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Ñ u Ñ JÝ ƒ ½Þ)ÝÔUSUS.,ÔÝ  ÝÔ_ÔÓ  Ó5(UhCEKQW]cioAutoList31.1.1.1.1.1.1.1.1.(Vm$˜˜Ìà0  àà ° à(,!ù$™™à0  àà0` (#(#àà  à Ñ * Ñ?a ®9Z+‹ Courier New  Ý ƒüœ!ÝÔUSUS.,ÔÝ  ÝÔ_ÔÑTRXà3Ø'NoteXà3Ø' Letter3Ø' Letterÿ3Ø'TÑѰÑÓ  Óò òÑ  Ñó óÌÓ  ÓÌÌÌÌÌÌÌÌÌÌò òÔ‡èã“çXXÔComments€ofÐ Ô$  ÐÌAttorneysðð€Liability€Assurance€Society,€Inc.,€ÌA€Risk€Retention€Group€(ALAS)ÌÌon€the€U.S.€Securities€and€Exchange€Commissionððs€ÌProposed€Rule€on€Lawyer€Conduct,€Ì17€Ô_ÔCFRÔ_Ô€Part€205ÌÌó óÌà @ àà @` àà @¸ àà @ àà @h àò òFile€No.€33„8150.Ô_ÔwpÔ_ÔÐ P ÐÌÌDecember€18,€2002Ìó óÌÔ#†X'bXçèã“Ø#ÔÔ‡ ô²!XX'bÔÌÌò òÔ#†X'bX! ô²·#ÔÐ  (`# ÐÑ  ÑòòTABLE€OF€CONTENTSóóó óÐ ° ÐÓ  ÓÌÌÌò òÓ$°°` Ý"°œX$Óó óIDENTIFICATION€AND€EXPERIENCE€OF€ALASà“y"y"IÝ".44/à5ˆÐ `° ÐÌINTRODUCTIONà“y"y"IÝ".˜ ˜ à6ˆÐ 8 ˆ ÐÌCOMMENTS€ON€SPECIFIC€PROVISIONS€OF€THE€PROPOSED€RULEà“y"y"IÝ".((>à8ˆÐ  ` ÐÌà  à1.€€SECTION€205.3(d)(1)(Ô_ÔiÔ_Ô),€MANDATORY€WITHDRAWAL,€Ìà0  àNOTICE€AND€Ô_ÔDISAFFIRMANCEÔ_Ô€BY€OUTSIDE€COUNSEL€Ð (#(# Ðà0  àFOR€ISSUERS,€SHOULD€BE€DELETED€FROM€THE€RULEà“y"y"IÝ".¼¼;à8ˆÐÀ (#(# ÐÌà0  àà0` (#(#àA.€€The€Requirements€of€Section€205.3(d)(1)(Ô_ÔiÔ_Ô)€ExceedÐ ` (#` (# Ðà  àà ` àthe€Language€of€Ô_ÔSarbanesÔ_Ô„Ô_ÔOxleyÔ_Ô€Section€307à“y"y"IÝ".hh>à8ˆÐ „Ô  ÐÌà  àà ` àB.€€Section€205.3€Is€Inconsistent€with€Withdrawal€Rules€in€Most€States€à“y"y"IÝ".´´[à9ˆÐ \¬ Ðà0  àà0` (#(#àà0Ý"` (#` (#àà0@Ý"(#(#àÐ Ý"(#Ý"(# Ðà  àà ` àC.€€The€Scope€of€Withdrawal€Required€by€Section€205.3(d)(1)(Ô_ÔiÔ_Ô)Ìà0  àà0` (#(#àFar€Exceeds€the€Mandate€of€Ô_ÔSarbanesÔ_Ô„Ô_ÔOxleyÔ_Ô€Section€307à“""HÝ".Ià10ˆÐ p` (#` (# ÐÌà  àà ` àD.€€Section€205.3(d)(1)(Ô_ÔiÔ_Ô)€Will€Subject€Withdrawing€and€Reporting€Ìà  àà ` àAttorneys€to€Liability€Claims€for€Doing€What€the€Rule€Requiresà“""HÝ".,,Rà11ˆÐ ä4 ÐÌà  àà ` àE.€€Section€205.3(d)(1)(Ô_ÔiÔ_Ô)€Will€Not€Likely€Deter€or€ExposeÌà0  àà ` à€Securities€Law€and€Other€Violationsà“""HÝ".àà8à12ˆÐ¨ø(#(# ÐÌà  àà ` àF.€€Eliminating€Mandatory€Withdrawal€and€Outside€Ìà  àà ` àReporting€Solves€the€Most€Serious€Problems€with€theÌà  àà ` àCommissionððs€Proposed€Ruleà“""HÝ".ˆˆ.à13ˆÐ X ¨ ÐÌà0  à2.€€THE€ATTORNEY€STATE€OF€MIND€REQUIREMENTS€FOR€Ð (#(# Ðà0  àREPORTING€UP„THE„LINE€AND€FOR€DETERMINING€AN€Ð (#(# Ðà  àð ðAPPROPRIATE€RESPONSEðð€SHOULD€BE€CLARIFIEDà“""HÝ".àà9à13ˆÐ  $X"  Ðà0  àà0` (#(#àA.€€The€Term€ð ðBecomes€Awareðð€in€Section€205.3(b)€Ð ` (#` (# Ðà0  àà0` (#(#àShould€be€Changed€to€ð ðKnowsðð€and€a€Definition€of€ð ðKnowsððÐ ` (#` (# Ðà  àà ` àSimilar€to€the€Model€Rules€Definition€Should€Be€AddedÌà  àà ` à€to€Section€205.2€à“""HÝ".ìì&à14ˆÐ tÄ ÐÌà0  àà0` (#(#àB.€€The€Definition€of€ð ðEvidence€of€a€Material€Violationðð€Ð ` (#` (# Ðà0  àà0` (#(#àin€Section€205.2(e)€Should€Be€Changedà“""HÝ".´´9à15ˆÐ8 ˆ` (#` (# ÐÌà0  àà0` (#(#àC.€€The€Definition€of€ð ðReasonably€Believesðð€in€Ð ` (#` (# Ðà0  àà0` (#(#àSection€205.2(l)€Should€be€Changedà“""HÝ".¤¤6à17ˆÐü L ` (#` (# ÐÌÌà  à3.€€PARAGRAPHS€(a)€AND€(f)€OF€SECTION€205.2,€CONTAINING€€Ìà0  àDEFINITIONS€OF€ð ðAPPEARING€AND€PRACTICING€BEFORE€THE€Ð (#(# Ðà  àCOMMISSIONððAND€ð ðIN€THE€REPRESENTATION€OF€AN€ISSUER,ðð€Ìà  àSHOULD€BE€CHANGEDà“""HÝ".dd à18ˆÐ „Ô  ÐÌà0  àà0` (#(#àA.€Narrowing€the€Definition€Will€Result€in€More€Ð ` (#` (# Ðà0  àà0` (#(#àReasonable€Applicability€of€the€Ruleà“""HÝ".¬¬8à19ˆÐH˜` (#` (# ÐÌà0  àà0` (#(#àB.€€Application€of€the€Rule€to€Foreign€Attorneysà“""HÝ".ppDà19ˆÐ p` (#` (# ÐÌà0  àà0` (#(#àC.€€Specialized€Applicability€of€the€Ruleà“""HÝ".ÄÄ=à20ˆÐøH` (#` (# ÐÌà0  à4.€€A€SAFE€HARBOR€SHOULD€BE€PROVIDED€FORÐ (#(# Ðà0  àATTORNEYS€WHO€MAKE€REPORTS€REQUIRED€BY€THE€RULEà“""HÝ".<<>à20ˆÐ¼ (#(# ÐÌà0  à5.€€THE€RULE€SHOULD€CONTAIN€AN€EXPRESSÐ (#(# Ðà0  àPROHIBITION€ON€PRIVATE€ENFORCEMENTà“""HÝ".ÔÔ1à21ˆÐ€Ð(#(# ÐÌà0  à6.€€THE€PROPOSED€RULE€PUTS€REPORTING€ATTORNEYSÐ (#(# Ðà  àIN€JEOPARDY€OF€DISCIPLINARY€PROCEEDINGS€AND€POSSIBLYÌà  àCIVIL€CLAIMS€WITHOUT€EFFECTIVE€PROTECTIONà“""HÝ".||8à21ˆÐ 0"€  ÐÌà  àà ` àA.€The€Ruleððs€Effort€to€Avoid€Impairment€of€the€Attorney„ClientÌà0  àà ` àPrivilege€Resulting€From€Reports€Required€by€the€Rule€Will€Ð (#(# Ðà0  àà ` àBe€Unavailingà“""HÝ".Ä Ä !à22ˆÐà%0!$(#(# ÐÌà  àà ` àB.€The€Ruleððs€Attempt€to€Preempt€State€Attorney€Conduct€Rules€Ìà  àà ` àAnd€State€Law€Duties€of€Attorneys€to€Their€Clients€Exceeds€the€Ìà  àà ` àThe€Scope€of€Section€307à“á!á!GÝ".tt,à€22ˆÐ )à$( ÐÌÐ h+¸&* Ðà  à7.€€SECTION€205.2(d),€DEFINITION€OF€ð ðBREACH€OFÌà0  àFIDUCIARY€DUTY,ðð€SHOULD€BE€EXPANDED€TO€INCLUDE€ð ðORÐ (#(# Ðà  àSIMILAR€VIOLATIONðð€AND€SHOULD€BE€CLARIFIED€à“""HÝ".ðð:à24ˆÐ ˆØ Ðà  àà ` àÌà  à8.€€Ô_ÔSARBANESÔ_Ô„Ô_ÔOXLEYÔ_Ô€SECTION€307€DOES€NOT€AUTHORIZEÌà  àSECTION€205.6(a)ððS€ATTEMPT€TO€CONVERT€RULE€VIOLATIONS€Ìà  àBY€ATTORNEYS€INTO€ðð34€ACT€VIOLATIONSà“""HÝ".ðð3à25ˆÐ 8 ˆ Ðà  àÌà0  à9.€€THE€Ô_ÔQLCCÔ_Ô€PROVISIONS€AND€CERTAIN€OTHER€PROVISIONSÐ (#(# Ðà  àOF€THE€PROPOSED€RULE€ARE€PARTICULARLY€MERITORIOUSà“""HÝ".””@à26ˆÐ ü L  ÐÌà0  àà0` (#(#àA.€€Qualified€Legal€Compliance€Committees€(Ô_ÔQLCCsÔ_Ô)à“""HÝ".00Eà26ˆÐÔ$ ` (#` (# ÐÌà0  àà0` (#(#àB.€€Definitions€of€ð ðMaterialðð€and€ð ðMaterial€Violationððà“""HÝ".Jà27ˆÐ¬ü ` (#` (# Ðà  àà ` àÌà  àà ` àC.€€The€Issuer€as€Clientà“""HÝ".¨¨,à27ˆÐ „Ô  ÐÌà0  àà0` (#(#àD.€€Responsibilities€of€Supervisory€and€Subordinate€Attorneysà“""HÝ".¨¨Qà27ˆÐ\¬` (#` (# ÐÌCONCLUSIONà“""HÝ".´ ´ à28ˆÐ 4„ ÐÌà0  àà0` (#(#àÐ  \` (#` (# ÐÔ_ÔÑ` Ñò òÑ  ÑÓ$ °X°°` Ý"$Óà@> > ìàIDENTIFICATION€AND€EXPERIENCE€OF€ALASó óˆÐ ° ÐÌÓ °à"°XÓà  àThe€Attorneysðð€Liability€Assurance€Society,€Inc.,€A€Risk€Retention€Group€(ALAS),€is€anÐ 3 Ø Ðassociation€of€more€than€260€large€United€States€law€firms€that€provides€professional€liabilityÐ  Ä Ðinsurance€coverage€to€approximately€54,000€attorneys€practicing€in€the€United€States€and€abroad.€Ð  ° ÐMost€ALAS€Member€Firms€are€medium„sized€to€large€law€firms€(average€size€firm:€200Ð ÷ œ Ðattorneys)€that€regularly€represent€organizational€clients,€including€public€companies,€in€a€wideÐ ã ˆ Ðrange€of€legal€matters.€These€matters€include€securities€offerings€and€civil,€criminal€andÐ Ï t Ðadministrative€proceedings€involving€federal€and€state€securities€laws€and€regulations.€€AmongÐ »` Ðother€activities,€ALAS€provides€to€its€insured€attorneys€legal€ethics€and€liability€avoidanceÐ §L  Ðcounseling.€€We€respond€to€an€average€of€almost€2,000€requests€for€such€advice€each€year.€Ð “8  ÐALAS€participates€in€the€defense€of€professional€liability€claims€against€its€insured€attorneys€andÐ $  Ðlaw€firms.€€Over€its€23€year€existence,€ALAS€had€dealt€with€over€14,000€ò òó óprofessional€liabilityÐ k  Ðmatters€involving€€attorneys.Ð Wü  ÐÌÖ€ÿÿÖà  àALASððs€Loss€Prevention€Counsel€were€actively€involved€in€the€American€Law€InstituteððsÐ /Ô  Ðten€year€project€to€prepare€and€publish€the€òòRestatement€Third,€The€Law€Governing€Lawyers€óóandÐ À Ðthe€ABA€Ethics€2000€Commissionððs€five€year€reconsideration€and€revision€of€the€Model€Rules€ofÐ ¬ ÐProfessional€Conduct€(completed€in€2002).€€Four€ALAS€Loss€Prevention€Counsel€were€membersÐ ó˜ Ðof€the€Membersðð€Consultative€Group€for€the€òòRestatementóó,€and€attended€virtually€every€ALIÐ ß„ Ðsession€at€which€the€òòRestatement€óówas€considered.€€They€also€were€members€of€the€AdvisoryÐ Ëp ÐCouncil€to€the€ABA€Ethics€2000€Commission,€frequently€testified€at€hearings€of€theÐ ·\ ÐCommission,€and€attended€every€meeting€of€the€Commission€that€was€open€to€the€public.€€All€ofÐ £H Ðthem€write€and€speak€frequently€on€the€subjects€of€legal€ethics€and€attorney€liability.€€SeveralÐ 4 Ðchair€state€or€local€bar€association€legal€ethics€and€professional€responsibility€committees,€andÐ {  Ðtwo€have€taught€legal€ethics€for€a€number€of€years€at€Northwestern€University€School€of€Law.€€Ð g  ÐÖ€ ìÖÖ€ ÿÿÖÌÓ °à"°à"Óà  àÌà  à¹ÑϰÑÓ  Óò òÑ` ÑÌÌÌó óÌÌÌÌÌÐ w)"% ÐÓ  Óà@ÌÌ$ìàò òINTRODUCTIONó óˆÐ [ ÐÌÔ‡"XVüXXX÷ÄÔà  àÔ#†X÷ÄXX"XVü,#ÔWith€the€passage€of€Section€307€of€the€Sarbanes„Oxley€Act,€Congress€has€required€theÐ 3 Ø ÐCommission€to€adopt€rules€of€professional€conduct€for€attorneys€appearing€and€practicing€beforeÐ  Ä Ðit.€€It€has€also€mandated€that€these€rules€be€adopted€within€a€matter€of€weeks,€even€though€theyÐ  ° Ðraise€profound€issues€of€federalism€and€address€subjects€with€which€the€legal€profession€has€beenÐ ÷ œ Ðgrappling€for€decades.€€In€this€context,€we€respectfully€submit€that€the€wisest€course€is€for€theÐ ã ˆ ÐCommission€to€proceed€with€caution.€€Certainly€at€this€stage,€it€is€not€necessary€for€theÐ Ï t ÐCommission€to€attempt€to€expand€its€legislative€mandate€and€adopt€rules€on€such€subjects€asÐ »` Ðnoisy€withdrawal€and€reporting,€that€are€not€required€by€the€legislation,€and€fly€in€the€face€of€theÐ §L  Ðapplicable€legislative€history.€€Nor€do€we€believe€it€is€wise€for€the€Commission€to€use€theseÐ “8  Ðregulations€as€a€means€to€superimpose€an€entirely€new€federal€regulatory€scheme€on€the€legalÐ $  Ðprofession,€or€fundamentally€to€alter€the€nature€of€relationships€between€attorneys€and€clients€thatÐ k  Ðhave€been€at€the€heart€of€the€profession€for€decades.€€Ð Wü  ÐÌà  àWe€recognize€that€the€impetus€for€Section€307€has€been€the€recent€series€of€well„Ð /Ô  Ðpublicized€corporate€failures,€and€a€sense€that€action,€or€inaction,€by€attorneys€somehowÐ À Ðcontributed€to€major€losses€by€investors.€€We€do€not€believe€that€this€perception€is€accurate,€orÐ ¬ Ðthat€it€generally€reflects€the€conduct€of€clients€or€their€attorneys.€€But€beyond€that,€ours€remainsÐ ó˜ Ðan€adversary€system,€with€the€public€ultimately€best€served€by€zealous€attorney€advocacy.€€ThisÐ ß„ Ðin€turn€requires€a€degree€of€trust€and€confidence€between€attorney€and€client,€as€well€as€counselÐ Ëp Ðwilling€to€advocate€positions€that€have€a€basis€in€law€and€fact.€€Even€a€series€of€rules€purportedlyÐ ·\ Ðlimited€to€a€specialized€administrative€process€can€have€far€broader€implications€throughout€theÐ £H Ðprofession.Ð 4 ÐÌà  àWe€fear€that€a€number€of€the€Commissionððs€proposals€will€impair€these€bedrockÐ g  Ðprinciples.€€We€are€particularly€concerned€that€a€requirement€that€attorneys€violate€obligations€ofÐ Sø Ðconfidentiality€through€noisy€withdrawal,€and€then€report€their€actions€to€a€federal€regulatoryÐ ? ä Ðagency,€will€forever€alter€the€nature€of€the€attorney„client€relationship,€not€to€mentionÐ +!Ð Ðundermining€the€carefully€crafted€rules€governing€attorney€conduct€in€50€states€and€the€District€ofÐ "¼ ÐColumbia.€€We€also€fear€that€these€requirements,€when€combined€with€the€state„of„mindÐ #¨ Ðdefinitions€in€the€Commission€proposal€that€would€trigger€them,€will€present€conscientiousÐ ï#” Ðcounsel€with€any€number€of€unresolvable€dilemmas.€€For€example,€if€counsel€maintains€what€heÐ Û$€  Ðbelieves€are€client€confidences,€he€could€well€face€claims€by€third€parties,€who€will€seek€to€useÐ Ç%l! Ðthe€Commissionððs€rules€as€the€basis€for€the€standard€of€care€in€civil€litigation.€€Yet,€if€counselÐ ³&X" Ðacts€in€accordance€with€Commission€rules€that€are€at€odds€with€state€ethics€requirements€orÐ Ÿ'D # Ðcommon€law,€he€will€inevitably€face€traditional€tort€claims€by€his€former€client,€encouraged€by€aÐ ‹(0!$ Ðplaintiffsðð€bar€whose€primary€objective€is€something€other€than€the€protection€of€investors.€Ð w)"% ÐPerhaps€the€most€significant€impact€of€the€Commissionððs€proposals€may€be€to€discourageÐ [ Ðattorneys€from€advising€securities€clients,€and€discouraging€clients€from€seeking€their€advice€inÐ Gì Ðthe€first€place.Ð 3 Ø ÐÌà  àAttorneys€are€citizens.€€They€have€the€obligation,€as€reflected€in€the€Model€Rules€ofÐ  ° ÐProfessional€Conduct,€and€by€operation€of€law,€not€knowingly€to€participate€in€illegal€activity€byÐ ÷ œ Ðany€client.€€It€does€not€follow,€however,€that€attorneys€must€also€serve€as€policemen,€orÐ ã ˆ Ðenforcement€agents,€with€the€practical€obligation€to€use€confidences€entrusted€to€them€toÐ Ï t Ðinvestigate€client€activity,€or€report€outside€the€client€organization.€€In€considering€rules€underÐ »` ÐSection€307,€we€urge€the€Commission€to€keep€these€principles€in€mind.Ð §L  ÐÌà  àWe€attempt€in€these€comments€to€recognize€those€portions€of€the€proposed€rule€that€weÐ $  Ðbelieve€have€merit,€but€also€to€bring€to€the€Commissionððs€attention€aspects€of€the€proposal€thatÐ k  Ðare,€in€our€judgment,€unwise,€unworkable,€or€unlikely€to€result€in€the€investor€protection€intendedÐ Wü  Ðby€the€Commission.€€€We€also€comment€on€a€number€of€aspects€of€the€proposed€rule€that,€in€ourÐ Cè  Ðview,€unfairly€create€ð ðtraps€for€the€unwary€attorney.ðð€€We€focus€our€comments€on€those€aspectsÐ /Ô  Ðof€the€Commissionððs€proposed€rule€that€present€the€greatest€risk€of€generating€unwarrantedÐ À Ðprofessional€liability€claims€against€attorneys.€€Because€ALAS€insures€only€outside€attorneysÐ ¬ Ðpracticing€in€private€law€firms,€as€opposed€to€employed€or€inside€attorneys,€and€has€directÐ ó˜ Ðexperience€only€with€claims€against€such€attorneys,€we€limit€our€comments€here€to€provisions€ofÐ ß„ Ðthe€proposed€rule€that€affect€such€outside€attorneys.Ð Ëp ÐÌÌÌÌÌÌÌÌÌÌÌÌÌÌÌÌÐ w)"% ЇÓ  Óò òÑ€°!ÑÑ€!P+ÑCOMMENTS€ON€SPECIFIC€PROVISIONS€OF€THE€PROPOSED€RULEó óÐ [ ÐÌò ò1.€€SECTION€205.3(d)(1)(i),€MANDATORY€WITHDRAWAL,€Ð 3 Ø ÐNOTICE€AND€DISAFFIRMANCE€BY€OUTSIDE€COUNSEL€Ð  Ä ÐFOR€ISSUERS,€SHOULD€BE€DELETED€FROM€THE€RULEó óÐ  ° ÐÌÓ  Óà  àò òProposed€Change:ó ó€€ò òDelete€paragraph€(d)(1)(i)€of€Section€205.3€entirely,€renumberÐ ã ˆ Ðthe€remaining€paragraphs€of€paragraph€(d)€accordingly,€and€delete€references,€if€any,€toÐ Ó x Ðthat€paragraph€elsewhere€in€the€rule.€€ó óÐ ¿d ÐÌà  àò òRationale:ó ó€As€described€in€more€detail€below,€proposed€paragraph€(d)(1)(i)€of€SectionÐ —<  Ð205.3€is€ill„advised€for€many€reasons.€€First,€it€is€contrary€to€the€intention€of€the€sponsors€ofÐ ‡,  ÐSarbanes„Oxley€Section€307.€€Second,€mandatory€withdrawal,€where€the€attorney€him„€or€herselfÐ s  Ðis€not€violating€the€law€or€legal€ethics€rules,€is€inconsistent€with€withdrawal€rules€in€most€U.S.Ð _  Ðjurisdictions€and,€therefore,€will€create€confusion€among€practicing€attorneys.€€Third,€even€ifÐ Kð  Ðsome€form€of€mandatory€withdrawal€remains€in€the€rule,€the€proposed€scope€of€withdrawal€is€farÐ 7Ü  Ðbroader€than€is€justified€by€Sarbanes„Oxley€Section€307.€€Fourth,€it€will€subject€an€attorney€whoÐ #È Ðwithdraws€and€ð ðreports€outðð€to€liability€claims€that€the€attorney€harmed€or€breached€duties€to€theÐ ´ Ðcorporate€client,€to€the€clientððs€shareholders,€and€to€officers€or€employees€of€the€client€who€claimÐ û  Ðto€have€been€adversely€affected€by€the€report.€€Fifth,€it€will€not€achieve€the€additional€protectionÐ çŒ Ðthe€Commission€intends€because€it€will€result€in€some€clients€excluding€their€outside€attorneyÐ Óx Ðfrom€discussions€that€might€prompt€the€attorney€to€begin€the€up„the„line€reporting€process.€Ð ¿d ÐAlternatively,€mandatory€disclosure€outside€the€company€will€cause€some€outside€attorneys€toÐ «P Ðwithdraw€prematurely€from€any€representation€in€which€they€sense€a€possibility€that€they€mightÐ —< Ðultimately€be€required€to€withdraw€and€report€their€clients€to€the€Commission.€€Ð ƒ( ÐÌò òÓ  ÓA.€€The€Requirements€of€Section€205.3(d)(1)(i)€Ð [ ÐExceed€the€Language€of€Sarbanes„Oxley€Section€307€Ð G ì ÐÌÓ  Óà  àó óNothing€in€Section€307€requires€the€Commission€to€adopt€the€language€it€is€proposing€inÐ "Ä ÐSection€205.3(d)(1)(i).€€Moreover,€the€principal€sponsors€of€the€amendment€that€became€SectionÐ  #° Ð307,€along€with€Senator€Sarbanes€himself,€made€clear€on€the€Senate€floor€that€they€intendedÐ ÷#œ ÐSection€307€òònotóó€to€authorize€the€Commission€to€promulgate€such€a€rule.€€Senator€Enzi€told€theÐ ã$ˆ  ÐSenate:Ð Ï%t! ÐÌà8  àà8@ƒàà8@ƒàThe€amendment€I€am€supporting€would€òònotóó€require€the€attorneys€to€reportÐ §'L # Ðviolations€to€the€SEC,€only€to€corporate€legal€counsel€or€the€CEO,€and€ultimately,Ð “(8!$ Ðto€the€board€of€directors.Ð)$"%Ð Ð  Ї148€Cong.€Rec.€S6555,€col.€3€(July€10,€2002)(emphasis€added).€€To€make€certain€this€point€wasÐ [ Ðabsolutely€clear,€Senators€Sarbanes€and€Edwards€discussed€what€obligations€the€amendmentÐ Gì Ðcreates€for€attorneys.Ð 3 Ø ÐÌà8  àà8@ƒàà8@ƒàMR.€SARBANES.€.€.€.€It€is€my€understanding€that€this€amendment,€which€placesÐ  ° Ðresponsibility€upon€the€attorney€for€the€corporation€to€report€up€the€ladder,€òòonlyÐ ÷ œ Ðinvolves€going€up€within€the€corporate€structure.€€He€doesnððt€go€outside€theÐ ã ˆ Ðcorporate€structure.€.€.€.€€Is€that€correct?à @² àóóÐÏ tÐ Ð  ÐÌà8  àà8@ƒàà8@ƒàMR.€EDWARDS.€€Mr.€President,€my€response€to€the€question€is€òòthe€onlyÐ §L  Ðobligation€that€this€amendment€creates€is€the€obligation€to€report€to€the€client,€.€.€.€Ð “8  ЀThere€is€no€obligation€to€report€anything€outside€the€client€ð!ð€the€corporation.óóÐ$ Ð Ð  ÐÌà8  àà8@ƒàà8@ƒàMR.€SARBANES.€€I€think€that€is€an€important€point.€€òòI€simply€asked€the€questionÐ Wü  Ðin€order€to€stress€the€fact€that€that€is€the€way€this€amendment€works.óó€€This€hasÐ Cè  Ðbeen€a€very€carefully€worked€out€amendment.€€I€engaged€in€an€exchange€with€theÐ /Ô  Ðdistinguished€Senator€from€North€Carolina,€and€the€Senator€from€Wyoming,€Mr.Ð À ÐEnzi,€the€cosponsors€of€this€amendment.€€I€know€how€careful€they€have€been€inÐ ¬ Ðtrying€to€craft€the€amendment€and€in€bringing€it€here.Ðó˜Ð Ð  ÐÌ148€Cong.€Rec.€S6557,€cols.€2„3€(July€10,€2002)(emphasis€added).€€Ð Ëp ÐÌà  àThus,€proposed€paragraph€(d)(1)(i)€of€Section€205.3€is€directly€contrary€to€the€intention€ofÐ £H Ðthe€co„sponsors€of€the€amendment€that€became€Sarbanes„Oxley€Section€307,€and€to€the€intentionÐ 4 Ðof€the€principal€sponsor€of€the€Sarbanes„Oxley€Act.€€These€senators€are€the€only€members€ofÐ {  ÐCongress€to€address€this€issue€on€the€floor€during€the€legislative€process.€€Ð g  ÐÌà@\ \ ìàò òB.€€Section€205.3(d)(1)(i)€Is€InconsistentˆÐ ? ä Ðà@‘ ‘ ìàwith€Withdrawal€Rules€in€Most€Statesó óˆÐ +!Ð ÐÌà  àMandatory€withdrawal€by€attorneys€is€governed€by€state€versions€of€ABA€Model€RuleÐ #¨ Ð1.16.€€That€Rule€specifies€only€three€situations€in€which€it€is€mandatory€for€an€ò òó óattorney€toÐ ï#” Ðwithdraw€from€a€client€representation:€(1)€where€the€attorney€is€discharged€by€the€client;€(2)Ð Û$€  Ðwhere€the€attorneyððs€physical€or€mental€condition€impairs€the€attorneyððs€ability;€and€(3)€where€Ð Ç%l! Ðcontinued€representation€will€result€in€the€attorneyððs€violating€the€rules€of€professional€conductÐ ³&X" Ð(such€as€by€knowingly€assisting€a€client€crime€or€fraud)€or€violating€other€law.€€See€Model€RuleÐ Ÿ'D # Ð1.16(a)€and€Comment€[2].€€According€to€ABA€Formal€Opinion€92„366,€withdrawal€also€wouldÐ ‹(0!$ Ðbe€mandatory€under€Model€Rule€1.2(d)€if,€but€only€if,€as€a€result€of€the€clientððs€use€of€theÐ w)"% Ðattorneyððs€services€to€perpetrate€a€crime€or€fraud,€the€attorneyððs€continued€representation€wouldÐ [ Ðconstitute€knowing€assistance€in€the€clientððs€crime€or€fraud.€€€ò òÐ Gì ÐÌà  àó óIf€a€òòclientóó,€as€opposed€to€the€attorney,€either€has€used€or€is€using€the€attorneyððs€services€toÐ  Ä Ðperpetrate€a€crime€or€fraud,€or€persists€in€conduct€that€will€have€that€result,€Model€RuleÐ  ° Ð1.16(b)(2)€and€(3)€òòpermitóó,€but€do€not€òòrequireóó,€the€attorney€to€withdraw€unless,€as€noted€above,Ð ÷ œ Ðcontinued€representation€would€amount€to€knowingly€assisting€the€clientððs€crime€or€fraud.€€TheÐ ã ˆ Ðoverwhelming€majority€of€states€follow€Model€Rule€1.16€in€specifying€when€attorney€withdrawalÐ Ï t Ðis€mandatory,€and€when€it€is€permissive.€€Ð »` ÐÌà  àThus,€Section€205.3(d)(1)(i)ððs€òòrequirementóó€of€withdrawal€when€an€attorney€fails€toÐ “8  Ðreceive€an€appropriate€client€response€to€the€suggestion€of€a€material€violation€is€inconsistentÐ $  Ðwith€the€rules€of€most€states,€and€will€lead€to€confusion€among€attorneys€for€issuers€as€to€theirÐ k  Ðduties€to€their€clients.€€The€Commission€should€consider€that€the€legal€ethics€rules€in€many€statesÐ Wü  Ðmay€already€require€attorney€withdrawal€and€disaffirmance,€òòif€the€attorneyððs€prior€work€will€beÐ Cè  Ðor€is€being€used€by€the€client€in€perpetrating€an€ongoing€or€future€crime€or€fraudóó.€€In€such€aÐ /Ô  Ðsituation,€noisy€withdrawal€may€be€required€in€order€for€the€attorney€to€comply€with€the€mandateÐ À Ðin€every€stateððs€ethics€rules€that€the€attorney€not€knowingly€assist€a€clientððs€crime€or€fraud.€€ABAÐ ¬ ÐFormal€Opinion€92„366.Ð ó˜ ÐÌà  àAs€to€disclosure€of€confidential€client€information€to€prevent€client€criminal€conduct,Ð Ëp Ðthirty„seven€states€already€permit€such€disclosure,€ten€prohibit€it,€and€only€four€require€it.€€(òòSeeóóÐ ·\ Ðauthorities€cited€in€note€69€of€Release€No.€33„8150.)€€Thus,€a€rule€that€requires€such€disclosure,Ð £H Ðeven€under€the€rubric€of€ð ðnoisy€withdrawal,ðð€for€not€receiving€a€timely€and€appropriate€responseÐ 4 Ðto€the€attorneyððs€prior€report,€would€conflict€with€the€legal€ethics€rules€of€many€states,€subjectingÐ {  Ðattorneys€to€conflicting€regulatory€mandates.€Ð g  ÐÌà@Q Q ìàò òC.€€The€Scope€of€Withdrawal€Required€by€Section€205.3(d)(1)(i)ˆÐ ? ä Ðà@€ € ìàFar€Exceeds€the€Mandate€of€Sarbanes„Oxley€Section€307ó óˆÐ +!Ð ÐÌà  àWhen€read€together€with€the€Commissionððs€commentary,€proposed€Section€205.3(d)(1)(i)Ð #¨ Ðappears€to€require€attorneys€subject€to€the€paragraph€to€withdraw€from€òòallóó€representations€of€theÐ ï#” Ðissuer,€not€just€from€the€representation€that€generated€the€attorneyððs€up„the„line€report,€or€from€allÐ Û$€  Ðrepresentations€involving€the€Commission.€€€Why€should€an€attorney€or€law€firm€that€mustÐ Ç%l! Ðwithdraw€from€a€securities€law€representation€under€(d)(1)(i)€be€required€also€to€withdraw€fromÐ ³&X" Ðdefending€the€issuer€in€state€common€law€tort€claims?€€Why€should€he€also€be€required€toÐ Ÿ'D # Ðwithdraw€from€employment€law,€environmental,€real€estate,€or€dozens€of€other€matters€that€haveÐ ‹(0!$ Ðno€or€little€relationship€to€the€securities€law€representation€covered€by€the€proposed€rule?€€€InÐ w)"% Ðaddition,€required€withdrawal€from€litigation€matters€without€court€approval€will€subjectÐ [ Ðattorneys€to€violations€of€court€and€ethical€rules.€€The€Commission€offers€no€rationale€for€such€aÐ Gì Ðsweeping€withdrawal€requirement.€€The€disruption€and€financial€harm€to€issuers€and€theirÐ 3 Ø Ðshareholders€from€such€a€broad€withdrawal€requirement€will€be€substantial.Ð  Ä ÐÌà  àEven€if€the€Commission€determines€to€retain€some€form€of€mandatory€withdrawal€in€itsÐ ÷ œ Ðfinal€rule,€it€should€limit€the€required€withdrawal€to€the€representation€that€gave€rise€to€the€up„Ð ã ˆ Ðthe„line€report.€€Because€of€the€potential€harm€to€issuers€and€their€shareholders€that€would€beÐ Ï t Ðcaused€by€requiring€attorneys€to€withdraw€from€all€representations€of€the€issuer,€€many€of€whichÐ »` Ðwill€be€unrelated€to€any€possible€securities€law€violation€or€the€purposes€of€Sarbanes„OxleyÐ §L  ÐSection€307,€there€is€no€rational€justification€for€such€a€requirement.Ð “8  ÐÌò òÓ  ÓD.€€Section€205.3(d)(1)(i)€Will€Subject€Withdrawing€and€Reporting€Ð k  ÐAttorneys€to€Liability€Claims€for€Doing€What€the€Rule€Requiresó óÐ Wü  ÐÌÓ  Óà  àA€subject€on€which€Release€33„8150€barely€touches€is€the€exposure€of€attorneys€coveredÐ /Ô  Ðby€the€proposed€rule€to€liability€claims€from€clients€or€others€who€allege€to€have€been€damagedÐ À Ðby€an€attorneyððs€withdrawal,€reporting€to€the€Commission,€and€disaffirmance€of€priorÐ ¬ Ðsubmissions.€€Based€on€ALASððs€experience,€the€basis€for€such€claims€will€be€not€only€that€theÐ ó˜ Ðattorney€violated€the€applicable€state€rules€of€professional€conduct,€but€also€that€the€attorneyÐ ß„ Ðviolated€duties€to€the€client€of€loyalty€and€confidentiality€imposed€by€agency€law€in€every€state.€Ð Ëp ÐEven€if€the€Commission€can€preempt€state€legal€ethics€rules€that€are€inconsistent€withÐ ·\ Ðrequirements€of€the€proposed€rule,€as€suggested€in€Section€205.1,€it€cannot€exempt€attorneys€fromÐ £H Ðliability€to€their€clients€for€their€actions.€€In€addition,€an€attorney€complying€with€paragraphÐ 4 Ð(d)(1)(i)ððs€requirements€to€withdraw,€report€out€and€disaffirm€may€be€sued€by€corporate€officersÐ {  Ðor€employees€who€claim€that€their€careers€or€reputations€have€been€harmed€by€the€attorneyððsÐ g  Ðconduct,€or€by€shareholders€who€claim€that€the€attorneyððs€withdrawal€or€report€adversely€affectedÐ Sø Ðthe€corporate€client€and€the€value€of€its€stock.€€Ð ? ä ÐÌà  àConsider€the€attorney€in€a€particular€situation€who€is€unsure€about€the€application€ofÐ "¼ ÐSection€205.3(d)(1)(i).€€If€this€attorney€makes€no€disclosure€and,€after€all€the€facts€andÐ #¨ Ðcircumstances€are€revealed,€the€attorney€should€have€given€notice€and€withdrawn,€the€attorneyÐ ï#” Ðmay€face€claims€by€third€parties€for€failure€to€comply€with€the€rule.€€Alternatively,€if€the€attorneyÐ Û$€  Ðdoes€report€and€withdraw€and€later€is€found€to€have€been€wrong€in€his€or€her€suspicions,€theÐ Ç%l! Ðattorney€risks€claims€by€the€client.€€€€Consequently,€mandatory€withdrawal€in€SectionÐ ³&X" Ð205.3(d)(1)(i)€could€result€in€liability€regardless€of€what€course€an€attorney€chooses€based€solelyÐ Ÿ'D # Ðon€a€retrospective€attribution€of€the€attorneyððs€knowledge€rather€than€on€any€improper€attorneyÐ ‹(0!$ Ðbehavior.€€As€a€result,€the€significant€liability€exposure€risks,€along€with€the€other€reasonsÐ w)"% ÐSection€205.3(d)(1)(i)€is€inadvisable,€outweigh€any€possible€benefit€of€that€section€of€the€rule.Ð [ Ðò òÌó óÌà@µ µ ìàò òE.€€Section€205.3(d)(1)(i)€Will€Not€Likely€Deter€orˆÐ  Ä Ðà@s s ìàExpose€€Securities€Law€and€Other€Violationsó óˆÐ  ° ÐÌà  àEven€if€one€could€overcome€the€prior€objections,€a€mandatory€attorney€disclosureÐ ã ˆ Ðrequirement€is€unlikely€to€deter€or€expose€unlawful€client€conduct.€Ð Ï t ÐÌà  àAlthough€in€most€cases,€attorneys€and€their€clients€share€open€and€candid€discussions€as€aÐ §L  Ðresult€of€the€assurance€of€confidentiality,€removing€that€assurance€has€the€potential€for€disruptingÐ “8  Ðthis€important€dynamic.€€It€is€in€this€context€that€attorneys€can€be€most€effective€in€counselingÐ $  Ðtheir€clients€to€do€the€right€thing.€€Mandatory€disclosure€of€any€kind,€even€in€the€limitedÐ k  Ðcircumstances€proposed€in€paragraph€(d)(1)(i),€will€cause€some€clients€to€exclude€outsideÐ Wü  Ðattorneys€from€their€deliberations€whenever€sensitive€issues€arise€that€might€ultimately€result€inÐ Cè  Ðmandatory€withdrawal€and€disaffirmance€by€the€outside€attorney.€€In€such€cases,€the€attorney€willÐ /Ô  Ðhave€no€opportunity€to€counsel€the€client€about€the€risks€of€its€proposed€conduct,€or€to€attempt€toÐ À Ðpersuade€the€client€to€abandon€any€proposed€unlawful€conduct,€because€the€attorney€will€not€evenÐ ¬ Ðbe€in€the€room,€not€be€consulted€as€frequently,€and€will€receive€only€selective€information€fromÐ ó˜ Ðthe€client.€€Ð ß„ ÐÌà  àIn€other€cases,€experienced,€highly€ethical,€risk„averse€attorneys€will€respond€toÐ ·\ Ðmandatory€withdrawal,€reporting€and€disaffirmance€requirements€by€trying€to€ensure€that€theyÐ £H Ðòòneveróó€become€involved€in€a€situation€where€such€action€is€required.€€At€the€first€hint€ofÐ 4 Ðproblematic€client€conduct,€long€before€anyone€could€even€argue€that€the€attorney€ð ðbecameÐ {  Ðawareðð€of€ð ðevidence€of€a€material€violation,ðð€these€attorneys€will€voluntarily€withdraw,Ð g  Ðmotivated€in€part€by€an€instinctive€revulsion€at€the€prospect€of€ð ðblowing€the€whistleðð€on€a€client,Ð Sø Ðand€in€part€by€a€desire€to€avoid€liability€exposure€for€breach€of€fiduciary€duties€of€loyalty€andÐ ? ä Ðconfidentiality€and€other€possible€liability€claims€(see€above).€€Thus,€at€the€very€time€the€issuerÐ +!Ð Ðclient€and€its€management€most€need€the€advice€of€experienced,€trusted€and€prudent€counsel,€theyÐ "¼ Ðwill€be€deprived€of€it.€€Based€on€our€experience€in€counseling€attorneys€who€encounterÐ #¨ Ðproblematic€client€behavior,€early€ð ðquietðð€withdrawal€will€unquestionably€be€the€response€ofÐ ï#” Ðmany€attorneys€to€a€mandatory€ð ðnoisyðð€withdrawal€requirement.€€In€many€cases€that€might€be€theÐ Û$€  Ðcourse€that€ALAS€might€recommend€to€its€insured€attorneys€in€order€to€minimize€liability€risks€toÐ Ç%l! Ðthe€attorney.€€Such€early€withdrawal,€however,€frequently€will€be€disruptive€and€costly€to€theÐ ³&X" Ðissuer€and€its€shareholders€with€no€commensurate€benefit€to€the€investing€public.Ð Ÿ'D # ÐÌÐ w)"% ЇÌà@d d ìàò òF.€€Eliminating€Mandatory€Withdrawal€and€Outside€ReportingˆÐ Gì Ðà@ããìàSolves€the€Most€Serious€Problems€with€the€Commissionððs€Proposed€Ruleó óˆÐ 3 Ø ÐÌò òó óà  àIn€summary,€the€mandatory€withdrawal,€reporting€out€and€disaffirmance€requirements€ofÐ  ° ÐSection€205.3€(d)(1)(i)€are€the€proposed€ruleððs€most€serious€weaknesses.€€They€produce€conflictsÐ ÷ œ Ðwith€existing€state€legal€ethics€rules,€state€common€law€principles€of€attorney€fiduciary€duty€toÐ ã ˆ Ðclients,€state€common€law€rules€of€attorney€liability€to€third€parties,€and€with€most€attorneysððÐ Ï t Ðinstinctive€reluctance€to€harm€their€clients.€€They€also€will€render€the€up„the„line€reportingÐ »` Ðrequirement€of€Section€307€far€òòlessóó€effective€than€it€would€otherwise€be€because€they€will€deterÐ §L  Ðsome€clients€from€involving€outside€attorneys€in€their€decision„making€process,€and€will€deterÐ “8  Ðsome€attorneys€from€remaining€involved€to€advise€and€counsel€clients€on€how€to€comply€with€theÐ $  Ðlaw.€€All€of€these€problems€will€be€avoided€if€the€Commission€simply€limits€its€proposed€rule€toÐ k  Ðwhat€Congress€intended€in€enacting€Section€307:€€up„the„line€reporting€òòwithinóó€a€clientÐ Wü  Ðorganization,€with€no€requirement€for€withdrawal,€outside€reporting€or€disaffirmance.Ð Cè  ÐÌò òà8  à€€€€€€à8@4Ð Ð à2.€€THE€ATTORNEY€STATE€OF€MIND€REQUIREMENTS€FORÐÀÐ Ð  Ѐ€à  à€€€€€€REPORTING€UP„THE„LINE€AND€FOR€DETERMINING€Ð ¬ Ðà  à€€€€€€AN€ð ðAPPROPRIATE€RESPONSEðð€SHOULD€BE€CLARIFIEDÐ ó˜ ÐÔ_Ôó óÔ_ÔÌò òà  àProposed€Changes:ó ó€ò òÐ Ëp ÐÌà  à(A)€The€knowledge€standard€for€attorney€reporting€in€paragraph€(b)€of€SectionÐ §L Ð205.3€should€be€changed€from€ð ðbecomes€awareðð€to€ð ðknowsðð€and€a€definition€of€ð ðknowsððÐ “8 Ðsimilar€to€the€Model€Rules€definition€should€be€added€to€Section€205.2;€Ð $ ÐÌà  à(B)€the€definition€of€ð ðevidence€of€a€material€violationðð€in€Section€205.2(e)€should€beÐ Wü Ðchanged€to€ð ðinformation€that€leads€the€òòóóattorney€òòóóin€question€reasonably€to€believe€.€.€.;ðð€Ð C è ÐÌà  à(C)€the€definition€of€ð ðreasonably€believesðð€in€paragraph€(l)€of€Section€205.2€shouldÐ "À Ðbe€changed€to€conform€to€the€definition€in€the€Model€Rules,€which€will€also€clarify€whenÐ #¬ Ðattorneys€have€or€have€not€received€an€ð ðappropriate€responseðð€to€a€prior€report.€ó óÐ ó#˜ Ðò òó óÌà  àò òRationale:€ó óThe€two€critical€questions€for€attorneys€under€Section€307€are€(1)€when€mustÐ Ë%p! Ðthe€attorney€report€up„the„line€ð ðevidence€of€a€material€violationðð?€and€(2)€when€must€the€attorney€Ð »&`" Ðreport€to€the€issuerððs€board€because€the€CLO€or€CEO€of€the€issuer€has€not€ð ðappropriatelyÐ §'L # Ðrespond[ed]ðð€to€a€prior€report€by€the€attorney?€€To€assist€attorneys€covered€by€the€rule€to€answerÐ “(8!$ Ðthese€questions,€the€state€of€mind€requirements€in€the€proposed€rule€should€be€as€clear€asÐ )$"% Ðpossible.€€They€should€adopt€terminology€and€definitions€that€are€the€commonly€understoodÐ [ Ðmeaning€of€the€words€being€used,€and€should€incorporate€the€same€state€of€mind€definitionsÐ Gì Ðalready€applicable€to€attorneys€under€the€ABA€Model€Rules€and€most€state€rules€of€professionalÐ 3 Ø Ðconduct.€Ð  Ä ÐÌà  àAn€attorneyððs€approach€to€answering€these€critical€questions€requires€a€two€step€process:€Ð ÷ œ Ð(1)€receiving€facts€and€information,€and€(2)€applying€the€attorneyððs€legal€knowledge,€experienceÐ ã ˆ Ð(including€familiarity€with€the€client€and€client€personnel€involved),€and€the€intangible€butÐ Ï t Ðessential€quality€of€judgment€to€the€facts€and€information€the€attorney€possesses.€€We€deal€withÐ »` Ðthe€first€step€of€this€process,€acquisition€of€information,€in€point€A€below.€€In€points€B€and€C€weÐ §L  Ðdiscuss€the€second€step€in€the€process,€the€attorneyððs€application€of€legal€knowledge,€experience,Ð “8  Ðand€judgment€to€the€known€facts€to€reach€a€conclusion€as€to€whether€there€is€evidence€that€wouldÐ $  Ðlead€a€reasonable€lawyer€to€conclude€that€there€was,€is€or€will€be€a€material€violation.€€It€isÐ k  Ðimportant€to€recognize€that€the€facts€the€attorney€Ô_ÔmustÔ_Ô€assess€are€often€incomplete,€changing,€andÐ Wü  Ðextremely€complicated€and,€therefore,€not€susceptible€to€black€and€white€analysis.€€In€addition,Ð Cè  Ðthe€assessment€step€may€involve€unsettled€legal€principles.€€For€these€reasons,€this€assessmentÐ /Ô  Ðstep€is€so€complex,€and€so€dependent€on€the€legal€knowledge,€experience€and€judgment€of€theÐ À Ðparticular€attorney€concerned,€that€the€Commissionððs€effort€to€employ€a€totally€ð ðobjectiveððÐ ¬ Ðstandard€to€define€the€attorneyððs€duty€is€ultimately€bound€to€fail.€€These€delicate€lawyerÐ ó˜ Ðjudgments€simply€can€not€be€fairly€evaluated€by€a€totally€objective€standard.Ð ß„ Ðà@ìì*ìàˆÌÓ  Óò òA.€€The€Term€ð ðBecomes€Awareðð€in€Section€205.3(b)€Should€Be€Ð ·\ ÐChanged€to€ð ðKnowsðð€and€a€Definition€of€ð ðKnowsðð€Similar€to€Ð £H Ðthe€Model€Rules€Definition€Should€Be€Added€to€Section€205.2ó óÐ 4 ÐÌÓ  Óà  àUnder€Section€205.3(b)€of€the€proposed€rule,€an€attorney€is€required€to€make€an€up„the„Ð g  Ðline€report€when€he€or€she€ð ðbecomes€awareðð€of€evidence€of€a€material€violation.€€The€phraseÐ Sø Ðð ðbecomes€awareðð€is€not€a€defined€term€in€the€ABA€Model€Rules€and,€we€believe,€is€never€orÐ ? ä Ðrarely€used€in€them.€€The€terms€ð ðknowingly,ðð€ð ðknown,ðð€and€ð ðknowsðð€are€defined€in€Model€RuleÐ +!Ð Ð1.0(f)€to€mean€ð ðactual€knowledge€of€the€fact€in€question.€€A€personððs€knowledge€may€be€inferredÐ "¼ Ðfrom€circumstances.ðð€€€Official€Comment€[8]€to€Model€Rule€4.2€further€elaborates€on€the€conceptÐ #¨ Ðof€ð ðknowledgeðð€by€noting€that€since€ð ðactual€knowledge€can€be€inferred€from€the€circumstances[,]Ð ï#” Ð...€ð ðthe€attorney€cannot€evade€[the€rule]€by€closing€eyes€to€the€obvious.ðð€€Ð Û$€  ÐÌÓ °X°ØÓà  àThe€term€ð ðknowledgeðð€also€is€used€in€many€sections€of€the€òòRestatement€Third,€The€LawÐ ³&X" ÐGoverning€Lawyersóó.€€Comment€òògóó€to€Section€94€of€the€òòRestatementóó€discusses€in€detail€the€subjectÐ Ÿ'D # Ðof€ð ðan€attorneyððs€knowledge€of€the€wrongful€nature€of€a€clientððs€conduct.ðð€€And€the€ReporterððsÐ ‹(0!$ ÐNote€to€Section€94€contains€almost€a€full€page€of€case€citations€and€other€authorities€that€supportÐ w)"% Ðthe€discussion€in€Comment€òògóó.€€Thus,€the€meaning€and€application€of€the€term€ð ðknowsðð€are€farÐ [ Ðmore€certain€and€easily€ascertainable€by€attorneys€than€the€phrase€ð ðbecomes€awareðð€in€proposedÐ Gì ÐSection€205.3(b).€€Ð 3 Ø ÐÌà  àChanging€the€phrase€ð ðbecomes€awareðð€to€ð ðknowsðð€will€make€no€substantive€change€in€theÐ  ° Ðmental€state€proposed€in€paragraph€(b).€€In€common€usage,€the€meaning€of€ð ðawarenessðð€is€theÐ ÷ œ Ðsame€as€ð ðknowledge.ðð€€Thus,€changing€ð ðbecomes€awareðð€to€ð ðknowsðð€in€proposed€Section€205(b)Ð ã ˆ Ðwill€conform€the€mental€state€required€by€the€rule€to€that€recognized,€explained€and€understood€inÐ Ï t Ðboth€the€Model€Rules€and€the€òòRestatementóó,€with€no€change€of€substance.Ð »` ÐÌà  àA€definition€of€ð ðknowsðð€should€be€added€to€the€proposed€rule€to€further€clarify€theÐ “8  Ðattorney€state€of€mind€requirement.€€An€appropriate€definition€of€ð ðknowsðð€that€combines€variousÐ $  Ðreferences€in€the€Model€Rules€would€be:Ð k  ÐÌà8  àà8` Ð Ð àà8¸ ` x` xàThe€term€ð ðknowsðð€means€actual€knowledge€of€theÐ Cè  Ðfact€in€question,€not€information€that€merely€couldÐ /Ô  Ðbe€imputed€to€the€attorney.€€Actual€knowledge€canÐ À Ðbe€inferred€from€the€circumstances.€€An€attorney€Ð ¬ Ðcannot€evade€knowledge€by€closing€his€or€her€eyesÐ ó˜ Ðto€the€obvious.€€Ðß„¸ ¸  ÐÌò òÓ  ÓB.€€The€Definition€of€ð ðEvidence€of€a€Material€Ð ·\ ÐViolationðð€in€Section€205.2(e)€Should€be€Changedó óÐ £H ÐÌÓ °Ý"°XÓÓ  Óà  àThe€proposed€definition€of€ð ðevidence€of€a€material€violationðð€in€Section€205(e)€isÐ {  Ðð ðinformation€that€would€lead€an€attorney€reasonably€to€believe€that€a€material€violation€hasÐ g  Ðoccurred,€is€occurring,€or€is€about€to€occur.ðð€€This€definition€reflects€two€problems€that€willÐ Sø Ðconfound€attorneys€attempting€to€comply€with€the€statute.€€The€first€problem€is€that€the€phraseÐ ? ä Ðð ðwould€lead€an€attorney€reasonably€to€believeðð€is€ambiguous.€€Does€it€mean€ð ðwould€lead€òòeveryóó€Ð +!Ð Ðattorney€reasonably€to€believe,ðð€or€does€it€mean€ð ðwould€lead€some€attorneys€reasonably€toÐ "¼ Ðbelieve?ðð€€Ð #¨ ÐÌà  àThe€second€problem€with€the€definition€of€ð ðevidence€of€a€material€violationðð€is€that€itÐ Û$€  Ðappears€intended€to€incorporate€the€definition€of€€ð ðreasonably€believesðð€in€Section€205.2€(l),Ð Ç%l! Ðwhich,€as€the€Commissionððs€commentary€acknowledges,€has€been€intentionally€changed€from€theÐ ³&X" ÐModel€Rule€(and€ordinary€meaning)€definition€to€make€it€a€totally€objective€standard€thatÐ Ÿ'D # Ðpurposely€ignores€the€actual€belief€of€the€attorney€whose€ð ðreasonable€beliefðð€is€at€issue.€€TheÐ ‹(0!$ Ðproblem€with€that€definition€is€discussed€in€Point€2.€C€below.Ð w)"% Їà  àThe€ambiguity€with€the€proposed€definition€of€ð ðevidence€of€a€material€violationðð€is€that€itÐ [ Ðappears€to€describe€only€what€one€attorney€could€reasonably€believe,€without€negating€theÐ Gì Ðpossibility€that€other€attorneys€reasonably€could€believe€something€entirely€different.€€A€clientððsÐ 3 Ø Ðproposed€conduct€might€lead€one€attorney,€acting€reasonably,€to€conclude€that€a€materialÐ  Ä Ðviolation€had€occurred,€was€occurring€or€would€occur€in€the€future.€€Another€attorney,€also€actingÐ  ° Ðreasonably,€might€be€led€to€the€conclusion€of€no€violation.€€The€proposed€definition€does€notÐ ÷ œ Ðallow€for€this€possibility.€Ð ã ˆ ÐÌà  àTake€an€example€of€an€issuer€that€declines,€against€counselððs€advice,€to€include€aÐ »` Ðparticular€fact€in€a€disclosure€statement.€€The€omission€of€the€fact€might€fall€anywhere€along€aÐ §L  Ðspectrum€from€a€clear€securities€law€violation,€through€a€gray€area€where€reasonable€attorneysÐ “8  Ðcould€disagree,€to€the€other€end€of€the€spectrum€where€all€reasonable€attorneys€would€agree€thatÐ $  Ðthe€omission,€although€contrary€to€counselððs€recommendation,€is€clearly€not€a€violation€of€law.€Ð k  ÐWe€all€can€conclude€that€omissions€in€the€ð ðclear€violationðð€category€should€be€subject€toÐ Wü  Ðreporting,€and€that€omissions€in€the€ð ðclearly€not€a€violationðð€category€should€not€have€to€beÐ Cè  Ðreported.€€But€what€about€omissions€as€to€which€reasonable€attorneys€disagree?€€€TheÐ /Ô  ÐCommissionððs€proposed€definition€appears€to€say€that€if€ð ðan€attorneyðð€acting€reasonably€couldÐ À Ðconclude€that€the€omission€was€a€violation,€it€must€be€reported,€even€if€the€attorney€doing€theÐ ¬ Ðevaluation€does€not€draw€that€conclusion€or€another€attorney,€also€acting€reasonably,€reaches€aÐ ó˜ Ðdifferent€conclusion.Ð ß„ ÐÌà  àIt€seems€obvious€that€if€a€reasonable€attorney,€acting€reasonably,€could€conclude€that€theÐ ·\ Ðomission€is€not€a€violation,€then€an€attorney€who€òòdoesóó€so€conclude€should€òònotóó€be€required€toÐ £H Ðreport€that€omission€as€ð ðevidence€of€a€material€violation.ðð€€Ð 4 ÐÌà  àThe€best€way€to€solve€this€problem€is€to€use€the€common€sense€meaning€of€ð ðreasonablyÐ g  Ðbelieves,ðð€which€is€also€the€definition€found€in€Model€Rule€1.0(i):€that€the€attorney€believes€thatÐ Sø Ðthe€omission€is€a€violation€and€that€the€belief€is€reasonable.€€To€reflect€this€standard,€theÐ ? ä Ðdefinition€of€ð ðevidence€of€a€material€violationðð€in€Section€205.2(e)€should€be€changed€to€à8 @z àÐ +!Ð Ðð ðinformation€that€leads€the€attorney€in€question€reasonably€to€believe€that€a€material€violation€hasÐ "¼ Ðoccurred,€is€occurring,€or€is€about€to€occur.ðð€€This€formulation€includes€the€converse€proposition,Ð #¨ Ðthat€if€the€attorney€believes€there€is€no€violation,€and€that€belief€is€reasonable,€the€attorney€is€notÐ ï#” Ðrequired€to€report.€Ð Û$€  ÐÌÓ  Óò òÌÌÌÐ w)"% ÐC.€€The€Definition€of€ð ðReasonably€Believesðð€Ð [ Ðin€Section€205.2(l)€Should€be€Changedó óÐ Gì ÐÌÓ  Óà  àThe€second€problem€with€the€proposed€definition€of€ð ðevidence€of€a€material€violationðð€isÐ  Ä Ðthat€it€is€probably€intended€to€incorporate€the€definition€of€ð ðreasonably€believesðð€in€paragraph€(l)Ð  ° Ðof€Section€202.€€We€say€ð ðprobablyðð€because€the€actual€language€in€the€definition€of€ð ðevidence€ofÐ ÷ œ Ða€material€violationðð€is€ð ðreasonably€to€believe,ðð€rather€than€ð ðreasonably€believes.ðð€€(ThisÐ ã ˆ Ðuncertainty€would€be€eliminated€if€paragraph€(l)€stated€that€it€was€defining€both€ð ðreasonablyÐ Ï t Ðbelievesðð€and€ð ðreasonably€to€believe,ðð€which€may€have€been€the€intent€of€the€drafters.)Ð »` ÐÌà  àIf€we€assume€that€the€proposed€definition€of€ð ðevidence€of€a€material€violationðð€òòwasóóÐ “8  Ðintended€to€incorporate€the€proposed€definition€of€ð ðreasonably€believes,ðð€the€problem€with€theÐ $  Ðparagraph€(l)€definition€becomes€immediately€apparent.€€It€is,€as€the€Commissionððs€commentaryÐ k  Ðnotes,€a€totally€objective€standard.€(The€commentary€states€that€the€definition€in€Section€205.2(l)Ð Wü  Ðis€based€on€Model€Rule€1.0(i),€but€ð ðmodified€to€eliminate€any€implied€subjective€element.ðð)€€ItÐ Cè  Ðdescribes€what€òòeveryóó€reasonable€attorney€òòmustóó€believe€(if€not,€the€attorney€would€not€be€actingÐ /Ô  Ðreasonably),€rather€than€what€a€particular€attorney,€acting€reasonably,€could€or€does€believe.€€ButÐ À Ðthis€is€a€tortured€definition€of€ð ðreasonably€believesðð€precisely€because€it€omits€the€subjectiveÐ ¬ Ðbelief€of€the€attorney€in€question.€€It€is€inconsistent€with€the€meaning€of€ð ðreasonably€believesðð€asÐ ó˜ Ðused€in€ordinary€speech,€and€with€the€definition€of€ð ðreasonably€believesðð€in€Model€Rule€1.0(i),Ð ß„ Ðwhich€has€been€adopted€in€almost€all€states.€€That€definition€is€ð ðthat€the€attorney€believes€theÐ Ëp Ðmatter€in€question€and€that€the€circumstances€are€such€that€the€belief€is€reasonable.ððò òó óÐ ·\ ÐÌà  àBecause€Section€205.2(l)ððs€proposed€definition€of€ð ðreasonably€believesðð€is€contrary€bothÐ 4 Ðto€the€ordinary€meaning€of€that€phrase,€to€the€meaning€it€has€in€the€Model€Rulesòòóó,€and€to€theÐ {  Ðattorney€conduct€rules€of€most€U.S.€jurisdictions,€it€will€confuse€and€confound€attorneys€andÐ g  Ðothers€trying€to€interpret,€apply€and€comply€with€the€proposed€rule.€à Ý" àÐ Sø ÐÓ  Óò òó óÌÓ  Óà  àUnder€the€QLCC€reporting€procedure€in€proposed€Section€205.3(c),€an€attorney€who€has€Ð +!Ð Ðreported€evidence€of€a€material€violation€to€an€issuerððs€QLCC€is€not€required€to€receive€orÐ "¼ Ðevaluate€the€appropriateness€of€the€issuerððs€response.€€(ALAS€supports€the€CommissionððsÐ #¨ Ðproposed€QLCC€procedure.€€òòSeeóó€point€9.A€below.)€€However,€when€an€attorneyððs€initial€report€isÐ ï#” Ðto€the€issuerððs€CLO€or€CEO€under€Section€205.3(b),€the€attorney€will€face€a€second€criticalÐ Û$€  Ðquestion:€has€the€issuer€made€an€appropriate€and€timely€response€to€the€report?€€€The€answerÐ Ç%l! Ðdetermines€whether€the€attorney€has€to€fulfill€the€duty€under€Section€205.3(b)(4)€to€report€furtherÐ ³&X" Ðto€the€issuerððs€audit€committee,€to€an€independent€board€committee,€or€to€the€board€itself.€€LikeÐ Ÿ'D # Ðthe€threshold€issue€of€whether€the€attorney€knows€of€evidence€of€a€material€violation,€the€exactÐ ‹(0!$ Ðnature€of€this€second€issue€is€determined€by€the€definitions€in€Section€205.2,€particularly€theÐ w)"% Ðdefinition€of€ð ðreasonably€believesðð€in€Section€205.2(l).Ð [ ÐÌà  àSection€205.2(b)€defines€ð ðappropriate€responseðð€to€mean€a€response€ð ðthat€provides€a€basisÐ 3 Ø Ðfor€an€attorney€òòreasonably€to€believeóóðð€that€there€is€no€material€violation,€or€that€the€issuer€hasÐ  Ä Ðtaken€remedial€measures.€€Section€205.3(b)€contains€four€paragraphs€ð!ð€paragraphs€(4),€(5),€(7)Ð  ° Ðand€(8)€ð!ð€that€describe€the€obligations€of€an€attorney€who€has€or€has€not€received€an€ð ðappropriateÐ ÷ œ Ðresponseðð€from€€the€issuer.€€The€meaning€of€each€of€these€paragraphs,€in€turn,€depends€on€theÐ ã ˆ Ðdefinition€of€ð ðreasonably€believes.ðð€Ð Ï t ÐÌà  àFor€the€reasons€discussed€above,€even€the€most€conscientious€attorneyððs€efforts€to€complyÐ §L  Ðwith€the€ruleððs€requirement€to€determine€whether€an€ð ðappropriate€responseðð€has€been€receivedÐ “8  Ðwill€be€confounded€by€the€convoluted€and€confusing€definition€of€ð ðreasonably€believesðð€inÐ $  ÐSection€205.2(l).€€The€Commission€can€clarify€both€the€standard€for€initial€attorney€reports€andÐ k  Ðthe€standard€for€determining€whether€the€issuer€has€provided€an€ð ðappropriate€responseðð€byÐ Wü  Ðadopting€a€definition€of€ð ðreasonably€believesðð€that€corresponds€to€the€ordinary€meaning€of€theÐ Cè  Ðwords,€and€is€consistent€with€how€that€term€is€used€in€other€attorney€regulatory€contexts.€€ò òÐ /Ô  ÐÓ  ÓòòóóÌ3.€€PARAGRAPHS€(a)€AND€(f)€OF€SECTION€205.2,€CONTAINING€€Ð ¬ ÐDEFINITIONS€OF€ð ðAPPEARING€AND€PRACTICING€BEFORE€THE€COMMISSIONððÐ ó˜ ÐAND€ð ðIN€THE€REPRESENTATION€OF€AN€ISSUER,ðð€SHOULD€BE€CHANGEDó óÐ ß„ ÐÌÓ  Óà  àò òProposed€Change:ó ó€ò òNarrow€the€applicability€of€the€proposed€rule€by€changing€theÐ ·\ Ðdefinition€of€ð ðappearing€and€practicing€before€the€Commissionðð€in€Section€205.2(a)€and€theÐ §L Ðdefinition€of€ð ðin€the€representation€of€an€issuerðð€in€Section€205.2(f)€as€follows:Ð “8 ÐÌà8  àà @ àà @ à(1)€€€attorneys€who€ð ðappear€and€practice€before€the€Commissionðð€should€beÐ k Ðdefined€as€the€term€ð ðpracticing€before€the€Commissionðð€is€currently€definedÐ Wü Ðin€Commission€Rule€of€Practice€102(f);€andÐC èÐ Ð  ÐÌà8  àà @ àà @ à(2)€ð ðin€the€representation€of€an€issuerðð€should€be€defined€as:€attorneys€whoÐ "À Ðare€ð ðretained€or€employed€by,€or€knowingly€act€at€the€direction€of,€an€issuerÐ #¬ Ðwith€respect€to€legal€matters.ððó óÐó#˜Ð Ð  ÐÌà  àò òRationale:ó ó€The€extraordinarily€broad€scope€of€the€definitions€proposed€in€SectionsÐ Ë%p! Ð205.2(a)€and€(f)€would€make€the€rule€applicable€to€thousands€of€unsuspecting€attorneys€whoÐ »&`" Ðnever€deal€with€the€Commission,€never€advise€their€clients€on€disclosure€or€other€federalÐ §'L # Ðsecurities€law€issues,€and€never€ð ðrepresentðð€an€issuer€in€the€ordinary€sense€of€that€word.€€TheseÐ “(8!$ Ðdefinitions€stretch€beyond€the€breaking€point€the€phrase€ð ðappearing€and€practicing€in€any€wayÐ )$"% Ðbefore€the€Commission€in€the€representation€of€an€issuer,ðð€Section€307's€mandated€scope€of€theÐ [ Ðrule.€Ð Gì ÐÌà@º º ìàò òA.€Narrowing€the€Definition€Will€Result€in€More€ˆÐ  Ä Ðà@Ñ Ñ ìàReasonable€Applicability€of€the€Ruleó óˆÐ  ° ÐÌà  àIn€contrast€to€the€common€sense€Rule€102(f)€definition,€the€definition€of€ð ðappearing€andÐ ã ˆ Ðpracticingðð€proposed€in€Section€205.2(a)€would€make€the€rule€applicable€to€many€attorneys€whoÐ Ï t Ðwill€have€no€idea€that€they€are€covered,€who€never€participate€in€any€Commission€proceeding,Ð »` Ðwho€never€file€or€consent€to€the€filing€of€any€document€with€the€Commission,€who€have€noÐ §L  Ðrelationship€with€or€access€to€the€issuerððs€CLO,€CEO€or€board€of€directors,€who€have€no€basis€forÐ “8  Ðevaluating€the€information€in€order€to€form€a€reasonable€belief€about€a€possible€violation,€andÐ $  Ðwho,€therefore,€have€no€practical€way€to€make€reports€required€by€the€rule€or,€even€if€they€didÐ k  Ðreport,€to€evaluate€the€appropriateness€of€any€response€from€the€issuer.€€Moreover,€they€have€noÐ Wü  Ðð ðclientðð€from€whose€representation€the€attorney€can€withdraw.€€Other€comments€to€theÐ Cè  ÐCommission,€including€those€of€Professor€Thomas€D.€Morgan,€will€provide€the€CommissionÐ /Ô  Ðwith€examples€of€some€of€the€absurd€results€possible€under€these€proposed,€over„broadÐ À Ðdefinitions.€€€Ð ¬ ÐÌà@î î ìàò òB.€€Application€of€the€Rule€to€Foreign€Attorneysó óˆÐ ß„ ÐÌà  àThe€Commission€has€specifically€invited€comment€on€whether€the€new€rule€should€applyÐ ·\ Ðto€foreign€attorneys.€€ALAS€believes,€particularly€if€the€definitions€of€ð ðappearing€and€practicingÐ £H Ðbefore€the€Commissionðð€and€ð ðin€the€representation€of€an€issuerðð€remain€as€broad€as€in€theÐ 4 Ðproposed€rule,€foreign€attorneys€should€clearly€òònotóó€be€included.€€Such€attorneys€will€be€even€lessÐ {  Ðlikely€than€those€licensed€in€this€country€to€be€aware€of€the€rule€and€of€the€fact€that€it€may€applyÐ g  Ðto€them.€€Enforcement€of€the€rule€against€foreign€attorneys€will€be€difficult,€if€not€totallyÐ Sø Ðimpractical.€Attempted€overseas€enforcement€will€create€regulatory€and€perhaps€even€diplomaticÐ ? ä Ðconcerns€involving€foreign€governments.€€And€the€resources€that€the€Commission€will€expend€inÐ +!Ð Ðattempting€foreign€enforcement€can€be€far€better€used€at€home.€€In€any€case,€this€is€not€a€decisionÐ "¼ Ðthe€Commission€needs€to€make€now.€€It€should€defer€any€decision€on€including€foreign€attorneysÐ #¨ Ðunder€the€rule€until€there€has€been€more€time€to€consider€and€assess€the€consequences€of€doingÐ ï#” Ðso.€€Ð Û$€  ÐÌà  àà@ìì*ìàˆÌÌÓ  Óò òÌÐ  w)"% ÐC.€€Specialized€Applicability€of€the€Ruleó óÐ [ ÐÌÓ  Óà  àThe€current€definitions€of€ð ðappearing€and€practicingðð€and€of€ð ðin€the€representation€of€anÐ 3 Ø Ðissuerðð€run€a€serious€risk€that€a€court€will€hold€them€invalid€either€because€they€far€exceed€theÐ  Ä Ðscope€of€statutory€language€that€authorizes€the€rule,€or€because€they€are€so€convoluted€andÐ  ° Ðcounter„intuitive€that€they€are€ð ðarbitrary€and€capricious,ðð€or€both.€€In€the€meantime,€theÐ ÷ œ Ðdefinitions€will€create€uncertainty€and€consternation€among€both€issuers€and€attorneys€who€doÐ ã ˆ Ðany€legal€work€that€relates€ð!ð€no€matter€how€remotely€ð!ð€to€an€issuer.€€€Ð Ï t ÐÌà  àIf€the€Commission€seeks€to€include€particular€attorneys€who€may€indirectly€renderÐ §L  Ðsecurities€law€advice€to€issuers,€the€better€course€is€to€have€a€general€definition€that€is€reasonablyÐ “8  Ðrelated€to€the€plain€meaning€of€the€statutory€language,€and€then€to€include€special,€particularizedÐ $  Ðprovisions€applicable€to€attorneys€representing€an€issuerððs€affiliates€or€agents,€or€representingÐ k  Ðconstituents€of€the€issuer€such€as€its€board€of€directors,€audit€or€other€board€committees,€orÐ Wü  Ðindividual€officers€or€directors,€and€who€knowingly€render€securities€law€advice€to€the€issuer.€Ð Cè  ÐÓùèÓÌò ò4.€€A€SAFE€HARBOR€SHOULD€BE€PROVIDED€FORÐ À ÐATTORNEYS€WHO€MAKE€REPORTS€REQUIRED€BY€THE€RULEó óÐ ¬ ÐÌÓ  Óà  àò òProposed€Change:ó ó€ò òA€ð ðsafe€harborðð€provision€should€be€added€to€the€proposed€ruleÐ ß„ Ðto€protect€from€civil€liability€and€disciplinary€sanctions€attorneys€who€make€reports€in€theÐ Ït Ðgood€faith€belief€that€the€reports€are€required€by€the€rule.€€€The€language€in€15€U.S.C.€ðð78j„Ð »` Ð1(c)€is€an€obvious€model.€€The€safe€harbor€should€also€provide€that€the€Commission€doesÐ §L Ðnot€intend€its€proposed€rule€to€be€an€indirect€basis€for€civil€liability€by€using€it€to€define€theÐ “8 Ðstandard€of€attorney€conduct€in€civil€claims€or€disciplinary€complaints€against€attorneys€forÐ $ Ðlegal€malpractice,€breach€of€fiduciary€duty,€or€other€alleged€misconduct.€€ó óÐ k ÐÌà  àò òRationale:ó ó€As€Congress€recognized€in€providing€a€safe€harbor€to€auditors€in€15€U.S.C.€ððÐ C è Ð78j„1(c),€any€requirement€that€a€professional€make€reports€that€may€be€adverse,€or€may€causeÐ 3!Ø Ðharm,€to€the€professionalððs€client€must€include€a€provision€that€gives€the€professional€protectionÐ "Ä Ðfrom€liability€claims€and€disciplinary€charges€arising€out€of€the€conduct€mandated€by€the€rule.€Ð  #° ÐThe€reasons€that€justify€such€a€safe€harbor€provision€are€(1)€professionals€have€fiduciaryÐ ÷#œ Ðobligations€of€confidentiality€and€loyalty€to€their€clients,€which€are€necessary€for€them€to€provideÐ ã$ˆ  Ðtheir€professional€services,€but€which€also€ð!ð€when€breached€ð!ð€subject€professionals€to€far€greaterÐ Ï%t! Ðthan€normal€exposure,€including€possible€punitive€damages,€for€breach€of€fiduciary€duty;€(2)Ð »&`" Ðprofessionals€are€subject€to€professional€discipline€if€they€are€found€to€have€breached€the€rules€ofÐ §'L # Ðprofessional€conduct€applicable€to€them;€and€(3)€professionals€who€report€their€clients€riskÐ “(8!$ Ðnegative€publicity,€impairment€of€client€relations,€and€other€adverse€economic€consequences€thatÐ )$"% Ðmay€effectively€end€their€professional€careers.€€For€these€reasons,€a€requirement€that€aÐ [ Ðprofessional€inform€on€his€or€her€client€simply€will€not€work,€as€a€practical€matter,€unless€theÐ Gì Ðprofessional€has€protection€from€civil€damage€and€disciplinary€liability.€€The€reason€is€that€inÐ 3 Ø Ðassessing€the€consequences€of€compliance€with€the€rule€that€include€liability€exposure,€manyÐ  Ä Ðprofessionals€will€choose€to€avoid€a€reporting€obligation€by€early€withdrawal€from€theÐ  ° Ðrepresentation€(òòseeóó€point€1.E€aboveòòóó).Ð ÷ œ ÐÔ_ÔÔ_ÔÔ_ÔÔ_ÔÌÓ  Óò ò5.€€THE€RULE€SHOULD€CONTAIN€AN€EXPRESSÐ Ï t ÐPROHIBITION€ON€PRIVATE€ENFORCEMENTó óÐ »` ÐÌÓ  Óà  àò òProposed€Change:ó ó€ò òThe€rule€should€include€in€Section€205.6€a€paragraph€expresslyÐ “8  Ðstating€that€only€the€Commission€may€enforce€the€rule,€that€the€rule€affords€no€privateÐ ƒ(  Ðparty€a€right€of€action€against€any€attorney€allegedly€subject€to€the€rule€for€injunctiveÐ o  Ðrelief,€damages€or€any€other€remedy,€and€that€no€shareholder€or€other€private€party€mayÐ [  Ðbring€an€action€to€enforce€attorney€compliance€or€punish€alleged€non„compliance€with€theÐ Gì  Ðrule.€ó óÐ 3Ø  ÐÌà  àò òRationale:ó ó€The€Commissionððs€commentary€on€Section€205.6€of€the€proposed€ruleÐ  ° Ðacknowledges€what€the€legislative€history€of€Section€307€makes€unmistakably€clear:€CongressÐ û  Ðdid€not€intend€in€Section€307€to€create€any€private€right€of€enforcement€or€other€private€remedy.€Ð çŒ ÐHowever,€once€the€Commissionððs€final€rule€is€adopted,€its€commentary€and€the€legislative€historyÐ Óx Ðof€Section€307€will€be€far€less€accessible€than€the€text€of€the€rule€itself.€€To€avoid€unfoundedÐ ¿d Ðprivate€actions€against€attorneys€based€on€their€alleged€non„compliance€with€the€rule,€whichÐ «P Ðactions€may€disrupt€or€impair€the€attorneyððs€relationship€with€the€client€and€generate€substantialÐ —< Ðdefense€costs€before€they€are€dismissed,€the€rule€should€state€explicitly€that€only€the€Commission,Ð ƒ( Ðand€not€any€private€party,€may€enforce€the€rule€or€seek€remedies€for€an€attorneyððs€alleged€non„Ð o Ðcompliance€with€it.Ð [ Ðò òÓ  Óó óÌÓ  Óò òà@§ § ìà6.€€THE€PROPOSED€RULE€PUTS€REPORTINGˆÐ 3!Ø ÐÓ  ÓATTORNEYS€IN€JEOPARDY€OF€DISCIPLINARY€Ð "Ä ÐPROCEEDINGS€AND€POSSIBLY€CIVILÐ  #° ÐCLAIMS€WITHOUT€EFFECTIVE€PROTECTIONÐ ÷#œ ÐÌÓ«Óà  àó óTwo€aspects€of€the€proposed€rule€attempt€to€protect€issuers€and€their€attorneys€from€beingÐ Ï%t! Ðsubject€to€the€conflicting€mandates€of€the€rule€on€the€one€hand€and€state€laws€and€rules€on€theÐ »&`" Ðother.€€One€attempts€to€preserve€the€issuerððs€attorney„client€privilege€despite€attorney€disclosuresÐ §'L # Ðthat€might€otherwise€waive€it.€€The€other€attempts€to€preempt€state€laws€and€rules€that€mayÐ “(8!$ Ðexpose€attorneys€to€sanctions€for€conduct€mandated€by€the€rule.€€Unfortunately,€as€describedÐ )$"% Ðbelow,€the€Commissionððs€power€to€accomplish€these€goals€is€doubtful.€€Therefore,€the€prudentÐ [ Ðcourse€would€be€for€the€Commission€to€minimize€the€extent€to€which€the€proposed€rule€conflictsÐ Gì Ðwith€state€laws€and€rules€governing€attorney€conduct.€€ò òÐ 3 Ø Ðó óà0  àò òÐ (#(# Ðà@¦ ¦ ìàA.€€The€Ruleððs€Effort€to€Avoid€Impairment€of€the€ˆÐ  ° Ðà@˜ ˜ ìàAttorney„Client€Privilege€Resulting€From€ReportsˆÐ ÷ œ Ðà@  ìàRequired€by€the€Rule€Will€Be€UnavailingˆÐ ã ˆ ÐÓ  ÓÌó óÓ  Óà  àThe€proposed€rule€purports€to€preserve€the€attorney„client€privilege€for€privilegedÐ »` Ðinformation€that€is€included€in€a€report€required€by€Section€205.3(d)(1)(i)€by€stating€that€ð ðtheÐ §L  Ðnotification€to€the€Commission€prescribed€by€this€paragraph€(d)€does€not€breach€the€attorney„Ð “8  Ðclient€privilege.ððÐ $  ÐÌà  àThe€proposed€rule€commentary€argues€that€because€any€disclosure€constitutes€a€ð ðnoisyÐ Wü  Ðwithdrawalðð€within€the€meaning€of€Comment€[14]€to€Model€Rule€1.6,€there€will€be€no€waiver€ofÐ Cè  Ðthe€privilege.€€But€it€does€not€say€what€authority€the€Commission€has€to€affect€privilegeÐ /Ô  Ðdeterminations€by€various€state€and€federal€courts€and€agencies€that€routinely€make€privilegeÐ À Ðdecisions€by€applying€the€rules€of€evidence€to€issues€arising€in€proceedings€pending€before€them.€Ð ¬ ÐIt€is€unlikely€that€a€federal€agencyððs€assurances€that€the€privilege€will€endure€despite€disclosureÐ ó˜ Ðwill€be€honored€even€by€federal€courts,€let€alone€state€courts€or€agencies.€€òòIn€re€Columbia/HCAÐ ß„ ÐHealthcare€Corporation€Billing€Practices€Litigationóó,€293€F.3d€289,€302„03€(6òòthóó€Cir.€2000).€€AÐ Ëp Ðmajority€of€federal€circuit€courts€of€appeal€have€refused€to€permit€assertion€of€the€privilege€afterÐ ·\ Ðit€has€been€disclosed€ð ðselectively,ðð€even€where€a€governmental€agency€has€purported€to€assureÐ £H Ðcontinuation€of€the€privilege.€€òòId.óó€at€294„302.Ð 4 ÐÌÓ  Óò òB.€The€Ruleððs€Attempt€to€Preempt€State€Attorney€ConductÐ g  ÐRules€and€State€Law€Duties€of€Attorneys€to€Their€ClientsÐ Sø ÐExceeds€the€Scope€of€Section€307Ð ? ä ÐÌó óÓ  Óà  àò òSummary€Comment:€The€proposed€ruleððs€attempt€to€preempt€the€state€standards€ofÐ "¼ Ðconduct€for€attorneys€is€not€authorized€by€Section€307,€and€goes€far€beyond€what€isÐ #¨ Ðnecessary€to€carry€out€the€purposes€of€that€section.€€Particularly€because€the€proposed€rule€Ð ï#” Ðis€overly€broad€in€its€coverage,€overreaching€in€its€scope€and€inconsistent€with,€orÐ Û$€  Ðprohibited€by,€state€rules€of€attorney€conduct€or€state€law€fiduciary€duties€of€attorneys€toÐ Ç%l! Ðclients,€this€attempted€preemption€is€likely€to€fail.ó óÐ ³&X" ÐÌà  àò òRationale:ó ó€€Section€205.1€of€the€proposed€rule€states:€Ð ‹(0!$ ÐÐ {) "% Ðà8  àà8@€the€rulàà8@€the€rulàð ðWhere€the€standards€[of€professional€conduct€for€attorneys]€of€a€state€where€anÐ [ Ðattorney€is€admitted€or€practices€conflict€with€this€part,€this€part€shall€govern.ððÐGìÐ Ð  Ðò ò€€€ó óÐ 3 Ø ÐThe€Commissionððs€commentary€on€proposed€Section€205.1€offers€no€indication€of€the€supposedÐ  Ä Ðbasis€or€authority€for€this€attempted€preemption€of€standards€that€have€historically€been€set€andÐ  ° Ðenforced€by€the€states.€€Neither€Section€307€nor€òòPolydoroff€v.€ICCóó,€773€F.2d€372€(D.C.€Cir.Ð ÷ œ Ð1985),€cited€in€footnote€29€of€the€release,€expressly€authorizes€any€such€preemption.€€Ð ã ˆ ÐÌà  àThe€absence€of€express€authority€in€Section€307€for€the€Commission€to€supersede€stateÐ »` Ðrules€and€laws€governing€attorney€conduct€is€not€surprising.€€The€intention€of€the€sponsors€ofÐ §L  ÐSection€307€was€that€the€attorney€conduct€standards€established€by€the€Commission€would€beÐ “8  Ðòòconsistentóó€with€the€rules€of€professional€conduct,€at€least€in€one€important€respect:€€the€statutorilyÐ $  Ðmandated€up„the„line€reporting€òòwithinóó€a€client€organization.€€Section€307's€sponsors€madeÐ k  Ðabundantly€clear€that€they€did€òònotóó€expect€or€intend€the€Commission€to€mandate€attorney€notice€ofÐ Wü  Ðpossible€client€misconduct€òòoutsideóó€the€client€organization€(òòsee€óópoint€Ô_Ô1.AÔ_Ô€above).€€Thus,€the€mostÐ Cè  Ðimportant€aspect€of€the€proposed€rule€that€conflicts€with€state€rules€and€laws€governing€attorneyÐ /Ô  Ðconduct€was€not€even€contemplated€by€Section€307's€sponsors.Ð À ÐÌà  àBut€other€aspects€of€the€proposed€rule,€such€as€Section€205.3(e)(2)ððs€purportedÐ ó˜ Ðauthorization€to€attorneys€to€disclose€confidential€client€information€without€client€consent,€willÐ ß„ Ðalso€conflict€with€attorney€conduct€rules€of€a€number€of€states.€€In€the€absence€of€expressÐ Ëp Ðstatutory€authority€to€supersede€such€state€laws€and€rules,€and€because€the€Commission€cites€noÐ ·\ Ðauthority€in€the€release,€it€is€unlikely€that€the€Commission€has€such€power.€€In€other€contexts,Ð £H Ðfederal€courts€have€been€skeptical€about€the€authority€of€federal€officials€or€agencies€to€supersedeÐ 4 Ðthe€authority€of€the€states€to€regulate€attorney€conduct.€€In€òòUnited€States€ex€rel.€OððKeefe€v.Ð {  ÐMcDonnell€Douglas€Corp.óó,€132€F.3d€1252€(8òòthóó€Cir.€1998),òòóó€the€court€struck€down€the€AttorneyÐ g  ÐGeneralððs€effort€to€exempt€federal€prosecutors€from€compliance€with€state€counterparts€of€ModelÐ Sø ÐRule€4.2,€the€ð ðno€contactðð€rule,€precisely€because€there€was€no€statutory€or€other€authority€for€theÐ ? ä Ðpurported€exercise€of€such€power.€€Quotingòò€Bowen€v.€Georgetown€University€Hospital,óó€488€U.S.Ð +!Ð Ð204,€208€(1988),€the€court€stated:€€ð ðIt€is€axiomatic€that€an€administrative€agencyððs€power€toÐ "¼ Ðpromulgate€legislative€regulations€is€limited€to€the€authority€delegated€by€Congress.ððÐ #¨ ÐÌà  àThis€is€not€to€say€that€the€Commission€may€not€promulgate€a€narrowly€drawn€rule€toÐ Û$€  Ðregulate€the€conduct€of€attorneys€actually€appearing€before,€filing€documents€with,€and€otherwiseÐ Ç%l! Ðdealing€directly€with€the€Commission.€€The€point€is€that€in€the€absence€of€express€statutoryÐ ³&X" Ðauthority,€the€more€broadly€the€Commission€attempts€to€regulate,€in€terms€of€both€applicability€ofÐ Ÿ'D # Ðits€proposed€rule€and€the€extent€to€which€that€rule€appears€to€conflict€with€state€laws€and€rulesÐ ‹(0!$ Ðgoverning€attorneys,€the€more€likely€it€is€that€the€attempted€regulation€will€be€struck€down.€Ð w)"% ÐWhere,€as€here,€the€option€of€regulating€more€narrowly€will€fully€comply€with€the€mandate€ofÐ [ ÐSection€307,€and€will€accomplish€the€goals€set€forth€by€Congress€and€the€Commission,€thatÐ Gì Ðshould€be€the€course€the€Commission€chooses.Ð 3 Ø ÐÌò òÓ  Ó7.€€SECTION€205.2(d),€DEFINITION€OF€ð ðBREACH€OF€Ð  ° ÐÓœ"Óà@  ìàFIDUCIARY€DUTY,ðð€SHOULD€BE€EXPANDED€TO€INCLUDEˆÐ ÷ œ Ðó óà@( ( ìàò òð ðOR€SIMILAR€VIOLATIONðð€AND€SHOULD€BE€CLARIFIEDó óˆÐ ã ˆ ÐÌà  àò òProposed€Change:ó ó€ò òExpand€the€definition€of€ð ðbreach€of€fiduciary€dutyðð€in€proposed€Ð »` ÐSection€Ô_Ô205.2(d)Ô_Ô€to€include€a€definition€of€the€statutory€phrase€ð ðor€similar€violation,ðð€andÐ «P  Ðlimit€breaches€and€violations€covered€by€the€rule€to€breaches€of€duties€owed€to€the€issuer.€€òòóóó óÐ —<  ÐÌà  àò òRationale:ó ó€€A€significant€part€of€the€concern€caused€by€Section€307€of€the€Sarbanes„Ð o  ÐOxley€Act€is€attributable€to€the€vagueness€and€vast€breadth€of€the€statutory€phrase€ð ðbreach€ofÐ _  Ðfiduciary€duty€or€similar€violation.ðð€€The€Commission€needs€to€include€significant€guidance€onÐ Kð  Ðthis€broad€statutory€phrase.€€Such€guidance€is€essential€to€provide€fair€notice€to€attorneys€ofÐ 7Ü  Ðexactly€what€kinds€of€breaches€and€violations€they€are€expected€to€report.€€The€CommissionÐ #È Ðshould€provide€such€notice€in€the€final€rule€by€including€a€definition€of€the€statutory€languageÐ ´ Ðthat€is€rationally€related€to€the€protection€of€shareholders€and€investors,€and€that€will€provideÐ û  Ðsome€content€to€the€extremely€broad€and€vague€phrase€ð ðsimilar€violations.ðð€Ð çŒ ÐÌà  àIn€the€case€of€officers,€directors,€employees€or€other€agents€of€issuers,€the€fiduciary€dutiesÐ ¿d Ðthat€should€be€covered€by€the€rule€are€those€the€agent€owes€to€shareholders€or€to€the€issuer€itself,Ð «P Ðand€the€breach€of€which€may€adversely€affect€the€issuer€and€its€shareholders.€€Section€307€shouldÐ —< Ðnot€be€interpreted€to€require€reporting€of€breaches€of€fiduciary€duties€by€an€issuerððs€agents€thatÐ ƒ( Ðare€wholly€unrelated€to,€and€cannot€harm,€the€issuer€or€its€shareholders.€€Otherwise€Section€307Ð o Ðwill€convert€the€issuerððs€securities€attorney€into€an€all„purpose€ombudsman€who€must€monitorÐ [ Ðand€report€on€violations€of€all€sorts€of€fiduciary€duties€that€may€have€nothing€to€do€withÐ G ì Ðshareholders€or€the€federal€securities€laws.€€Ð 3!Ø ÐÌà  àLimiting€the€type€of€fiduciary€duty€covered€by€the€rule€in€this€way€will€also€help€toÐ  #° Ðanswer€the€€question,€ð ðwhat€is€a€similar€violation?ðð€€It€will€give€content€and€concrete€meaning€toÐ ÷#œ Ðthe€otherwise€extremely€vague€phrase,€ð ðsimilar€violation,ðð€that€follows€immediately€after€ð ðbreachÐ ã$ˆ  Ðof€fiduciary€dutyðð€in€Section€307.€€Unless€the€term€ð ðfiduciary€dutyðð€is€limited€to€duties€owed€toÐ Ï%t! Ðan€issuerððs€shareholders,€the€related€phrase€ð ðsimilar€violationðð€will€continue€to€confoundÐ »&`" Ðattorneys€seeking€to€comply€with€the€rule.€€€€Ð §'L # ÐÌà  àThe€limited€definition€we€propose€will€provide€attorneys€and€issuers€subject€to€the€rule,Ð )$"% ÐCommission€personnel€who€must€apply€and€enforce€the€rule,€and€courts€that€may€in€some€casesÐ [ Ðbe€called€upon€to€interpret€and€provide€remedies€for€violation€of€the€rule,€fair€notice€of€what€kindÐ Gì Ðof€ð ðbreach€of€fiduciary€duty€or€similar€violationðð€is€covered€by€the€rule.€€Those€who€will€beÐ 3 Ø Ðrequired€to€comply€with€and€enforce€the€rule€need€and€deserve€such€guidance.Ð  Ä ÐÌò òÓ  Ó8.€€SARBANES„OXLEY€SECTION€307€DOES€NOT€AUTHORIZE€Ð ÷ œ ÐSECTION€205.6(a)ððS€ATTEMPT€TO€CONVERT€Ð ã ˆ ÐRULE€VIOLATIONS€BY€ATTORNEYS€INTO€ðð34€ACT€VIOLATIONSó óÐ Ï t ÐÌÓ_1Óà  àò òProposed€Change:€Delete€paragraph€(a)€of€proposed€Section€205.6.Ð §L  Ðà  àÌà  àRationale:ó ó€Section€205.6(a)€of€the€proposed€rule€provides€that€an€attorneyððs€violation€ofÐ $  Ðthe€rule€ð ðshall€be€treated€for€all€purposes€in€the€same€manner€as€a€violation€of€the€SecuritiesÐ o  ÐExchange€Act€of€1934,ðð€and€that€attorneys€guilty€of€such€rule€violations€ð ðshall€be€subject€to€theÐ [  Ðsame€penalties€and€remedies,€and€to€the€same€extent,€as€for€a€violation€of€that€Act.ðð€€TheÐ Gì  ÐCommissionððs€commentary€on€Section€205.6(a)€notes€that€these€remedies€include€a€civil€actionÐ 3Ø  Ðfor€injunctive€and€other€equitable€relief,€and€for€civil€monetary€fines,€or€a€Commission€cease€andÐ Ä Ðdesist€proceeding.€€(The€commentary€also€notes€that€the€Commission€does€not€believe€thatÐ  ° Ðviolation€of€the€rule,€òòwithout€moreóó,€would€warrant€criminal€penalties€under€the€ðð34€Act.)Ð ÷œ ÐÌà  àNothing€in€Section€307€or€any€other€section€of€the€Sarbanes„Oxley€Act€authorizes€theÐ Ït ÐCommission€to€convert€regulatory€violations€into€statutory€violations,€or€to€subject€rule€violatorsÐ »` Ðto€the€same€penalties€and€remedies€as€violators€of€the€Act.€€The€Commissionððs€commentary€onÐ §L ÐSection€205.6(a)€offers€no€justification€or€explanation€for€this€audacious€provision.€€TheÐ “8 Ðunfairness€of€equating€an€attorneyððs€violation€of€a€reporting€rule€„€which€could€result€from€a€mereÐ $ Ðmisjudgment€about€the€nature€of€a€clientððs€conduct€„€with€the€kind€of€fraudulent€issuer€conductÐ k Ðthat€is€normally€punished€under€the€ðð34€Act€is€obvious.€€This€is€especially€true€for€a€new€rule,€theÐ Wü Ðprecise€scope€and€meaning€of€which€will€become€clear€only€as€the€Commission€and€the€courtsÐ C è Ðrender€decisions€in€enforcement€proceedings,€or€as€the€Commission€issues€interpretive€guidanceÐ /!Ô Ðconcerning€the€rule.Ð "À ÐÌà  àFor€these€reasons,€Section€205.6(a)€of€the€proposed€rule€should€be€deleted.Ð ó#˜ ÐÌò òÓ  Óà @ àÌÌÌÌÐ {) "% ЇÌ9.€€THE€QLCC€PROVISIONS€AND€CERTAIN€OTHER€Ð Gì ÐPROVISIONS€OF€THE€PROPOSED€RULE€AREÐ 3 Ø ÐPARTICULARLY€MERITORIOUSó óÐ  Ä ÐÓ/;ÓÌà  àò òSummary€Comment:ó ó€€ò òThe€proposal€for€Qualified€Legal€Compliance€Committees€inÐ ÷ œ Ðof€Section€Ô_Ô205.3(c)Ô_Ô€is€an€innovative€and€practical€concept.€€It€will€provide€a€useful€avenueÐ ç Œ Ðfor€reporting€potential€problems€to€those€in€corporations€who€can€deal€with€them,€and€itÐ Ó x Ðwill€assist€both€issuers€and€their€counsel€in€complying€with€Section€307€while€minimizingÐ ¿d Ðpossible€disruption€of,€or€damage€to,€the€attorney„client€relationship.€€In€addition,€it€mayÐ «P  Ðhelp€attorneys€avoid€some€of€the€unwarranted€liability€exposure€that€might€otherwise€resultÐ —<  Ðfrom€compliance€with€the€proposed€rule.€€A€number€of€other€provisions€in€the€proposedÐ ƒ(  Ðrule€(described€below)€€track€existing€law€or€state€rules€of€professional€conduct,€are€clearÐ o  Ðand€should,€subject€to€our€prior€comments€on€the€need€to€change€certain€definitions,€assistÐ [  Ðattorneys€seeking€to€understand€and€comply€with€Sarbanes„Oxley€Section€307€and€the€rule.€Ð Gì  ÐWe€also€applaud€the€proposed€ruleððs€requirement€for€attorney€personal€knowledge,€asÐ 3Ø  Ðopposed€to€imputed€knowledge,€as€a€trigger€for€reporting€in€Section€205.3ó ó(ò òb).€€Ð Ä ÐÌÓ  ÓA.€€Qualified€Legal€Compliance€Committees€(QLCCs)ó óÐ û  ÐÓ  Óà  àÌà  àThe€proposal€for€Qualified€Legal€Compliance€Committees€is€a€good€example€of€creativeÐ Óx Ðand€constructive€administrative€rule„making.€€Where€used€by€issuers,€such€committees€will€helpÐ ¿d Ðboth€issuers€and€their€outside€securities€attorneys€to€comply€with€Section€307€while€minimizingÐ «P Ðrisks€of€attorney„client€friction,€disruption€of,€or€damage€to,€the€attorney„client€relationship,€andÐ —< Ðliability€exposure€for€reporting€attorneys.€€By€placing€responsibility€to€investigate€reports€fromÐ ƒ( Ðoutside€counsel€in€a€board€committee€of€independent€directors,€QLCCs€assure€that€outsideÐ o Ðattorney€reports€will€be€responded€to€in€the€most€effective€way€by€those€who€have€ultimateÐ [ Ðauthority€for€the€affairs€of€the€issuer.€€They€also€provide€a€far€easier€and€less€burdensomeÐ G ì Ðprocedure€for€outside€counsel€to€share€with€the€issuerððs€board€concerns€that€may€be€difficult€orÐ 3!Ø Ðimpossible€to€raise€with€the€issuerððs€senior€management.€€From€the€corporationððs€perspective,Ð "Ä Ðimplementation€of€a€QLCC€may€reduce€the€costs€of€compliance€with€the€rule€because€reportingÐ  #° Ðto€the€QLCC€will€be€less€time€intensive€for€an€outside€attorney€and,€therefore,€less€costly€to€theÐ ÷#œ Ðcorporation.€€Finally,€because€attorneys€are€never€required€under€the€QLCC€procedure€toÐ ã$ˆ  Ðdetermine€the€ð ðappropriatenessðð€of€the€issuerððs€response,€they€will€not€be€required€to€investigateÐ Ï%t! Ðtheir€own€clientððs€conduct,€nor€to€withdraw€(if€paragraph€(d)(1)(i)€of€Section€205.3€is€not€deleted,Ð »&`" Ðas€ALAS€has€recommended€above),€nor€to€report€to€the€Commission€and€disaffirm€priorÐ §'L # Ðsubmissions€simply€because€of€a€breakdown€in€the€clientððs€investigation€and€responseÐ “(8!$ Ðprocedures.Ð )$"% Їà  àWe€urge€the€Commission€to€retain€the€concept€of€QLCCs€in€its€final€rule,€and€perhapsÐ [ Ðeven€to€expand€it€by€providing€more€incentives€to€issuers€and€their€outside€attorneys€to€utilize€theÐ Gì ÐQLCC€procedure.€€For€example,€the€Commission€might€consider€an€express€exception€toÐ 3 Ø Ðapplicability€of€the€new€up„the„line€reporting€rule€for€outside€counsel€specially€retained€by€aÐ  Ä ÐQLCC€to€investigate€and€make€recommendations€to€the€QLCC€in€response€to€reports€from€theÐ  ° Ðissuerððs€counsel.€€Since€outside€attorneys€hired€òòby€the€issueróó€to€investigate€up„the„line€reports€òòareóóÐ ÷ œ Ðsubject€to€the€rule€under€Section€205.3(b)(6),€an€exception€for€QLCC„retained€counsel€wouldÐ ã ˆ Ðprovide€issuers€a€strong€incentive€to€use€that€procedure.€€Moreover,€it€would€have€no€negativeÐ Ï t Ðimpact€on€the€efficacy€of€the€rule€because€the€QLCC€itself€remains€responsible€under€SectionÐ »` Ð205.2(j)(4)€and€(5)€to€deal€appropriately€with€the€report,€including€under€certain€circumstancesÐ §L  Ðreporting€a€material€violation€to€the€Commission.€€ò òÐ “8  ÐÌÓ  ÓB.€€Definitions€of€ð ðMaterialðð€and€ð ðMaterial€ViolationððÐ k  Ðó óÓ|NÓÌà  àThe€proposed€definitions€in€paragraphs€(h)(ð ðmaterialðð)€and€(i)(ð ðmaterial€violationðð)€ofÐ Cè  ÐSection€205.2€appear€consistent€with€existing€law.€€However,€the€meaning€of€the€term€ð ðmaterialÐ /Ô  Ðviolationðð€will€be€confusing€unless€the€rule€provides€clearer€guidance€on€the€scope€and€meaningÐ À Ðof€ð ðbreach€of€fiduciary€duty€or€similar€violationðð€as€used€in€Section€307€(òòseeóó€point€Ô_Ô7Ô_Ô€above).€€€Ð ¬ ÐÌò òÓ  ÓC.€€The€Issuer€as€Clientó óÐ ß„ ÐÓ QÓÌà  àSection€205.3(a)ððs€designation€of€the€issuer€as€client€is€consistent€with€Model€RuleÐ ·\ Ð1.13(b)òòóó.€€This€is€an€area€on€which€ALAS€frequently€counsels€its€member€firms€and€the€ruleððsÐ £H Ðconsistency€on€this€point€is€helpful.Ð 4 ÐÌò òÓ  ÓD.€€Responsibilities€of€Supervisory€and€Subordinate€Attorneysó óÐ g  ÐÓ†RÓÌà  àSections€204.4€and€205.5€on€responsibilities€of€supervisory€and€subordinate€attorneysÐ ? ä Ðappear€generally€consistent€with€ABA€Model€Rules€5.1€and€5.2.€€As€we€have€noted€throughoutÐ +!Ð Ðthis€comment,€such€consistency€is€desirable€to€minimize€both€attorney€confusion€and€any€conflictÐ "¼ Ðbetween€the€proposed€rule€and€state€rules€of€professional€conduct€and€state€agency€law€principlesÐ #¨ Ðgoverning€attorney„client€relationships.€€Ð ï#” ÐÌÓ  ÓÐ  Ç%l! Ðà @ àò òCONCLUSIONó óÐ [ ÐÓUÓÌà  àThe€expansive€attorney€conduct€rule€proposed€in€Release€33„8150€would€haveÐ 3 Ø Ðconsequences€far€beyond€the€contemplation€of€Sarbanes„Oxley€Section€307.€€Because€of€the€shortÐ  Ä Ðtime€the€Commission€has€to€implement€Section€307,€and€the€even€shorter€time€it€will€have€toÐ  ° Ðconsider€the€comments€of€affected€attorneys€and€others,€the€Commission€should€limit€itself€to€anÐ ÷ œ Ðinitial€rule€that€implements€the€minimum€requirements€of€the€statute.€€This€will€allow€time€forÐ ã ˆ Ðthe€Commission€to€consider€several€developments€now€underway€that€ought€to€affect€the€ultimateÐ Ï t Ðscope€of€the€rule:€the€recommendations€of€the€ABA€Task€Force€on€Corporate€Responsibility€forÐ »` Ðchanges€in€the€Model€Rules;€the€activity€now€underway€in€almost€every€state€to€revise€stateÐ §L  Ðattorney€conduct€rules€to€incorporate€recommendations€of€various€ABA€bodies,€including€theÐ “8  ÐTask€Force;€and€the€Commissionððs€own€report€to€Congress€under€Sarbanes„Oxley€Section€703Ð $  Ðthat€will€describe€€the€extent€to€which€attorneys,€among€others,€have€been€involved€in€aiding€andÐ k  Ðabetting€securities€law€violations€by€issuers€and€with€what€consequences.€€More€time€will€permitÐ Wü  Ðboth€the€Commission€and€affected€attorneys€to€address€with€greater€care€and€deliberation€theÐ Cè  Ðimportant€issues€raised€by€Section€307,€and€will€avoid€the€disruption€of€attorney„clientÐ /Ô  Ðrelationships€that€would€certainly€follow€implementation€of€the€rule€proposed€in€Release€33„Ð À Ð8150.€Ð ¬ ÐÌà  àIn€considering€our€comments€on€the€proposed€rule,€as€well€as€those€of€others,€we€urge€theÐ ß„ ÐCommission€to€balance€the€need€to€assure€public€confidence€in€attorneys€and€to€protect€investorsÐ Ëp Ðon€the€one€hand€and,€on€the€other€hand,€the€importance€of€the€attorney„client€relationship€and€theÐ ·\ Ðrole€of€attorneys€as€confidential€counselors€who,€if€they€have€their€clientððs€trust,€can€be€the€singleÐ £H Ðmost€effective€force€to€assure€lawful€issuer€conduct.€€If€the€Commission€uses€the€limited€time€itÐ 4 Ðhas€to€finalize€a€rule€that€both€provides€clear€guidance€to€those€who€are€subject€to€it€and€that€fitsÐ {  Ðwithin€the€regulatory€scheme€already€applicable€to€attorneys,€Congressðð€mandate€will€be€satisfiedÐ g  Ðand€both€attorneys€and€the€public€interest€will€be€well€served.€ò òÐ Sø ÐÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_Ôó óÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_ÔÔ_Ô