Transparency International-USA

The Coalition Against Corruption
1112 16th Street, N.W., Suite 500, Washington, D.C. 20036
Tel: 202-296-7730   Fax: 202-296-8125   tiusa@aol.com   www.transparency-usa.org

December 18, 2002

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609

Commission File Nos. S7-45-02, 33-8150.wp
Proposed Rule: Implementation of Standards of Professional Conduct for Attorneys

Dear Mr. Katz:

Transparency International-USA (TI-USA) is pleased to comment on the above referenced proposed rule that would establish standards of professional conduct for attorneys.

TI-USA has commented on earlier SEC rule proposals to implement the Sarbanes-Oxley Act of 2002 ("the Act.") Many of the Act's requirements parallel the recommendations in TI-USA's July 22 Statement on Corporate Governance and Accounting Reform (Attachment 1.)

In our statement, we underscore that effective reform is essential to restore the credibility of the US system both domestically and internationally. We note the important role of attorneys and include them among those with a duty to take meaningful steps to promote corporate accountability and to ensure their own responsible conduct.

Section 307 of the Sarbanes-Oxley Act of 2002 (the "Act") directs the Commission to develop rules governing attorneys' professional conduct so as to protect the public and investors. The law calls for rules that require an attorney to report violations "up the ladder" to the most senior levels of management and, ultimately, to the audit committee or to the board if management does not take appropriate remedial measures or sanctions.

We concur that a rule requiring attorneys to report violations to the highest level of authority within the organization would help ensure that an attorney acts in the best interest of the company and its shareholders, rather than that of corporate management. We recognize that the application of such a reporting requirement raises complex definitional and administrative issues that require careful consideration by the Commission.

As to that aspect of the Proposed Rule that deals with reporting out to the SEC, or "noisy withdrawal," it raises difficult issues, including whether it exceeds the mandate of Section 307 and its impact on a fundamental tenet of the US system, the privilege that protects client confidences.

It is timely to consider the issue of exemptions to the privilege. We note that the Preliminary Report of the ABA Task Force on Corporate Responsibility (the "Cheek Report") recommends that the Model Rules of Professional Conduct ("Model Rules") should be amended to provide a sufficient guide to "help lawyers comply with their duties to an organizational client in circumstances in which corporate officers engage in or countenance criminal, fraudulent or deceptive conduct likely to cause harm to the organization or its shareholders."

The Cheek Report provides a useful discussion of the issues. In recommending that Model Rule 1.6 be amended as proposed in the Ethics 2000 report, it recognizes that there are exemptions to the privilege that are justified and necessary.

Currently, most states permit or require disclosure to prevent a client from perpetrating a fraud that constitutes a crime. However, existing state rules are not considered to have been an effective deterrent in the recent corporate governance failures.

Guidance is needed that strikes a balance between protecting the expectation of confidence and the prevention of injury and duty to the public. How to achieve this and who should set the rules requires further discussion and consideration than is possible within the current time constraints.

Given the number and complexity of the issues raised by the "reporting out" aspect of the proposed rule, we urge the SEC to consider extending the deadline and holding public hearings on this part of the rule. This will help ensure that the rules actually promote the Act's objectives of more transparency and effective reporting.

The recent scandals make it highly pertinent that these issues be fully considered and adequately addressed. TI-USA supports the SEC's efforts to develop rules that will help ensure best practices by all the key players responsible for restoring investor and public confidence, including attorneys. We are pleased to provide comments on the proposed rule for their professional conduct and hope there will be an opportunity for further comment.

Sincerely,

Transparency International-USA

The Coalition Against Corruption
1112 16th Street, N.W., Suite 500, Washington, D.C. 20036
Tel: 202-296-7730   Fax: 202-296-8125   tiusa@aol.com   www.transparency-usa.org

TI-USA Statement on Corporate Governance and Accounting Reforms

Transparency International is an international anti-corruption organization headquartered in Berlin, Germany, with over 80 chapters promoting transparency and accountability in government and the private sector worldwide. In TI's view, US corporate governance and accounting scandals have impaired US leadership and raised questions about the US system as a model for disclosure and ethical business practices. They have made it more difficult for the United States to promote good governance internationally and serve as an excuse for countries resisting action to reform corporate governance and strengthen regulatory oversight.

Prompt, effective reform here at home is indispensable to US credibility abroad. The United States is setting an example by acknowledging weaknesses in its system. Adoption of needed reforms would serve as a model for similar reform efforts which are also needed in other countries.

The true test will be whether, over the next few months, the Administration, Congress, regulators, stock exchanges and key players in the private sector — corporations, accountants, lawyers, securities analysts, underwriters and rating agencies — actually take meaningful steps to strengthen integrity and accountability. Legislation is necessary for some aspects of reform, for example to ensure that the SEC has the appropriate legal basis to act. The Justice Department and SEC should forcefully prosecute offenders, and Congress should provide adequate resources for them to do so. At the same time, companies, listed and non-listed, must direct their efforts at

ensuring an ethical corporate culture, going beyond the letter of the law and providing incentives that reward compliance, transparency and accountability.

From TI's perspective, it is essential for companies to have effective internal controls and for there to be strong, consistent international systems for corporate accounting and auditing. Transparency International-USA urges prompt action on the following:

Corporate Governance:

• Companies should adopt effective corporate compliance programs, covering compliance with laws and regulations and with ethical standards. Such programs should have the active support and participation of senior management and be provided with adequate resources. Compliance programs should include training requirements, procedures for reporting illegal or unethical behavior, and strong monitoring and enforcement mechanisms.
   
• Oversight over corporate compliance programs should be vested in an audit or governance committee comprised entirely of directors who are independent of management. This committee should have the requisite authority, expertise, time and support to carry out its mandate.
   
• SEC should require companies to include in their annual reports an assessment by management, reviewed by the audit committee, of the adequacy of internal controls, including corporate compliance processes.
   
• Companies should establish an internal audit function with a reporting channel directly to the audit committee. Among its responsibilities should be monitoring compliance programs and ensuring the adequacy of internal controls.

Accounting and Auditing:

• SEC should require CEOs and CFOs to certify the accuracy of financial statements and disclosures in periodic reports. CEOs and CFOs should be subject to criminal penalties for misleading auditors or the public.
   
• US generally accepted auditing standards should require auditors to treat a significant deficiency in corporate compliance processes as a matter reportable to the audit committee.
   
• The audit committee should be comprised entirely of directors who are independent of management, and it should have the requisite authority, expertise, time and support to carry out its mandate. It should have sole responsibility for the selection of outside auditors, for their compensation, and for the scope of their duties; the auditors should report to the audit committee. The audit committee should ensure that auditors are independent and not impaired by conflicts of interest, including placing restrictions on hiring of external auditors by the company.
   
• Congress should create an independently-funded public oversight board for the accounting profession, operating under the aegis of the SEC. The board should have confidentiality privilege and be protected against liability. It should have the power to set ethics standards and independence requirements, including conflict of interest rules, to conduct quality control reviews of firms, and to impose penalties. In addition, the public oversight board should have responsibility for setting auditing standards, which may be delegated to an expert body over which it has oversight.
   
• FASB should be provided with independent funding and the ability to promptly bring rules up to date to respond to changing circumstances. Convergence to a stronger, internationally recognized set of accounting standards is essential. To that end, consideration should be given to achieving the best balance between the IASB principles-based approach and the US GAAP rules-based approach.
   

July 22, 2002