immense, and arguably well beyond the amounts arrived at by the Commission in determining the proposed rules' likely compliance costs. Further, the expense is needless because the failure to disclose a material violation of non-U.S. law will likely be a violation, as applicable, of §§ 11 and 12 of the Securities Act and § 10 of the Exchange Act, as well as Rule 10b-5 under the Exchange Act, and therefore a material violation under U.S. securities law.

The Sarbanes-Oxley Act defines securities laws to mean the Federal securities laws. We believe the Commission's rules would serve Congress' intent and the Commission's purposes by not straying from the Act into non-U.S. legal concepts. Expanding the definition of material violation beyond U.S. law concepts will impose a massive cost on the U.S. legal profession and upon non-U.S. issuers without achieving a substantive benefit for investors.

Recommendations. For the foregoing reasons, we recommend the following revisions to the proposed rules' definitional provisions:

(i) Section 205.2(i) should be revised to provide as follows:

"Material violation' means a material violation of the securities laws, a material breach of fiduciary duty, or a similar material violation of the laws of the United States or of any State."

(ii) Section 205.2(d) should be revised to provide as follows:

"Breach of fiduciary duty' refers to any breach of fiduciary duty with respect to the issuer recognized under the common law of any State, including, but not limited to, misfeasance, nonfeasance, abdication of duty, abuse of trust, and approval of unlawful transactions."

(iii) A new paragraph (n) should be added to § 205.2 to provide as follows:

"Securities laws" and "State" have the meanings assigned in Sections 3(a)(15) and (16) of the Sarbanes-Oxley Act of 2002."

VII. The Commission's Final Rules Should Contain a Provision Foreclosing Any Private Right of Action Under the Rules.

The proposed rules do not expressly provide that a violation of the rules will not give rise to a private cause of action against a subject attorney. The Commission stated in the proposing release that:

Nothing in Section 307 creates a private right of action against an attorney. Indeed, statements by the sponsors of the provision unequivocally demonstrate that there was never an intention to create a right of action by third parties for violation of the rule. Similarly, the Commission does not intend that the provisions of Part 205 create any private right of action against an attorney based on his or her compliance or non-compliance with its provisions.

The Commission cited the statements of Section 307's sponsors, specifically Senators Edwards and Enzi.⁹ Because the Commission has made a determination that these rules should not give rise to a private right of action, the Commission should codify this principle within the rules, which would foreclose, to the extent within its authority, the assertion of such claims by private litigants in the future. The Commission took a similar approach with Rule 102 of Regulation FD. The absence of a private right of action to enforce Regulation FD has not prevented Regulation FD from causing significant changes in issuer disclosure policies, nor has it prevented the Commission from enforcing the Regulation.

VIII. The Proposed Rules are Ambiguous with Respect to the Obligations of Mid-Level Attorneys

The proposed rules at §§ 205.4 and 205.5 impose different responsibilities on subordinate and supervisory attorneys. We believe that clarification of the roles of attorneys within an attorney hierarchy is a useful component of the rules, but we are concerned that the Commission's definition of who constitutes a supervisory attorney will lead to ambiguity and confusion. In contemporary legal practice, many attorneys assume both a supervisory and a subordinate role. This is typically the case for mid-level attorneys, such as senior associates practicing in law firms and for many attorneys practicing below the level of general counsel at issuers with large legal departments.

Proposed § 205.4 would define "supervisory attorney" to include an attorney who has any amount of supervisory authority over another attorney, even if the attorney reports to a further supervisory attorney within the law firm or issuer. The effect of the definition would be to require duplicative efforts by partner and senior associate in a law firm. Each supervisory attorney under the rules would be required to undertake the same compliance measures with respect to a given subordinate attorney, including ensuring such attorney's compliance with his or her reporting obligations and pursuing any subordinate's material violation reports. This redundancy will lead to a diversion of resources to duplicative supervision and recordkeeping, and could lead to a lack of clarity in the reporting channels within a law firm or legal department. Despite these substantial costs and inefficiencies, it is unclear that such redundancy would incrementally improve attorney compliance with the rules.

For the foregoing reasons, we believe the Commission's final rules should clarify that an attorney who is subordinate to another attorney does not assume any supervisory attorney obligations under the rules.

IX. The Proposed Rules Should Not Address Sanctions for Violation of the Rules

Section 205.6 provides that violations of Part 205 be treated in the same manner as violations of the Exchange Act and offers a limited clarification of the term "improper professional conduct" as it pertains to attorneys. By adopting Section 205.6, the Commission would be granting itself certain powers regarding the appearance and practice of attorneys before the Commission, prescribed under section 4(C) of the Exchange Act (15 U.S.C. 78a et seq), that Congress itself has not granted the Commission. Such action would clearly exceed the mandate of the Sarbanes-Oxley Act. If Congress intended such broad discretion on the Commission's behalf, it could have so stated in Sarbanes-Oxley Act § 307 or in § 602, codifying Rule 102(e) of the Commission's Rules of Practice. The fact that Congress codified Rule 102(e) for accountants in enacting § 602 but not for attorneys in § 307 should be taken on Congressional intent that § 307 does not authorize the Commission to do so by rule.

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We appreciate the opportunity to comment to the Commission on the proposed rules, and would be pleased to discuss any questions the Commission may have with respect to this letter. Any questions about this letter may be directed to John T. Bostelman (212-558-3840), Richard R. Howe (212-558-3612) or Robert S. Risoleo (202-956-7510).