A. Noisy Withdrawal [§ 205.3(d)]

Section 205.3(d) requires a reporting attorney who has not received an appropriate response in a reasonable time and who concludes that the reported violation is either ongoing or is about to occur and is likely to result in substantial injury to the company or investors, to take three actions: (1) withdraw from the representation (if the attorney is not an inside lawyer); (2) notify the SEC, within one business day, that the withdrawal is based on professional considerations; and (3) disaffirm any false or materially misleading submission to the SEC that the attorney has participated in preparing. If the violation has previously occurred, but has no ongoing effect, a reporting attorney would be permitted, but not required, to withdraw, notify the SEC and disaffirm tainted filings under § 205.3(d)(2). 

We support the proposed rules' narrowly-circumscribed rule requiring outside lawyers to make noisy withdrawal to the Commission in circumstances that will, as the Commission rightly notes, be rare. 

1. History of withdrawal and disclosure in client fraud situations

Noisy withdrawal is permitted under the ethics rules of almost every state. The comments by the Commission mention the ABA's Canons of Professional Ethics (1908-1969), which required lawyers to disclose ongoing client fraud, at least when the lawyer's services had been used to perpetrate the fraud. That continued to be the ABA's position after 1969, when the ABA's next rendition of model ethics rules was adopted. The ABA's Model Code of Professional Responsibility, DR 7-102(B)(1), as originally drafted and adopted by the ABA in 1969, not only allowed, it required, lawyers to disclose their clients' frauds in which the lawyers' services had been used. Moreover, that provision with its requirement of disclosure was the law in almost every state in the country until 1974 and in all but about a dozen or so states until the late 1980s. 

In 1974, the ABA amended DR 7-102(B)(1) to add the words "except if privileged" to the end of the rule and proceeded in short order to interpret the word "privilege" to include all confidential information, not just material covered by the attorney-client privilege. See ABA Formal Op. 341 (1975). The combination of the amendment and the opinion interpreting it rendered DR 7-102(B)(1) a rule whose meaning was at war with its text. A "shall disclose" rule was transformed in this circuitous manner to a "shall not disclose" provision. The history is important because the transformation by the ABA of DR 7-102(B)(1) was motivated by the bar's resistance to the SEC's [1972] actions in the National Student Marketing case, 457 F. Supp. 682 (D.D.C.1978), in which the Commission's enforcement division argued that the securities laws demanded precisely what the ethics rules of most states and the ABA required: disclosure of client fraud when efforts to get the client to rectify ongoing fraud failed. The ABA was apparently comfortable with DR 7-102(B)(1)'s required disclosure as long as no one in authority sought to sanction lawyers who did not do what the rule insisted they must do. When the Commission demanded, in effect, that lawyers live up to the principles articulated in ABA rules and in state law, the ABA abandoned the principle it had long articulated.

But the states were not quick to follow the ABA's departure from the traditional understanding. Of the over 40 states that had adopted DR 7-102(B)(1) in its original form, only 14 were persuaded by the ABA to change to a "shall not disclose" rule. The ABA, however, fought on in 1983, adopting Model Rule 1.6 in 1983, which is a "shall not disclose" rule insofar as client fraud is concerned. This despite the fact that the states had overwhelmingly rejected the ABA's rewriting of DR 7-102(B)(1) to the same effect. The ABA should not have been surprised that most states rejected its new position on client fraud: silent withdrawal as the only permitted response to client fraud situations, softened by the "noisy withdrawal" comment. The high courts of the states, charged with primary responsibility for the maintenance of an independent, vigorous and trustworthy legal profession, could not be persuaded by arguments that the bar should abandon its longstanding position that a lawyer should disclose confidential information to prevent or rectify a client's ongoing or prospective fraud. 

The Commission's proposed rules do not require disclosure of confidential information to the Commission or to third parties. "Noisy withdrawal" is required only in limited circumstances; and neither the ABA nor the Commission treat notice of withdrawal and disaffirmance of tainted documents as a disclosure of confidential information. The Commission's rule do not go as far as the ABA itself went for most of that organization's history. Nothing in the ABA's own Model Rules prohibits lawyers from complying with the Commission's rule. Indeed, the Comment to Model Rule 1.6, adopted by the ABA House of Delegates in 1984 and still in force, either requires or permit lawyers to withdraw noisily in more situations than those contemplated by the SEC's proposed rule. Comment [14] to Rule 1.6 of the ABA Model Rules as amended in February 2002 provides: 

If the lawyer's services will be used by the client in materially furthering a course of criminal or fraudulent conduct, the lawyer must withdraw, as stated in Rule 1.16(a)(1). After withdrawal the lawyer is required to refrain from making disclosures of the client's confidences, except as otherwise permitted in Rule 1.6. Neither this Rule nor Rule 1.8(b) nor Rule 1.16(d) prevents the lawyer from giving notice of the fact of withdrawal, and the lawyer may also withdraw or disaffirm any opinion, document, affirmation or the like. . . . 

See also ABA Formal Op. 92-366 (1992) (amplifying and explaining the ABA's "noisy withdrawal" comment and justifying notice of withdrawal and disaffirmance as implied from the lawyer's duty to avoid assisting a client's crime or fraud, prohibited by Rule 1.2(d)). 

The Commission's noisy withdrawal provision, like the ABA view of its Model Rules, kicks in after the lawyer has been required to resign in an ongoing or prospective client fraud situation. The Commission's rule goes further in only one respect: the proposed Commission rule is explicit in requiring all of the actions in question - withdrawal, notice of withdrawal, and disaffirmance of any filing or document tainted by the client's prior filings or representations - actions that the ABA ethics opinion says are sometimes required to avoid a violation of Rule 1.2(d). 

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